Obama Opens Coastal Areas to Oil Drilling

President Obama today announced plans to open vast new stretches of coastline to oil and gas drilling. The New York Times has the story here. The President claims that the plan "would balance the need to produce more domestic energy while protecting natural resources, would allow drilling along the Atlantic coastline, the eastern Gulf of Mexico and the north coast of Alaska. It would end a longstanding moratorium on exploration from the northern tip of Delaware to the central coast of Florida, covering 167 million acres of ocean."

The plan is already being criticized on both sides: by environmentalists who argue that it will do nothing to improve American energy "security" (whatever the hell that is) while substantially increasing risks to marine wildlife and coastal ecosystems; by oil industry types and their Republic supporters in Congress who claim that the plan leaves too many coastal areas off-limits to oil drilling. Both sides are right.

This is precisely the kind of split-the-difference, conciliatory Obama approach to policy - similar to his initial forays into health care reform, before he was finally forced to stick his neck out - that pleases no one and pisses off everyone. I thought the health care reform process might have taught him the political value of strongly supporting a set of principles he believes in. Apparently not. Based on this off-shore oil drilling plan, it's not at all clear what the hell he believes in. 

Interview with Elinor Ostrom at Yes Magazine

You can read the interview, which is excellent, here.

Hat tip: Tyler Cowen at Marginal Revolution

Books I've Been Reading Lately

John Milton Cooper, Jr., Woodrow Wilson (Knopf 2009).
A mostly interesting bio of a not-particularly exciting subject.

Anthony Scott, The Evolution of Resource Property Rights (Oxford 2008).
Professor Scott, who did seminal work in fisheries economics in the 1950s, has now published a magnum opus, which is amazing for the depth of legal, as well as economic, analysis.

Herbert A. Simon, The Sciences of the Artificial (MIT Press 1969).
Okay, I'm re-reading this book - a lingering part of my summer 2009 commitment to read or re-read all of Simon's major works. All economists should read Chapter 2 (at least) of this book.

Winston S. Churchill, The New World, Volume II of A History of the English Speaking Peoples (Barnes & Nobel 1956).
Fun and beautifully written.

Helen Simonson, Major Pettigrew's Last Stand (Random House 2010).
Wonderful, wonderful, wonderful.

Big Champions League Match

Arsenal host Barcelona in the first-leg of their quarter-final confrontation in the Champions League. They are probably the two most positive and stylish footballing clubs in the world. But Arsenal may be without their best player, Cesc Fabregas (who ironically was a junior player at Barca before moving to the London club at age 15). Barca will be without influential midfielder Andres Iniesta. They will, however, have super-superstar Lionel Messi, who lately has been playing (and scoring) like no soccer player on the planet ever has.

I cannot expect my beloved Gunners to prevail in the home-and-home series (although I would jump for joy if they did). In any case, the quality of football on display should be stunning. Every soccer fan in the world should be tuned into these matches.

UPDATE: After going down 2-0 just after halftime, Arsenal fought hard to recover a 2-2 tie. In a sense, it was a moral victory, but a very costly one: Arshavin limped off before halftime and is out for 3 weeks with a calf problem; Gallas was stretchered off before halftime and is out for the season; and the inspirational Cesc Fabregas, who tied the game on a late penalty, spent the final few minutes hobbling on what might be a broken leg. Thanks to their two away goals, Barcelona must be heavily favored to go through to the next round. Meanwhile, Arsenal will be left extremely short-handed as they try desperately to compete with Chelsea and ManU for the Premier League championship.

Morning Update/ Market Thread 3/31

Good Morning,

Equity futures are down this morning following a negative jobs outlook by ADP. Below is a 30 minute chart of DOW futures on the left and 5 minute overnight view of S&P futures on the right:

The dollar is plummeting overnight while the Euro soars as Greece announces they are going to indebt themselves more by issuing dollar denominated bonds this go around. Long bonds are higher, breaking bullishly out of that bearish flag that was sitting right on support. Oil is breaking higher, now pushing $84 a barrel, despite Obama announcing that he’s opening up the Gulf to more oil drilling, completely necessary because, well, there’s a glut of oil in storage and because obviously oil must be the energy of future. Good thing we have a president who isn’t beholden to special interests and uses his clear future vision to get things done. Watch gold, it is higher and on the verge of breaking upwards.

Below is the same chart of the dollar and long bonds I showed yesterday. You can see the long bond on the right breaking wrong direction higher. Resting on support like it was, it either breaks down through it or some event occurs to send money back into bonds:

The totally worthless MBA report produced yet another wild weekly figure. Totally not real, none of this so called report should be given any credence whatsoever. In fact, as far as I’m concerned they are producing their best attempt at a marketing product designed to obscure any real data they may possess. In the old days they called it fraud. Today we call it spin and just chalk it up to marketing – of course the citizens are left to filter this information for themselves. Just another break down of the rule of law:
Housing demand may be thankfully emerging from winter hibernation. The Mortgage Bankers Association's purchase index is showing significant life, up a very sharp 6.8 percent for the fourth gain in the last five weeks. Buyers are appearing to take advantage of the government's second round of housing tax credits that expire at April's end. As the report says the pattern is similar to the rush ahead of the expiration of the first round of tax credits in November: "We may be seeing a similar pattern now, as the extended version of the tax credit ends next month."

Refinancing is showing less life, the result of heavy refinancing activity over the past year and also the result of rising rates. The average 30-year mortgage rose 3 basis points to 5.04 percent. Note that talk of an emerging bear market for Treasuries points to the risk of higher rates in the coming rates.

Remember, it was just five weeks ago that the MBA admitted their “index” was at the lowest point in history although they never tell us what their index is, what it is based upon, and then they revise it at will all without allowing us to see the data. Worthless spin and completely not real.

You know, where is the neutral party to generate statistics? Where is the oversight to prevent special interests from taking over economic statistics to prevent them from being “spun?” This should be one of the core and basic jobs of your government, they have failed miserably in this respect exactly because they too are co-opted by special interests. The root of this problem is the Federal Reserve Act, and the solution is Freedom’s Vision.

The ADP jobs report has not been the best indicator of what the B.L.S. produces for their Unemployment Report, but because it always comes out first, it is used to set expectations. In this case, expectations were rising for a positive number come this Friday. I think there’s big disappointment coming down the road as I think the insurance industry bailout Act and other forms of higher taxes are going to produce even more pressure on hiring in the near future. Here’s Econoday:
ADP is calling for a disappointing 23,000 decline in private payrolls for March. A gain was expected. Stocks are falling and money is moving into Treasuries following the results. Commodities first declined but quickly recovered as the dollar moves lower.

I thought the following article was amusing. It reminded me of the family who, deep in debt and paying their credit card bills with other credit cards, finally gets caught and must begin selling their possessions and looking for loose change under their sofa cushions. This article shows the ripple effect and how families going through crises causes governments to subsequently go through the same crisis. This is why real and functioning economies are built from the bottom up, not from the top down.
Cities look to debt collectors for help

NEW YORK (CNNMoney.com) -- In the northeastern Pennsylvania town of Pittston, the seemingly manageable issue of garbage became a much bigger problem than anyone could have ever anticipated.

While the streets were hardly strewn with litter, the city of 8,100 is now saddled with roughly $250,000 worth of unpaid garbage fees owed by city residents.

Hoping to stamp out the problem, the city council recently contracted with an outside collection agency, hoping to recoup some of the outstanding debt.

"They are going to go after them with whatever means they can," said Greg Gulick, a city spokesman.

Pittston, which dubs itself the "The Tomato Capital," is hardly alone. School boards, county courts, local libraries and even prison systems across the country are increasingly looking to private collection agencies for help.

