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Blog Topics 2015
January Does Implementation of the Death Penalty lead to higher costs February Less Competition and Higher Hospital Costs March Millionaires Who Get Subsidies from the Affordable Care Act April The Unintended Obama Legacy May The NY Times and $15 Minimum Wage June Are Disability Payments Bankrupting Social Security August Seattle's $15 minimum wage and it's Surprising Consequence October The Great Stagnation: The Obama Legacy November Poverty in the United States December Should Insider Trading be Legalized: Part one by Olivia Marchioni
Blog Topics 2014 blog topics for 2013 are at page bottom
January Will Lake Meade become another Aral Sea February Does Taxing the rich hurt the economy March The Cause of the Great Depression April Temporary Agricultural Subsidies lead to wealthy Farmers and Higher Prices May The Presidents Stance on Gun Control leads to Increased Gun Ownership June Is there really a Gender Pay Gap July Did the Supreme Court decision in Roe v. Wade lower the crime rate August Department of Education and wasted Money October The Financial Follies of the EPA November Social Security and Portfolio Diversification December The White House and Terrorism
January Jobs Report
In January, the economy created 151,000 jobs, less than the 197,000 expected by economists. The unemployment rate (U-3) ticked down to 4.9% from 5% which is lower than the Natural Rate of Unemployment and the lowest rate since February of 2008 (remember, unemployment is a lagging indicator and we were already in the 3rd month of the great recession in Feb of 2008). The Real Unemployment rate (U-6) remains stubbornly high at 9.9%; the U-6 is all those who are unemployed as well as "persons marginally attached to the labor force, plus total employed part time for economic reasons. A Marginally attached worker is someone who hasn't looked for a job in 4 weeks or more. A subset of this is discouraged workers, who are workers who have stopped looking for a job. The number of long-term unemployed (those jobless for 27 weeks or more) was essentially unchanged in January, at 2.1 million, and has shown little movement since June. These individuals accounted for 26.9 percent of the unemployed (BLS). Thanks to the policies of the current administration, this LTU still remains higher than the double-dip recession of the early 80's. The average work-week for manufacturing workers remained over 40 hours and average overtime was 3.3 hours. In January, average hourly earnings for all employees on private nonfarm payrolls increased by 12 cents to $25.39. Over the year, average hourly earnings have risen by 2.5 percent. Among the major work groups, the teenage unemployment rate was 16%, by race blacks had the highest at 8.8% and Asians the lowest at 3.7%. Both can be attributed to levels of educational attainment where blacks have the lowest level and Asians the highest.
Volatility, with a downward bias, continues to be the norm on Wall st. Yesterday, after being down 185 points, it rallied to a positive 50, and finished the day down 100 points. Slight before noon today, the DOW is down 300 points at 15,620. Investors are looking for safe havens and are flocking to the bond market. As a result, the yield on a 10 year Treasury note is down to 1.53%, a 52 week low. Their are a number of events hurting the market: oil is under $27 at $26.83/barrel (to investors, it is not so much oversupply, as a weak global economy, The oil collapse is also causing trouble for energy companies, with dozens filing for bankruptcy over the past year and many others slashing jobs and suffering from steep declines in profits; also bank stocks in Europe are getting crushed again after a profit warnings from French bank Societe Generale which sparked fresh fears about the health of European banks, struggling with weak growth, low interest rates and fears of rising bad debts. Do no harm is the 1st line of the Hippocratic oath and that's what could summarize Janet Yellen's testimony before Congress. She didn't tell the markets what they wanted to hear, no interest rate hikes this year, but she left the door open to that. She concludes her testimony today. As the market and oil heads down, gold continues to climb (as are gold stocks), currently at $1243/oz, soaring more than 4%. During times of economic and/or geopolitical stress, there is always a flight to hard assets. The dollar remains constant at $1.13/Euro and the average price of a gallon of regular gas is down again to $1.703.