"Given all the budget constraints at the state level and the problems with the economy, we are seeing quite a bit of outsourced activity," said Bruce Cummings, the CEO of Municipal Services Bureau, an Austin, Texas-based firm which assists more than 500 state and local governments across the country collect unpaid bills.

It remains unclear precisely how much in unpaid court fees and parking tickets has been farmed out to collection agencies by state and local governments since the recession began. But experts say this is one of the faster-growing segments of the multi-billion dollar debt collection industry.
That’s it, go after the deadbeats who can’t pay their garbage bill because big government sucks the life blood out of the economy. That will solve the problem. Better keep the food stamps and unemployment money flowing, civil unrest won’t be too far behind otherwise.

But hey, not to worry because the stock market is up 76% in just a little over a year. That’s a sign of health, right? I mean isn’t that what healthy economies and markets do? No?

I can’t even watch CNBC for more than 5 seconds anymore. I made the mistake of turning it on and there stood the “analyst” (marketing spokesman) stating that he thought 15% returns were completely possible over the next few years like that was on the low range and a completely normal type of number. Fifteen percent? Are you kidding me? That is such a huge number that not sustainable instantly jumps into my mind and all I can think is how people who buy into that BS are going to get burned. Yet it pales in comparison to 76% which evidently is the new benchmark for health. I say stupidity and folly. Yeah, those guys deserve what’s coming for them, and in many respects Americans, all of us, deserve what’s coming too for not putting an end to it sooner.

But hey, 25% of the market volume comes on just Bank of America, or on Citi Bank. That’s normal. That’s healthy.

And yet another small movement in the McClelland Oscillator yesterday, expect any directional move to be large.

As I type, the March Chicago PMI was released, 58.8 was the number, consensus was looking for 61, and the prior was 62.6. Must have been the weather in February.

Yesterday a comment was made about our economy and bond market walking a tight rope. Absolutely a high wire act. Exciting to watch, but given enough exposure, sooner or later somebody’s going to fall.

Leon Russell – Tight Rope:

"Property Rights"

For those who prefer their explanations of property theory to come with formal mathematical models, Ilya Segal (Stanford) and Michael D. Whinston (Northwestern) have posted this working paper at SSRN, which will be published as a chapter in the forthcoming Handbook of Organizational Economics (Gibbons and Roberts, eds, Princeton University Press).

The chapter seems comprehensive and useful (with or without the math).

Happy Birthday Papa Haydn (1732-1809)

Judges Acting Like Academics

Over at Concurring Opinions, Lawrence Cunningham has a nice post about the Supreme Court's unanimous  vacating the 7th Circuit's ruling in Jones v. Harris. The Court expressly rebuked Judges Easterbrook, who wrote the majority opinion, and Posner, who dissented, for holding an academic debate about the economic wisdom of the statute they were supposed to be applying, not judging: "The debate between the Seventh Circuit panel and the dissent from the denial of rehearing regarding today's mutual fund market is a matter for Congress, not the courts."

U.S. Economic Picture Mixed

As I've said before, it seems likely that second quarter growth in the U.S. was higher than the sligtly upwardly revised 0.7% of the first quarter. This is despite the fact that the most important component of personal consumption expenditure will grow far slower than the slightly downwardly revised 4.2% of the first quarter, probably as low as 1.5% as blogger "Calculated Risk" argues on the basis of the personal income and spending release for May.

But on the other hand, business investments (particularly nonresidential construction) will probably grow faster than in the first quarter. Residential investments will probably be a much smaller drag than in the first quarter. And inventories will likely add rather than significantly subtract from growth as in the first quarter. Net exports is the big wild card and I will not try to forecast second quarter growth in any more specific terms than "higher than in the first quarter but probably not dramatically higher" before the May trade balance number is released.

Anyway though, the most interesting question is not really second quarter growth, but the outlook for the third and fouth quarter.

There are two (or in one sense three) conflicting forces in the U.S. economy. On the one hand, the housing sector remains a mess and will probably continue to be a drag for the rest of the year. Househould finances are certainly not in great shape, with the household savings rate at -1.4%. Moreover, rising interest rates, rising oil prices and falling house prices will further worsen household finances. Partially offsetting this is rising stock prices. But nevertheless, consumer spending will likely rise only very slowly at best.

Against this is the great shape of corporate America, where profits remain high, although earnings growth is stagnant in the domestic nonfinancial sector. Are the "stagnant but still very high" earnings enough to keep business investment growing significantly? There have been conflicting signals about this lately. The answer to this question is arguably the single most important factor in determining whether America will fall into a recession or continue with merely slow growth. Other factors, most notably various market signals such as bond yields, stock prices and oil prices is also important, but business leader assessment of whether it is profitable for the to increase investments is arguably the most important factor.

Morning Update/ Market Thread 3/30

Good Morning,

You remember Bill Murray in the movie “Groundhog day?” I’m beginning to wonder if there’s a point in writing about the markets anymore, lol.

The equity futures are up a little, the dollar is down slightly, interestingly the Euro is down a little, bonds are down again right on support, and both oil and gold are down just slightly. Below is a 30 minute chart of DOW futures on the left and 5 minute chart of S&P futures on the right:

The 30 minute chart of the dollar (left) and the long bond futures (right) is interesting, the dollar is forming what looks like a bullish wedge or flag, and bonds are forming the same pattern but the bearish version for price, bullish for interest rates:

They look to be breaking just as the market opens. Of course this is the dilemma of a debt saturated society. Interest rates rising will make life difficult for debt holders. Who’s made themselves the world’s largest debtor? That’s an easy one, we have by allowing the “Federal Reserve” to co-opt our money system and then our government.

The Case-Schiller Home Index showed a drop of -.2% month over month in January, but seasonally adjusted they claim it rose .4%. Prices declined .7% year over year, in line with forecasts. The index itself dropped from 158.18 to 157.89. Obviously the rate of fall has subsided for now. However, looking into the future do not forget that chart of the wave of Option-Arm mortgages that must reset, and gee, just in time to meet rising interest rates. That will be interesting. Here’s Econoday’s spin:
Case-Shiller points to continued gains for home prices in January, gains that may be accelerating given more recent data on new and existing homes. Case-Shiller's adjusted reading for its composite 10 index shows a solid 0.4 percent gain in the month, the second straight 0.4 percent gain. The 20 index shows a second straight 0.3 percent gain. Note that home prices swing lower in the light demand months of the winter, a factor to keep in mind when looking at the unadjusted rates. Unadjusted data, which the news wire run prominently, show a third straight 0.2 percent monthly decline for the 10 index and a very deep 0.4 percent decline for the 20 index.

Among individual cities, gains stand out for Los Angeles, San Diego, and Phoenix, all areas hit deeply by the housing collapse. Prices in Miami, also hit hard, continue to decline but now only marginally, while prices in Tampa show strength.

The housing sector is at a pivot point, hopefully an upward point as second-round stimulus should begin to improve sales and perhaps prices going into the spring. But the expiration of stimulus together with what may be rising long rates are negative wildcards for the longer outlook.
Big difference between a pause and a pivot point.

Citizen Confidence was just released for March, jumping from 46.0 to 52.5, 50 was expected. Feels good to be on a roller coaster that just climbed a giant hill, eh? We’ll see how we all feel at the next low point. By the way, normal readings of Consumer Confident reside in the mid and upper 70’s, not at 50.

As we struggle to put in another economic cycle, the pressures become greater as the debts have not been allowed to be cleansed, they have been additive. This is exactly why we now talk in trillions and why the next swing downward is very likely to be a monetary or nation changing event.

Boy, do we know how the IMF wants to change the world. Power and control. Money from nothing.
March 30 (Bloomberg) -- The International Monetary Fund would determine terms of assistance it provides Greece, Managing Director Dominique Strauss-Kahn said, underlining concerns some European leaders have expressed over the lender’s participation in a possible rescue.

Leaders of the 16-nation euro region last week endorsed a combination of IMF and bilateral loans at market interest rates should Greece run out of fund-raising options, while saying they would maintain control over the process.

Any Greek package would “be an IMF program decided by the IMF as it happens with each and every country,” Strauss-Kahn said in an interview on a flight to Bucharest from Warsaw today. “The IMF will define the conditionality, as we do with any country.”
Greece, I certainly hope that you take the lead offered by Iceland and tell these people to pound sand! These are the same people that brought you to crisis by selling their debt backed and financial engineered systems to you in the first place. Being “rescued” by the IMF is like rushing into the arms of someone trying to drown you.

Bloomberg ran a piece this morning on a hopeful outlook for state tax collections. Let’s look at it, but as you read it, ask yourself if they are actually going to materialize, what the numbers are compared to, and would any increase in tax be due to improvement in the real economy, or would they be related to higher tax initiatives and price increases in things like the cost of utilities?
March 30 (Bloomberg) -- The two-year slide in tax collections that opened a $196 billion gap in U.S. state budgets has stopped, easing pressure on credit ratings and giving leeway to lawmakers as they craft spending plans for next year.

The 15 largest states by population forecast a 3.9 percent gain in tax revenue in fiscal 2011, budget documents show. The 50 states on average may increase collections by about 3.5 percent, the first time in two years the figure is expected to grow, said Mark Zandi, chief economist at Moody’s Economy.com, California took in 3.9 percent more since December than projected in January, Controller John Chiang said this month. New York got $129 million above forecasts in its budget year through February, according to a report from Comptroller Thomas DiNapoli. In New Jersey, the second-wealthiest state per capita, January sales-tax collections were 1.9 percent higher than a year earlier, the first annual increase in 19 months, forecasters said in a report last month.

“This time last year, we were sliding down a mountain,” said David Rosen, chief budget officer for the New Jersey Legislature. “I don’t think we are now; it’s stabilized.”

States collected almost $81 billion less in sales, income and corporate taxes in 2009 than in 2008, according to the Nelson A. Rockefeller Institute of Government in Albany, New York, as the economy struggled through its deepest slump since the Great Depression. Emergency spending cuts and tax increases became routine during the recession that began in December 2007.

‘Panic Mode’
The end of the collections crash will ease fiscal strains that led New York-based Moody’s Investors Service to lower the ratings of five states last year, after no downgrades in 2008. It will also enable governors and legislators to draw up budgets for fiscal 2011, which starts July 1 for most states, with more confidence that money they plan to spend will arrive.

“As long as revenues were sliding, budgeters were in a panic mode,” said Zandi, whose West Chester, Pennsylvania-based company provides economic analysis to businesses, government and investors. “It’s not as scary when revenues are rising.”

States’ combined budget gaps will still total $180 billion in fiscal 2011 and $120 billion in fiscal 2012, the Washington- based Center on Budget and Policy Priorities estimates.

This fiscal year, the 15 largest states expect to collect 11 percent less taxes than in fiscal 2008, budget proposals show. It won’t be until 2013 that revenue returns to 2008 levels, said New Jersey’s Rosen and Barry Boardman, the North Carolina General Assembly’s chief economist.
The panic is letting up for now? Yet they are still facing another $180 billion in shortfalls next year? Here’s what I love about economists and financial planners… they are always projecting out a straight line growth rates of whatever growth just occurred, unless it’s negative of course, then they just panic. But the lines are not straight at this juncture in history, government spending and debt are on a parabolic rocket shot, headed straight to the moon. Good luck with those deficit projections, they will need it.

Still, to see the rate of tax receipts stabilize does show that the cliff dive has subsided for now. How far ahead of that is the stock market? Well, the S&P 500 is now 76% off the 666 March bottom of last year. That is a scary wild number, but remember the way percentages work, we are still way off the highs of late ’07 and we are in a bizarro drug induced debt induced convulsion. Remember, we had a debt bubble, that bubble is likely bursting and the spash of money will create odd looking things as that money looks elsewhere to where it may be treated better.

I haven’t shown a big picture chart in awhile, so let’s back out two years and look at the SPX. We created a huge rising wedge on diminishing volume, then we diverged from that wedge, and although still rising, you can see that we are still inside the confines of what appears to be a large megaphone formation, defined by the diverging blue lines:

Megaphones are usually reversal patterns, although not always. You can see that we’re getting near the top of this one, the first resistance line is about 1,185, there is a pivot at 1,187. Support is now at 1,176 then 1,168.

As I look at the debt markets I see that bonds are clearly under pressure. We’re still sitting on that neckline, what’s it going to be? If we wish to cycle up in the economy and markets, then we pressure debt. There’s only one way to get off the roller coaster, and that’s to step outside of the Fed’s debt backed money box. AZRainman made one heck of a great pinkslip yesterday, we’ll be sending these into the “Federal Reserve” soon:

Queen & David Bowie - Under Pressure:

Need to Ride

I've been off the bike for a week, and desperately need to get in at least an hour and a half of hard intervals this afternoon (no training ride this evening because of Passover seder). Before I can get out on the bike, however, I need to work ahead on class preps for tomorrow and next Monday. So, don't look for much more blogging from me today.

UPDATE: I got out for only 50 minutes, and my woeful set of intervals confirmed what I had been suspecting: I've lost a substantial amount of fitness over the last several weeks of only intermittent riding. Time to HTFU, ride more, and ride harder.

President Obama's Proposed Legislation to Regulate Financial Services

Just in case you want to educate yourself about what's actually in the legislation, before all the spinning and counter-spinning start.

senate finance bill -

Not Recommended Reading: The Health Care Reform Bill As Enacted

But if you really, really want to...

Health Care Reform Bill -

Happy Birthday Vincent Van Gogh (1853-1890)

Bill Still - Nasa and Big Banks

What If Israel Attacked Iran's Nuclear Facilities?

This was the question asked by researchers at the Saban Center for Middle East Policy at the Brookings Institution, when they held a day-long war game between three players - Israel, Iran, and the US - each making three moves, with the first being Israel's unprovoked strike on Iranian nuclear facilities. Kenneth M. Pollack, Director of the Saban Center, reports on the results of the game here.
One of the most important points that the stimulation illustrated was the danger for Israel that any strike against Iran could well force Jerusalem to mount major counter-terror operations against Hizballah in Lebanon and Hamas in Gaza.
It goes without saying that such simulations cannot replicate the strategic decisions made in the heat of actual conflict. So, it is never easy to determine how realistic are the outcomes of stimulations. But they are a useful exercise for policy makers, and we might well presume that other versions of the Saban Center's simulation have been or are being carried out in Israel and Iran.

How Government Regulations Make U.S. Health Care More Expensive

The release of Michael Moore's movie "Sicko" which criticizes the U.S. health care system have made the issue of the U.S. health care system a hot topic.

One factor overlooked by both Moore and some of his critics are how the U.S. system is much less free market than it appears and that regulations are an important factor in making the system so expensive. The Economics Focus of the latest The Economist points to a study that argues that regulations cause an additional $169 billion in annual net costs.

And that is the net cost figure. The gross cost is a full $339 billion. The study assumes that somehow $170 billion in benefits is created by these regulations. But many of these supposed benefits, even if for the sake of the argument assumed to be real, will still add to the costs of the system.

Some Recommended Readings for Monday, March 29, 2010

Daryl Levinson, "Parchment and Politics: The Positive Puzzle of Constitutional Commitment."