Fantasy football and baseball are very big events, but after seeing Obama's proposed $4.15 trillion budget, that would add over 1/2 trillion to the already 19 trillion dollar debt (that his administration doubled), I cant help but wonder if he doesn't get together with other heads of state and play fantasy president. Needless to say, this is another DOA Obama proposal. After being up 50 points within the last hour of the trading day, the Dow gave up gains to finish down 12, at 16,014. Oil, at $28/barrel, came under pressure after a report by the International Energy Agency (IEA) said supply is set to outpace demand this year and that global excess supply may reach 2 million barrels per day during the first quarter. Worldwide supply is currently 95 million barrels/day. In the pre-market, oil is up slightly to $28.38. The Dow is up 115 in the pre-market after diving during the night after Bernie's win in NH. What is driving the market is anticipation of favorable testimony of Janet Yellen's testimony in front of Congress today. Market's are hoping that she will give an indication of a slowing or stopping of proposed interest hikes for this year. Since the FED raised rates in December for the 1st time in 10 years, the DOW has lost more than 1700 points and we are closing in on bear market territory (a 20% decline from highs). What should be interesting today, is Tesla's earning which will be announced after the closing bell, I recently stated that it wouldn't surprise me if we end up seeing Tesla hit $100. Gold is down slightly to $1185/oz, the dollar has weekend slightly to $1.13/Euro, and the average price of gas nationwide is down again to $1.717/gallon.
The Obama administration continues to live in economic fantasyland. His proposed oil tax has already been called Dead On Arrival by Republicans who currently control both houses in Congress. However in spite of this, he has proposed now to increase it to $10.25 barrel from $10. As I've said previously, it's not the first concept I teach in Investment Analysis, but it's one of the first, you don't raise taxes on a distressed industry that is in a recession (the number of exploratory oil rigs has dropped from 1600 to under 600(chart). It's been a roller coaster on the Dow today. With 30 minutes in the trading day remaining, the Dow is up 40 points, but it was down at 145 points at the midday, and recovered to plus 105, after settling to its current price. For once, the market is not following oil which closed its trading day at $28.17/barrel. There has been a flight from risky assets, such as stocks, as investor worries mount over a myriad of risks, including slowing global growth, a steep decline in oil prices, uncertainty over interest rate policy in the U.S. and, more recently, concern over the health of banks, mainly in Europe. As a result, there has been a flight to bonds which is driving yields down. All eyes will be on Janet Yellen tomorrow as she address Congress and will try to give some guidance on interest rate hikes. Last year the FED gave some guidance to 4 rate hikes this year, however, there are a number of analysts who see less than 2 if any at all. Gold is once again up, this time to $1190/oz and the average price of a gallon of gasoline nationwide is down once again to $1.728.
At one point the Dow was down 400 points, however, it rallied to finish the day down 177 points at 16,027 (see my 1-4 post). The largest point loss for the year was the Jan 15th plunge of 391 points. Oil was once again one of the culprits as it dipped below $30 and finished the day slightly above at $30.12. Both the bank sector (see this weeks stock pick) and the technology sectors were hit hard on recessionary worries. The banking sector is in bear market territory as it is off more than 20% from the summer highs. Shares of Morgan Stanley slid 6.9 percent in their largest one-day drop since November 2012, while rival Goldman Sachs fell 4.6 percent. Both stocks closed at their lowest since the spring of 2013 while Bank of America is close to 3 year lows. Yields on sovereign bonds from so-called safe-haven issuers such as the United States, Germany and Japan have tumbled recently as investors increasingly doubt central banks in these countries will be able to raise interest rates any time soon; in other words, yields are sinking as bond prices are increasing. The yield on the 10-year Treasury note fell below 1.75%. Wall Street also fears a too-aggressive Fed will choke off growth and cause a recession and hurt corporate earnings, which are already under pressure from a strong dollar, the rout in the energy and commodity space and slowing growth around the globe (USA). Gold continued it's climb closing at $1189/oz and gold stocks, KGC, NEM,AEM and GG are soaring (see stock pick 1-19), the dollar remained steady at $1.12/Euro the average nationwide price of a gallon of regular gas is down again to $1.739.
Wall Street's and oil's winning streak is over. A disappointing jobs report sent stocks skidding and the Nasdaq composite to its lowest level in more than 15 months. The Dow lost 205 points finishing the week at 16,205. Stocks slid from the opening bell following the release of a weak January jobs report, a key data point that shows a possible downshift in the U.S. economy amid global tumult and which adds further uncertainty to Federal Reserve interest rate policy. The economy created 151,000 jobs when 190,000 were expected. The unemployment rate went down to 4.9% and the last time it was this low was February of 2008. This may sound good, but in February of 2008 we were in the 3rd month of the great recession; remember, that unemployment is a lagging indicator and it can look good when the economy is actually bad (Chart). What the report did not do is reduce uncertainty or provide clarity for markets as to what the Fed will do next, nor will it reduce all recession-related fears (USA). Since their is no clear direction, it is not surprising that markets tanked since they hate uncertainty. If you're following TESLA, the stock is being hammered on earnings/revenue fears. In the past month, it is down 36% and gave up 12 points yesterday. Earnings are due out this Wednesday, and I think the fear is going to be justified; look for a 3-6 month price of $100, it is currently at 162. Oil stocks also didn't fare well since Obama' statement that he wants an extra $10 tax/barrel. It's not the 1st thing I talk about in investment analysis, but you don't add an additional tax on an industry that is in a recession. Oil is down to $31/barrel, the dollar stayed steady at $1.12/Euro, gold was up once again at $1174/oz and the average price of a gallon of regular gas nationwide is down to $1.744.
TWO YEAR GOLD CHART
After advancing 183 points on Wednesday, the Dow was up another 80 points today to finish at 16,417 but not before it went thru a 220 point swing. Markets continue to remain volatile with no clear direction and continuing to be influenced by oil and volatility in oil prices continued to keep markets on edge as oil prices pulled back after surging 8% Wednesday. After falling as low as $31.68 per barrel earlier in the session Thursday, the price of U.S.-produced crude jumped as high as $33.60 before retreating again to close at $31.72, down 1.7%. A number of analysts on CNBC have been consistent in saying that the dividends of the larger oil companies are safe since they are relatively cash rich. However, when Conoco Phillips announced today that they will be cutting their dividend by 2/3's to .25/share from .74/share, the stock got hammered finishing the day at $35.32, down $3.31 (8.6%). Speaking of oil, the Obama administration wants a new tax (GO FIGURE). He wants to put a $10 fee on each barrel of oil. That should increase the cost of gas at the pump by 25 cents. In case your wondering, there is currently a 18.4 cent Federal tax on gas and each state has it's own state tax. In NH, its 23 cents, i.e., the total tax in NH on gas is 41.4 cents. With the average price of a gallon of gas in NH at $1.79, that comes out to a tax on gas of more than 30%. The dollar continued to weaken at $1.12/Euro, and gold continued its rise finishing at $1156/oz. What will be market moving tomorrow is the release of the January jobs numbers and unemployment rate which will be released at 8:30 AM.
Where as consumption is 70% of GDP, the service sector (one of three components of consumption along with durable goods and non-durable goods) is 60% of consumption, which if you remember your statistics, makes it the largest sector of GDP at 42%. The ISM service figures were down from 55.8 in December to 53.5 in January. While and reading above 50 shows expansion, that expansion has been slowing, and in the months to follow, I expect it to drop below 50 which would be consistent with a recession. The ISM (Institute for Supply Management) manufacturing index for January showed a contraction when it came in at 48.5, also consistent with a recession. Yesterday wasn't a pretty day for the Dow as the index dropped 295 points as a result of oil dipping below $30/barrel, and a worldwide economic malaise. There are currently 9 countries in which the Central bank has instituted negative interest rates. Simply stated, a commercial bank has to pay to have its money on deposit with the Central Bank or in its vault (bank reserves). The purpose of this is to encourage banks to lend money and stimulate economic investment (spending on capital goods). As a result, interest rates on 10 year bonds (chart) has been adversely affected. This is good for home buyers, since mortgage rates are tied to the rate on the 10 year bond. Slightly pass the noontime hour the Dow is down 13 points in spite of oil's increase to $31.80/barrel, 6% in spite of increasing inventory by 