Arthur G. Fraas, "The Treatment of Uncertainty in EPA's Analysis of Air Pollution Rules," RFF DP 10-04 (Feb. 2010).

Shi-Ling Hsu, "A Game-Theoretic Model of International Climate Change Negotiations."

Christine Wiedinmyer and Matthew D. Hurteau, "Prescribed Fire As a Means of Reducing Forest Carbon Emissions in the Western United States," Environ. Sci. Technol. 44:1926-1932 (2010).

David Vogel, Michael Toffel, Diahanna Post, and Nazli Z. Uludere Aragon, "Environmental Federalism in the European Union and the United States," Harvard Business School Working Paper 10-085 (2010).

U.S. General Accounting Office, "Climate Change: Observations on Options for Selling Emissions Allowances in a Cap-and-Trade Program," GAO-10-377 (Feb. 2010).

Larry Hardesty, "What computer science can teach economics," MIT News (Nov. 9, 2009).

Morning Update/ Market Thread 3/29

Good Morning,

It’s a Monday, equity futures are higher… for now. How long has this Monday phenomena been going on? Seems like forever. And the rush to get in is moving from starting late on Fridays just prior to the close, to earlier in the day, then to Thursday to beat the rush. Now Pavlovian traders believe that markets only move in one direction – we shall see. Below is a 30 minute chart of DOW futures on the left and a 5 minute chart of S&P futures on the right:

The dollar is lower, bonds are slightly lower, oil and gold are both a little higher. Below is a 30 minute chart of long bond futures, you can see a very clear flag formation. That is bearish for bonds and if it breaks in the expected direction for that formation, down, then prices will land convincingly below the large H&S neckline validating that 2 year head and shoulders pattern, thus signaling higher rates:

This is an import formation to watch, prices need to break wrong way out of that formation or the Fed has a problem.

The trend away from debt is not, I believe, any kind of positive trend, it is not saying that the economy is rip-roaring healthy, instead it is saying that there is too much supply of debt and that people are beginning to revulse. Keep in mind that the last bubble was in debt and that money flows/ flees from one asset class to another. Of course money can just be destroyed as assets classes deflate, so there is likely some of both occurring while at the same time governments around the world attempt to issue more and more debt because they are trapped inside of the central banker debt box. The bankers have developed ways to trap fees from the constant roll-over and the movement of money from one asset class to the next. This is benefiting no one but them.

Personal Income and Outlays was reported this morning for February. Personal Income did not change month over month, but consumer spending supposedly did. Let’s see, no income but spending up = debt. Is consumer debt growing again? Possibly some, but I highly doubt the consumer is in a position to take on a bunch of debt to create a sustainable trend. Here’s Econoday’s spin:
February was tepid for the consumer as personal income was held down by weakness in wages and salaries while personal spending was softened by a dip in auto sales. But this sluggishness may be temporary. Personal income was flat in February, following a 0.3 percent rise the month before. The important wages & salaries component also was unchanged in February after jumping 0.4 percent in January.

Spending was mixed by component. Overall, personal consumption advanced 0.3 percent, following a 0.4 percent boost in January. By components for the latest month, durables fell 0.4 percent, nondurables gained 0.7 percent, and services increased 0.3 percent. Durables were pulled down by a drop in motor vehicle sales while nondurables appear to have been propped up by higher gasoline prices.

Inflation numbers were subdued in February as the headline PCE price index was flat as was also the core PCE price index. Analysts had expected a 0.1 percent uptick in the core. For January, the headline price index rose 0.2 percent while the core rate was unchanged.

Year on year, personal income growth for February came in at up 2.0 percent, rising from up 1.2 percent in January. Year-ago headline PCE inflation eased to plus 1.8 percent from 2.1 percent in January. Year-ago core PCE inflation came in at up 1.3 percent, compared to up 1.3 percent in January.

But we may see a turnaround in income and spending. First, spending in February likely was held down by severe snow storms during the month and likely will bounce back in March. Also, if economists and analysts are correct that March will see a sizeable gain in payroll employment in Friday's employment situation, then personal income also will likely get a lift for the month.

LOL, how long are these guys going to talk about the weather? What a joke. Expectations of a sizeable growth in employment could be a set up for disappointment, the report is released on Friday morning.

Volvo, the Swedish, no U.S. auto manufacturer owned by Ford, no wait it was announced over the weekend that Ford reached a definitive agreement to sell its Volvo car unit and related assets to China's privately held Zhejiang Geely Holding Corp for about $1.8 billion. Notice how real assets follow the holders of debt? Assets do not stay in debtor hands for long. Power and control, you lose it when you live life in debt.

Friday produced yet another small movement in the McClelland Oscillator, meaning that we can expect a large directional move today or tomorrow. The markets are now on daily sell signals and the divergences in breadth are becoming more apparent. There are signs of distribution occuring so cautious is the only way to be.

Below is a 60 minute chart of the SPX with the current upchannel shown. We poked beneath the channel slightly on Friday but are Monday ramping back inside so far this morning.

Watch the debt and currency markets, that’s where the action is, the equity markets are moving as if up is the only direction from now on. Hey, that’s the way it’s got to be, living in a fantasy.

Supertramp – From Now On:

The Universe of Information

Technology Review (here) has a fascinating account of a new theory of quantum physics according to which the basis of gravity - indeed, the basis of the entire universe - is information. As I non-scientist, I have no idea what to make of this; the implications seem both baffling and very exciting.

Becker and Posner on Health Care Reform

Becker finds nothing to like, and believes that real reform would be deregulatory. Posner finds several things to like in the health care reform legislation, but thinks it's a budget buster that moves the US in the direction of a  Greek-style economic melt-down, which he thinks might be a good thing for the US because it might finally force the federal government toward more efficient institutions. Their full analyses are here at the Becker-Posner blog.

I would agree that the reform legislation is likely, in the long-run (i.e., after all its provisions are implemented, which will not be for some time), to increase the budget deficit at least marginally, but will it threaten the overall stability of the US economy? It seems doubtful. Becker characteristically pretends that there is nothing structurally wrong with health care markets, aside from too much government interference; he blissfully ignores the fact that other advanced, industrial democracies obtain similar overall health outcomes at far lower cost than the US. Posner's view of the legislation is more nuanced and realistic, but the implicit prediction of doom in his analogy to Greece seems entirely too far-fetched. My relatively uneducated guess is that the CBO scoring of the health care reform bill will prove to have substantially underestimated the costs, but that the excess costs will not be nearly as great as Posner supposes.

Happy 81st Birthday Richard Lewontin

Lewontin has made important contributions to evolutionary biology and established a mathematical basis for population genetics. I still have his book The Genetic Basis of Evolutionary Change (Columbia 1974) on my bookshelf from when I was a graduate student at Chicago studying philosophy of science. 

Post-SELE Blues

I'm back home now from the second annual meeting of the Society for Environmental Law and Economics in Atlanta. Very sad to leave my new and old SELE friends. Even more sad to come back with class preps to finish for 4 hours of teaching tomorrow. Such is life.

What Is Buffet's Problem?

Warren Buffet, who at least before his massive donation was considered the world's second richest man, complains that he pays too little in taxes. He says that he and other rich Americans "must do more to help the less fortunate". Well, since I am comparatively a lot less fortunate I'd be more than happy to take a billion dollars or so off his hands! He can contact me any time he wants to make the arrangement.

And if he specifically wants to give more money to the government, he can easily give away his money to the U.S. government here to the Treasury Department's gift section.

There is thus no reason at all for Buffet to complain that he has too much money as there are more enough private individuals as well as the government who would be willing to accept his money. Could it really be that someone who is such a successful entrepreneur is really that clueless? More likely he is a hypocrite.

Industrial Profits in China Rise 42%

Profits rose a full 42.1% in Chinese industries during the first 5 months of the year. That together with the excess liquidity created by its currency policy indicates the investment boom will continue despite some tightening measures from the authorities.

Ahmadinejad in Trouble

Large riots have erupted in Iran to protest against cuts in subsidies of gasoline (or petrol as the British call it). Despite soaring income from oil, the Iranian government has had economic troubles, not least because of soaring costs of gas subsidies. Iran has littler refining capacity and so they have to export their oil to countries with refining capacity and then import the gasoline. And gasoline consumption has soared in recent years because of the low price and because of a growing population.

For financial reasons, the Iranian government has now decided to ration the amount of subsidized gasoline. But this has proven very unpopular among Iranian motorists who in many cases have started to riot in protest. Of course, an even better way of reducing the budget deficit -not likely to cause much discontent among ordinary Iranians- would have been to cut off funds to Hezbollah, Hamas and other terrorist groups that they fund now. And to really improve the economy, they would have to do away with Islamic dogma forbidding for example interest rates. But none of these measures are likely as long as the Mullahs remain in power.

Happy 68th Birthday Jerry Sloan

My favorite player, when I was a kid, growing up in Chicago.

Damon Vrabel – Renaissance 2.0, Lesson 4, The Culture of Empire

In Damon’s words:
I just posted the next couple videos in the Renaissance 2.0 series. They are the first 2 parts of Lesson 4 on the Culture of Empire. I think this type of content is important to help people understand WHY we need to move beyond debt-based money at the federal level and fix the Federal Reserve monetary system without only relying on math and spreadsheet models.

The fact is, most people don't care about the numerical justifications. It's just not interesting to them because it only speaks to the left brain...it doesn't engage the right brain and our deeper emotions, which would help them understand why their left brain should care. The Culture of Empire does engage the deeper issues. People do care about their lives, their families' lives, their communities, and the natural world they live in. That's the purpose of Lesson 4. It should help all of us explain the "why it matters" issue to people who haven't already joined an effort to reform the monetary system.
To view the other videos in this series (and the very cool artwork of AZRainman), please visit Renaissance 2.0

Renaissance 2.0, Lesson 1 of 4, The Culture of Empire (7:56)

Renaissance 2.0, Lesson 2 of 4, The Culture of Empire (8:39)

The Gunners Lose Ground

When I last checked the match before lunch, Arsenal were up 1-0 in the 82d minute. I returned from lunch to find that Birmingham City tied the match at 1-1. This is a dispiriting result, especially given Chelsea's 7-1 romp at Aston Villa. Arsenal couldn't afford the 2 points they dropped today. If they are to have any chance of winning the Premiership, I think they will have to win out their remaining matches. The Gunners cannot expect Chelsea and Manchester United, who still have to face one another, to drop enough points in their remaining games to permit Arsenal another slip up.

BIS Again Publishes "Austrian" Analysis

As reported in the Wall Street Journal, the Bank of International Settlements, an international organiztion for central banks, have published another "Austrian" analysis of the global economy.

This is not the first time they've published an "Austrian" analysis. They did so last year too, as I reported at the time. Given the general "Austrian" attitude towards central banks, there is of course some irony in the fact an organization like the BIS promotes it.

Bravo Fabian!

Fabian Cancellara pulls away from Tom Boonen and Juan Antonio Flecha in the last two kilometers to win the E3 Prijs Vlaanderan. Sounds like it was a great race. Wish I could have seen it. Tomorrow, the Criterium Internationale pits Lance Armstrong against former teammate and still rival Alberto Contador. I would be surprised if either winds up on the top step of the podium, but the rivalry adds a bit of extra luster to this particularly Spring Classic.

Day Two of SELE (2010)

Today, we have 5 panels on: Enforcement; Tax and Environmental Regulation; Environmental Law and Other Disciplines; Benefit Cost Analysis; and Distributional Considerations. Presenters, coming from universities and research institutions in six different countries, including Julie Steiner (St. Johns); Howard Chang (Penn); Christian Langpap (Oregon State); Yoram Margalioth (Tel Aviv); Josephine van Zeben (Amsterdam); Mauel Utset (Florida State); Celeste Black (Sydney); Suzanne Kingston (University College, Dublin); Jim May (Widener); Douglas Noonan (Georgia Tech); Jose G. Vargas-Hernandez (Guadalajara); Peter Appel (Georgia); Tracey Roberts (Vanderbilt); and Jonathan Nash (Emory). I might also add, in this context, that during the last session yesterday, Akanksha Bhagat of the National Law School of the University of India, gave a remote presentation on market-based approaches to endangered species protection.

In just its second year of existence, the Society for Environmental Law and Economics has grown into a truly global organization.

Happy Birthday Heinrich Mann (1871-1950)

Elder brother of Thomas Mann, and a wonderful novelist in his own right, including Professor Unrat (which was adapted into the film The Blue Angel), Man of Straw, and my favorite, the two-volume fictionalized biography of King Henry IV of France (Young Henry of Navarre and Henry, King of France).


The View at SELE (2010)

My buddy and co-organizer Shi-Ling Hsu is at the podium presenting a paper on a game-theoretic model of international climate negotiations.

More Live Blogging from SELE (2010)

This afternoon, several papers on REDD, the United Nations Collaborative Programme on Reducing Emissions from Deforestation and Forest Degradation in Developing Countries. This is, in my view, mainly a program for distributing resources (that is, cash money) from developed to developing countries for the ostensible purpose of conserving forests that are carbon sinks and, thus, mitigate carbon emissions.

The monitoring and verification problems associated with implementing REDD are almost innumerable and very serious. Among other things, if a certain area of forest is protected pursuant to some REDD-related agreement, what's to prevent forest users from merely cutting down more trees in some other, unprotected forest area, thereby undermining any emissions savings from the REDD-related agreement. Moreover, what constitutes "deforestation" under REDD is not entirely clear. Would agreements allow for prescribed burns that might minimize the deleterious effects of wildfires? A study in the current issue of Environmental Science and Technology (here) finds that prescribed burns can actually reduce net carbon emissions from specific forests between 18-60% by reducing fuel for wildfires. 

My Panel at SELE (2010)

My paper (with Peter Grossman) on why the game-theoretic treatment of Garrett Hardin's "tragedy of the commons" (the Herder Problem) is wrong, and how it might be improved, was well received. Paul Rubin, the commentator, called it a "nice paper" (high praise indeed).

The other paper on the panel was by Dan Kelly (Notre Dame) on "Strategic Spillovers." It's a very interesting paper on strategic decisions to create, or threaten to create, negative externalities that would not otherwise be created but for institutional mechanisms that provide possible pay-offs to avoid them.

OECD on Social Mobility

The Organization for Economic Cooperation and Development (OECD) has a new publication on Economic Policy Reforms. Chapter 5 of that publication (here) compares social mobility - the extent to which people moving up and down the prosperity ladder - in all the OECD countries. Interestingly, and contrary to the conventional wisdom, "[m]obility in earnings, wages and education across generations is low in France, southern European countries, the United Kingdom, and the United States. By contrast, such mobility tends to be higher in Australia, Canada and the Nordic countries."

What are the reasons for this? Among other factors, the OECD finds that "[r]edistributive and income support policies seem to enhance intergenerational social mobility." Presumably, higher inheritance taxes would also be associated with higher levels of social mobility. As a Property Law scholar, I also wonder about the effects of the growth of dynastic trusts (and the decline of the Rule Against Perpetuities) on the relative lack of downward social mobility in the US. 