9 million barrels. The reason seems to be diminished production in the US oil patch, a weakening dollar $1.11/Euro, which tends to increase the price of oil since it is traded in dollars worldwide and rumors some OPEC members calling for an emergency meeting to cut production. Fears of a global economic slowdown spreading to he U.S. kept investors on edge. Two economic reports painted a mixed picture. Before the opening bell, payroll processer ADP reported that private employers created 205,000 jobs in January, topping forecasts and signaling that the more important government January jobs report set for release Friday will see solid gains as well which will be the next market mover. Gold is continuing to rise, currently up to $1139/oz, up 1.6% and gold mining stocks are following (see last weeks stock pick)
The slow start to the year persists on Wall Street, following the worst January for the Dow and S&P 500 since 2009 during the financial crisis. After dropping 17 points on Monday, the Dow is down 240 points 2 hours into the trading day. After being up 4 days in a row as a result of possible production cuts between Russia and OPEC, oil was down yesterday and is down close to 5% today at $30.03/barrel as a result of those cuts not materializing. Also contributing to the down market is earnings. Even tho XOM and PFE handily beat earnings predictions, they both guided lower for the remainder of the year and the market is taking a hit. Currently, the only stock on the DOW that is in the green is Dupont (DD) as a result of better than expected earnings and one of the few companies that is giving a positive earnings outlook. Lower oil prices dragged down stock prices in Europe, as well. The broad Stoxx Europe 600 was down 1.8%. The German DAX was off 1.4% and the CAC 40 in Paris was 2.1% lower. Gold is up to $1029/oz, the dollar is steady at $1.09/Euro and the average price of a gallon of regular gas is down to $1.79/gallon. Besides earnings, the next significant market mover will be unemployment numbers for February which is set to be released this Friday.
It was a terrible month for stocks, but the Dow advanced 396 points on Friday to finish the month at 16,466, which had the Dow down for the month by 960 points. This came in spite of weak 4th quarter GDP numbers that came in at an anemic .7% which made GDP 2.4% for the year. This will undergo two more revisions, but it appears that GDP for the year will once again be under the 40 year average of 3.1%. What was also disconcerting, was inventories increased by $68 billion which is not surprising in a slowing economy, since sales are less than expected. The dollar, which has gained 11 percent against the currencies of the United States' trading partners since last January, remained a drag on exports, leading to a trade deficit that subtracted 0.47 percentage point from GDP growth in the fourth quarter (CNBC). What I find very disconcerting is business Investment spending on capital equipment was down 9.9%. Downturns in investment, always accompany a recession. Two factors that contributed to Friday's increase was a move by Japan's central bank to push interest rates into negative territory in an effort to boost economic activity, fight deflation and spur more bank lending. The BoJ (Bank of Japan) followed the policy path of the European Central Bank, in pushing the rate for deposits down to -0.1% for current financial firms that have cash deposited at the BoJ. A negative interest rate means depositors pay the bank to keep their money at the bank. The other factor was oil as it rallied to $33.74/barrel. Gold also rallied to $1118/oz. A major concern for stocks is that the crash in the price of oil together with weakening growth around the world, is y too much of a burden for stock markets that are considered overvalued by many market participants; add to this the looming threat of a recession, makes believe that Friday's rally was overdone.
With all the talk of interest rate hikes, I've received a number of e-mails concerning an explanation of what interest rates are relevant to us as consumers. The Federal Funds Rate This is the interest rate that is followed most closely and affects all other short term interest rates. It is the rate that one bank charges another bank on an overnight loan and has a direct effect on the prime rate. The current rate is .25%. Prime Rate This is the rate that the larger banks charge their best customers on short term loans (under 3 months). Once the federal funds rate is changed, the prime rate is changed by, usually, the largest bank, JP Morgan-Chase, and all other banks follow. The prime rate is generally 3% higher than the Federal Funds rate. The current prime rate is 3.25%. This affects all other short term loans: HELOC's (Home Equity Line Of Credit), boat loans, car loans, etc. What it does not affect directly is the mortgage rate.