Live Blogging from SELE (2010)

It's day one of the second annual meeting of the Society for Environmental Law and Economics at Emory Law School in Atlanta. The first panel is on Environmental Decisionmaking and Benefit-Cost Analysis, with two very good papers by Matt Adler (Penn), on "Future Generations: A Prioritarian View," and Jonathan Masur and Eric Posner (Chicago) "Against Feasibility Analysis." Right now, Sasha Volokh (Emory) is commenting on both papers.

Nearly all of the conference papers can be read here.

Morning Update/ Market Thread 3/26

Good Morning,

Equity futures are up with a typical no volume overnight ramp job that followed yesterday afternoon’s daylight high volume sell-off. Below is a chart showing 30 minute DOW futures on the left and 5 minute S&P futures on the right:

The Dollar is down slightly, while the Euro is up. Bonds are down yet again, oil and gold are back up a little.

The final revision to 4th quarter GDP came in revised downward to an annualized rate of 5.6%. The consensus and prior report was 5.9%. Econoday’s report follows:
Fourth quarter economic growth was up but not quite as much as previously believed. The good news is that we have moved well beyond the final quarter of last year and forward momentum is now probably a little better than seen in GDP. Real GDP growth for the fourth quarter was revised downward to an annualized 5.6 percent from the prior estimate of 5.9 percent. The consensus expectation was for no change from the previous estimate. Both final sales and inventory investment were revised down. Final sales grew a meager 1.7 percent, following a 1.9 percent rise in the third quarter.

The 0.3 percentage point cut in the GDP growth rate primarily reflected downward revisions to nonresidential fixed investment, to private inventory investment, and to personal consumption expenditures.

Year-on-year, real GDP held on to its return to positive territory, improving to up 0.1 percent from minus 2.6 percent in the third quarter.

Inflation is still barely noticeable as the GDP price index was revised down to a 0.5 percent gain, compared to the prior estimate of an annualized 0.4 percent. Analysts expected no net revision to the prior estimate of 0.4 percent.

Were today's report the initial estimate for the fourth quarter, it would be upsetting how weak final sales were. But more recent monthly data show a gradual improvement in consumer spending, business investment in equipment, and an uptrend in exports. Basically, there should be little reaction to today's GDP revision.

All I can really say is that I believe the entire GDP report and associated growth to be as false as the bank’s mark to fantasy accounting. This is an annualized number, measured in dollars and it contains all the false inflation data errors, plus it reports financial engineered and government engineered “productivity.” Wake me up when we stop lying to ourselves.

Citizen Sentiment is released at 9:55 Eastern.

Yesterday’s zoom to the moon followed by dive into the close is a typical intraday reversal that is often seen near major tops. These types of reversal signals, however, have been manipulated away during this past year’s rally, but one day one of them will be for real, it certainly could be this one as the market internals are now badly diverging and the oscillators have all issued sell warning. Breadth is deteriorating as seen in the Advance Decline line.

Most important is what’s occurring in the bond and currency markets. Bonds are selling off hard as supply is overwhelming and the Fed is talking like they are going to really, truly, cross their hearts, mean it when they say they are going to end their nonsense. Right… right up to the moment that the markets begin to roll over again and it turns the pressure back on.

The pressure, however, is already on. The middle and long end of the bond market is signaling that higher rates are coming. Below are 2 year charts of TLT (20 year bond fund) and the TNX (10 year Treasury), both have broken smaller H&S patterns that target higher rates than here, and the TNX has broken, although not yet convincingly, the very large 2 year (inverted) Head & Shoulders pattern neckline. This portends higher rates are coming and targets may well be achieved within the next 6 month to a year.

Now, they still are not yet convincingly below the neckline, so there is still time to come in and continue to manipulate the bond market again, but in the end the manipulations can only last so long, otherwise the government winds up being the only players in the market.

The TNX is currently just under 4%, that was a doubling of rates from 2%. The target on a break is 6%. While that may not sound like much, it is a tripling of the borrowing costs from a little over a year ago. And while it is closer to historic norms in terms of rates, what’s different is that the level of debt in the system has grown exponentially and there is a ton of supply still coming on. Most of it was financed short term and that presents a problem going forward. Also, if those targets are achieved, interest rates will break a 28 year downtrend line, portending the possibility of even higher rates. So, it’s crunch time again. They either try to stop it here again, or they let the markets do what they are going to do.

Keep an eye on the VIX here as well, it broke above the most recent downtrend line yesterday as seen on this 3 month chart:

Hey, it looks to me like the bond market (DEBT) has got them under a little pressure:

Billy Joel – Pressure:

The Economist Assesses Health Care Reform

Here. The bottom line:
What will it mean for America? The short answer is that the reforms will expand coverage dramatically, but at a heavy cost to the taxpayer. They will also do far too little to rein in the underlying drivers of America’s roaring health inflation. Analysis by RAND, an independent think-tank, suggests that the reforms will actually increase America’s overall health spending—public plus private—by about 2% by 2020, in comparison with a scenario of no reform (see chart). And that rate of spending was already unsustainable at a time when the baby-boomers are starting to retire in large numbers.

Unemployment in Various Recessions

The current recession is much worse than any other recession since the Great Depression. But I didn't need to tell you that.

Hat tip: Mark Thoma at Economist's View and Tyler Cowen at Marginal Revolution

Happy 69th Birthday Richard Dawkins

First-rate philosopher of science and public intellectual.

Golden Opportunity to Abolish Farm Subsidies

As I pointed out recently, food prices are soaring. This is particularly true for food commodities such as corn and other grains. And as we're talking about globally traded commodities, this is not just an American phenomenon. As is pointed out in the latest The Economist, there are good reasons to believe that food commodity prices will remain high for several years to come.

One aspect of this that most people -including until now me- have failed to highlight is that this means that now exist a golden opportunity to do away with one of the most evil and destructive government programs: farm subsidies. Why this program is particularly bad is something which I have explained repeatedly in the past and the case for doing away with it would really be just as strong at any time.

But, the problem have always been that certain influential groups, meaning the general farm lobby in America and the government of France in the EU, have blocked any cuts in farm subsidies. These forces remain strong and will likely continue to oppose cuts. But with soaring prices causing farm income to soar, this means that the forces working for a cut should have an easier time. With farmers making more and more money and with the real income of low income urban people being squeezed, the injustice and absurdity of taxing the latter to benefit the former becomes more obvious than ever. If only free market advocates can enlighten people about how they are impoverished by farm subsidies, then enough public anger could perhaps be mobilized to abolish or at least sharply reduce farm subsidies.

The Foundation of Economies

I’ve been talking a lot to people lately about the rule of law and how important it is to the foundation of our economy. It is THE critical element, without it, no functional economy. You can have massive human and natural resources, but without the rule of law, you will not have capital formation and you will not have an economy that works.

The basis of a functioning economy is a rule not of man, but of nature. It is natural because man can attempt to manipulate or bypass the process, but man will lose every time they stray outside of the rules. The same rules win out every time they are tested, just like gravity. The basis of economies are ruled by the same rules of mathematics and of physics, it is bound and limited in its construct by both. Create a system that is not harmonious with those bounds and well… welcome to exponential math and the limits of the physical world.

Sometimes when what you’re doing isn’t working, it’s best to get back to the basics. Allow me to start with a most fundamental concept, one that many people are aware of but may not be able to verbalize real well. I call it BE – DO – HAVE. The concept is simple. In order to have, you must first BE, then DO… THEN you can HAVE. Take, for example, the lotto winner. They skip right over BE and DO and proceed straight to HAVE. This is what people are attempting to do every time they gamble, every time they buy that ticket at the 7-11.

And what happens to those lucky enough to win, do they hold onto their wealth? Of course not, they failed to first BE and then DO. Thus they do not HAVE for very long.

My point? The same thing is true for nations. This is the root of socialism and WHY it is not harmonious with nature. Sharing the wealth destroys work ethics, it undermines BE and DO. It is an attempt to HAVE from the efforts of others. I was in the Soviet Union at the height of the cold war, I saw the lack of work ethic first hand. I saw how it impeded the progression of mankind – it was like stepping back in time 50 years or more. Innovation? Forget it. Security? No way. Freedom? Hardly.

Of course Plutocracy, rule by the rich, is hardly efficient at advancing humankind either. That doesn’t work because it too eventually destroys work ethic, serfs and slaves forced to give away all their productive efforts will eventually give up.

A Dictatorship, Mr. Chavez, is also an attempt to proceed directly to HAVE while skipping over BE and DO. This is why dictatorships do not last; they too are not harmonious with nature.

So let’s take a look at the basis of a healthy and functioning economic system, one that is built upon a solid foundation.

Pyramid of national wealth:

Note that the first bricks of the foundation are built upon the rule of law. They are not built upon money and they are not built upon human or natural resources. The rule of law comes FIRST, without it the others are meaningless.

If you attempt to head straight to wealth, you are skipping over BE and DO. This is the current method, it is top down, not bottom up. This is why money printing fails, it is not real wealth, and it is the “solution” being offered. It is destined to fail in exactly the same way that the gambler is destined to die broke.

Think that our nation can just go straight to creating jobs? Never happen, will never work without first starting at the foundation and building your way up to it. Think you know the answer to job creation? Build this project, build that project? If you think that you can just fire up job creation, you are mistaken.

Large projects and infrastructure building, real wealth, cannot be stolen, it cannot be dictated. In order to create jobs, the rule of law must be in place, a system of exchange and way of providing capital must work, there must be human resources at the appropriate level, there must be natural resources available, and THEN you can HAVE jobs that build wealth.


The rule of law is necessary FIRST because without it capital will not be formed, it is not attracted, it will not concentrate. Would you give your money to Hugo Chavez as an “investment?” Would you lend your money to someone who is constantly changing the rules of the game? Would you put your money to work by giving it to a lazy person with no work ethic? Would you lend your money to someone who spends three times what they earn?

NO? Neither would I. Capital, you see, is free to come and go as it pleases, it is a part of nature and it cannot be contained, not in the long run.

Lawmakers skipping over and creating new procedures to pass healthcare? Is that the Rule of Law? Bailing out bankrupt companies, is that the Rule of Law? TARP, Quantitative Easing, Mark to Fantasy accounting, government buying of mortgage paper, are those the things that comprise the rule of law? Private individuals charging people interest to use their own money system, is that the Rule of Law?

These things are gouging huge holes in the foundation of our economy. They are causing capital to flee. This is a part of why so many do not have jobs, and why we are becoming less wealthy as a nation. It begins at the foundation. Who is responsible for maintaining the rule of law, the foundation? It is WE the People.


Money and exchange systems are necessary to provide working capital. Want to build a nuclear power plant? Where’s the capital coming from? Capital concentration is completely necessary to the advancement of human kind. A person and his capital can accomplish little things. Combine capital with several partners and you have the basis to accomplish something greater – the core of a simple partnership or business.

Want to send wooden sailing ships across the ocean without risking ALL your capital? Better have some limited liability, the foundation of corporations and the next level of capital formation that was necessary to advance humankind.

Want to accomplish something larger than is capable by a corporation? You will need capital that is directed and formed by government. That capital, however, will not last long if it is manufactured or not formed in accordance with the rule of law.

Let’s go back and visit the way in which capital is free. You may recall from the following diagram from my article Asset Classes and Capital Flow…

There are 5 principal asset classes:

1. Currencies – for capital to flow from one asset to another, it must first be exchanged for currency.

2. DEBT – Debt, because our money is backed by debt, it is as large an asset class as currency. Yes, debt, although likely a liability to you is an asset to someone else. An asset to someone, like say, the central bank who issues an instrument of debt when YOUR money is created.

3. Equities – Providing working capital for corporations is an essential process for capital formation. This is, in case you have forgotten, the reason that we have stock markets. No, they do not exist for the pleasure of market makers, quants, banks, or gamblers in derivatives.

4. Real Estate – Sections of the earth. Under our current rule of law, by the way, you don’t really own, you rent.

5. Commodities – Things of the earth.

It’s a fascinating study watching money pour from one asset class to another. The equity bubble in technology leading up to the year 2000… pop, into currency, into real estate… pop, into DEBT, pop… and now which asset class do you see capital flowing to?

New home construction lowest level on record. No, not there, keep looking. Meanwhile, with each cycle the DEBT piles higher, our money system adds on another three zeros. We are forgetting the basics, it’s time to head back to the fundamentals.

E-Boarding Passes

On this morning's flight to Atlanta, I used an e-boarding pass for the first time. It was easy. When I checked in for my flight on the home computer, Delta sent the boarding pass to my cell phone. On the e-boarding pass was something similar to a bar code. At security and at the gate, I simply scanned my cell phone instead of a paper boarding pass. Easy and cool. It probably didn't save much time, but at least it saved a piece of paper.

Is the Market Being Manipulated?

Yesterday I was tipped to read the following article from the Financial Armageddon website. I found the facts within the Phil Davis conversation (of Phil’s Stock World) to be quite fascinating. Here he discusses where the volume, what little of it still exists, is occurring. He also quantifies the effect of recent substitution bias in the DOW Industrials…

Is It...or Isn't It?

Larry Doyle, a long-time Wall Street veteran and publisher of the Sense on Cents blog, hosts a Sunday night show, "No Quarter Radio's Sense on Cents with Larry Doyle," on Blog Talk Radio. In this week's edition, which features an interview with Phil Davis of Phil's Stock World, Larry raises a question that a few of us, who are amazed at and unsettled by the willingness of investors to throw caution to the wind and repeat the mistakes of the past (see "Back Buying the Same Kind of Crap" for one example), have occasionally wondered about ourselves:

Is the stock market being manipulated?

I can not count the number of times I have been asked that question over the last 9 months. Rather than my offering personal opinions which market pundits may view as sour grapes or worse, I want to revisit a ten-minute segment of my interview last evening with Phil Davis.

The segment runs from 29:45 until 40:00 (audio player provided below). If you do nothing else today, please listen to this dialogue between Phil and myself. Neither of us goes into this conversation with agendas or preconceived notions in an attempt to score points. I will offer an edited version here. I think you will find the information, thoughts, and opinions offered to be enlightening.
PD: It’s getting more and more likely that there’s going to be an event that takes the market down and that’s because of the nature of the market rally. The rally has been a very thinly traded, low participation rally.

LD: I want to pursue that….the idea that there could be or will be some sort of an event. Obviously, all of the governmental support that has come into the market, all of the quantitative easing, the easy money, the 0-.25% Fed Funds rate…all sorts of other backstops. Now they’re trying to figure out how to ease some of those supports out of the market while China and India have increased their rates. Are we overextended? Have we created a little bit of an asset bubble?

PD: I think we have created a ‘helluva’ asset bubble…..Let’s be honest. We were delusional in 2007. Those valuations were completely wrong….the earnings were fake and I want to emphasize again fake because they were fake. They were not only not real earnings but what were reported as earnings turned out to be tremendous losses. The financials were putting out fake numbers…it was all fake…..How did we get the market back to where it is then? How is this even possible?

LD: How much are we overvalued?

PD: Don’t forget the Dow is fake also. They took out GM and Citibank from the Dow. Those are two zeros and they put in Travelers and Cisco…that’s 640 Dow points that were added because they swapped GM and Citi for Travelers and Cisco. Now is that real?

LD: I look at the most actively traded stocks. Almost everyday the most actively traded stock in the market is Citi…this isn’t real…

PD: Whether Citi is real or not, I think you touch on something more important, though. The most active stock is Citi. The next most active stocks are Bank America, Wells Fargo…

LD: Also AIG.

PD: Those trades are 80% of all trades in the market and the total market volume is less than half of what it was back then. In other words, you’ve got half the market participation of what it was and of that half, 80% of it is concentrated in less than half a dozen financial firms.

LD: What does this say about the future of Wall Street?

PD: It says that the people who are running the system are in total control of the marketplace. There is no retail participation….on a relative basis.

LD: They don’t believe it.

PD: ….it looks like a bunch of crooks….
So, is the market being manipulated? I would guess that depends on how one defines manipulation. That said, market volume and market depth tell us a lot. I thank Phil Davis for providing this ’sense on cents.’

No, the markets are not real and they are not performing the function for which they were intended. The entire run of the past year rests on the back of mark to fantasy and other accounting fraud, combined with the hot money created by robbing the American people. All this is run by a few of the biggest players and their computers.

Cheered on by the media and politicians, rules and ethics are routinely ignored in an attempt to smooth over the American marketing façade. Company annual reports are the slickest marketing brochures money can buy. Your broker adds on yet another layer of marketing brochures, and all this is championed by those who should know better. Not an adult in the room. Americans are caught in the middle, I certainly would not call it “investing.”

By the way, without the effects of substitution bias over the years, the DOW Industrials would be worth almost exactly zero - GE being the only survivor, having only survived with bailouts and accounting fraud.

Very Weak Swedish Export Growth

The Swedish statistical central bureau reports that the Swedish trade surplus fell from 12.7 billion kronor May 2006 to 9.7 billion kronor May 2007. For the first 5 months of the year, the surplus fell from 70 billion kronor to 57.7 billion. This is perhaps not surprising given the sharp credit driven increase in domestic demand.

But what was surprising was how this seems mainly due to weak exports rather than strong imports. Exports actually fell in May compared to a year before and for the first 5 months; export growth was a mere 4%, which is very weak. This could mean that domestic demand is strong that Swedish companies divert their resources for domestic demand rather or it could mean that some other factor is involved. Or more likely a combination of the two.

While country and commodity breakdown for May is not yet available, the weakness in exports during the first quarter reflected the important "other"-factor of a 52% decline in forest product exports to the United States, presumably reflecting the U.S. housing recession.

Morning Update/ Market Thread 3/25

Good Morning,

Futures are moving upwards once more in more parabolic fashion, with the ramp beginning around midnight. The movement is particularly strong in the NDX, but weakest in the RUT. Below is a 30 minute chart of the DOW on the left and a 5 minute chart of the S&P futures on the right:

This move appears to be a fifth wave higher off the last touch of the uptrend line and comes off a bullish flag that appears to have been wave 4 of this move.

The dollar had an enormous move upwards yesterday on high volume and was a breakout. It is slightly lower this morning. Bonds had a massive move downwards yesterday (higher rates), moving back down to support. The TNX broke upwards out of a bullish triangle, signaling that higher rates are likely. This is a big deal for our debt saturated economy should it continue. Both oil and gold are higher this morning, the downward movement in gold yesterday produced a bearish target of $1,040 an ounce on the Point and Figure chart:

Yesterday new home sales fell another 2.2% to the lowest sales level in history! That’s right, at no point in my lifetime have the number of new home sales been lower than last month. Now that’s an economic recovery. It shows just how damaging the creation of bubbles can be and how long the aftermath can be.

The weekly jobless claims did, however, come in slightly less than expected, but still at very depressed levels. Here’s Econoday:
Initial jobless claims fell to a lower-than-expected 442,000 in the March 20 week, which outside of a single week in the up-and-down month of February, is the lowest total of the recovery. Expectations were centered at 450,000. The four-week average, at 453,750, is at a cycle low.

Continuing claims are also at a cycle low, at 4.648 million with the four-week average at 4.689 million. The unemployment rate for insured workers is unchanged at a cycle low of 3.6 percent. Claims for emergency unemployment compensation and extended benefits also fell. Today's data include annual revisions.

According to the D.O.L.’s raw data, “States reported 5,558,430 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending March 6, a decrease of 329,618 from the prior week. There were 2,094,811 claimants in the comparable week in 2009.” That decrease is about the same size as the increase the month prior. There are nearly 3.5 million more people on the Emergency rolls this year than last.

Ben Bernanke testifies at 10 Eastern. Tomorrow we get Citizen Sentiment and the final revision to 4th quarter GDP.

The Republicans were evidently able to force another vote on the healthcare bill over a technicality. Not sure that will change anything, but the more I learn about it, the sicker and more perverse it seems, the more damaging to the economy it appears. I’ll just call it an “accelerating event.”

The market is reaching historic extremes in the upwards direction while our housing market is hitting historic extremes in the downward direction. And 100% of DOW stocks are above their 30 day moving average, even after yesterday’s move lower. It’s quite a roller coaster ride, “you would sure hate to miss out on a rise like that,” says the man about to fall victim to Minsky’s 6th bubble stage. But, hey, hot money running away from the debt bubble has to go somewhere, no? Just remember as you see the cost of healthcare zoom, taxes zoom, food and energy zoom, that Zimbabwe had the best performing stock market in the world for about a year. All the while the real economy was collapsing. The foundations of our economy are being chiseled away, we are looking more like Zimbabwe everyday.

Will America go through what was experienced in Zimbabwe, Weimer Germany, Argentina? It’s hard to say where events will lead. This time most of the entire world is going through these Debt driven events together. When the economic inequalities are at their highest, it seems to me, that the risk of “other events” climb higher. Things are heating up around the globe at the same time that sovereign debt is growing exponentially. There is one thing of which I have no doubt. The rules of the game of money are about to change.

Styx – Crystal Ball:

Hahn and Stavins Are Pushing My Buttons

Over at Resources for the Future, Bob Hahn and Robert Stavins have posted a new discussion paper (here) on the implications of the "Coase Theorem" for the allocation of emissions allowances in a cap-and-trade system.

The Coase Theorem basically says that entitlements to resources will ultimately be allocated by the market (or by some central planner, as Steve Cheung pointed out) to maximize efficiency, regardless of the initial allocation, so long as transaction costs are zero and the other standard assumptions of neoclassical economic theory hold. Hahn and Stavins refer to market reallocations that improve efficiency regardless of initial allocations as the "independence property" of the "Coase Theorem." They note that "[a] number of factors call the independence property into question theoretically, including market power, transaction costs, non-cost-minimizing behavior, and conditional allowance allocations. However, "in practice," they find, "support for the independence property in some, but not all cap-and-trade applications."

 I do not doubt their empirical finding for a moment. Markets often do manage to reallocate entitlements to more highly valued uses. But - and this cannot be over-stressed - that has nothing to do with the "Coase Theorem." As Coase himself has noted time and time again, the assumptions behind that theorem, including most importantly the assumption of zero transaction costs, never hold in the real world. When market reallocations improve efficiency, it is not because of the "independence property" of the "Coase Theorem"; it is in spite of the existence of positive transaction costs and other impediments to transacting. Always.

It would be useful for economists (and legal scholars) to bear in mind that the "Coase Theorem" doesn't posit that markets will sometimes reallocate property rights to improve efficiency; it posits that they will never fail to do so under the conditions specified in neoclassical economic theory. Those are two very different propositions, with very different implications. In finding that emissions markets sometimes, but don't always reallocate allowances to maximize efficiency, Hahn and Stavins are only telling us something we should already know: that the "Coase Theorem" does not apply, and has no implications for cap-and-trade regimes in the real world.

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