Yield on the 10 Year Government Bond The government finances it's deficit by borrowing money and it does this by issuing bonds that have a maturity value anywhere from 30 days to 30 years. Technically, Treasury bills are issued for terms less than a year.Treasury notes are issued in terms of 2, 3, 5, and 10 years and Treasury bonds are issued in terms of 30 years. The price of a bond is inversely related to its yield and the mortgage rate is usually 2-3% higher than the 10 year yield.
California Drought of 2015 California is in the middle of a drought; it must be global warming or now the more politically correct term (spare me), climate change. In case you haven't noticed, the climate is always changing. It is in a constant state of flux. If you notice the chart below right, California has had a number of mega-droughts during the medieval ages and this was considerably worse than it is now. Oh yea, and probably the father of these current climate alarmists were predicting an ice age in the 1960's (click on pictures below).
Obamacare Revised Costs
More on Obamacare In a recent survey by the New York FED on businesses, the median increase in healthcare premiums is expected to be 10%. More than a quarter of the manufacturing and service firms surveyed said they either have or will boost prices for goods and services "because of the effects that the ACA is having on your business." About 20 percent of respondents said they were reducing their number of workers and/or raising the share of part-time workers as a result of the ACA. His is in stark contrast to the presidents remarks earlier this year that healthcare costs are decreasing. Maybe CEO's were right when they said the president "Just doesn't get it".
Commentary on Minimum Wage
There is currently a debate in the state of NH on whether to increase the minimum wage to 8.25 from 7.25. The main argument is that it will help to alleviate poverty. That is clearly not the case. As you can see from the chart at the left, the poverty rate dropped dramatically in the 1960's. This was a function of great society legislation; specifically, increase in Social Security benefits in addition to the inception and implementation of Medicare and Medicaid. Since then, the poverty rate has fluctuated between 9-15% and is highly correlated with the unemployment rate. The vertical grey area's in the graph represent periods of recessions in the US. As can be expected, unemployment rises during recessions and peaks at the end (unemployment is said to be a lagging indicator). As you can also see from the chart, so too does the poverty rate. There is no indication whatsoever that the poverty rate is affected by increases in the minimum wage. Generally, this is quite the contrary. As can be evidenced from the below left chart, increases in minimum wage can contribute to unemployment and as we can infer from the above chart, as unemployment increases so to does poverty. If you look at NH, they have the lowest state poverty rate in the nation and it generally parallels the national unemployment rate. By raising the minimum wage, you increase business costs. As a result; businesses either pass these costs onto the consumer (in which case inflation nullifies any wage increase), substitute capital for labor, or simply go out of business. If you look at the chart below right, UAW (United Auto Workers) membership has decreased in the late 1970's from 1.5 million to 350,000 in 2009. The reason for this is simple. Detroit isn't making fewer cars, they are making more, but they have made their assembly lines more robotic and have substituted capital for labor, which became cheaper in the long run. This can also happen to those fast food workers who want a $15 minimum wage. There is currently a machine on the market that can make 300 burgers/hour. In other words, capital can be substituted for labor. Someone please e-mail me and explain how someone is better off unemployed at $8.25/hour as opposed to being gainfully employed at $7.25/hour
You cannot legislate equality. If you want to decrease poverty, implement policies to insure that higher levels of education is available to all.
The Congressional Budget Office predicted this week that more than 2 million people will leave the labor force because of Obamacare. Specifically, more people will leave the labor force or reduce their hours, to stay under the cap for federal subsidies. If you are a family of 4, and household income is under, WAIT FOR IT, $94,000, you are eligible for a federal subsidy. The number of part time/temporary workers has already increased by 35% since Obamacare was passed in 2010; and yes it will get worse, wait until 2015 when it becomes mandatory for businesses.
For a good laugh on Obamacare, go to this web site and watch this video; http://www.youtube.com/watch?v=qpa-5JdCnmo. It shows the president on 36 different occasions stating that if you like your healthcare plan you can keep it. Obviously there are 1 of two explanations for this misunderstanding. He was ill advised on the 2700 page, 4500 provision Affordable Care Act, or he knew about it and lied. According to a study by Forbes magazine, the ACA will increase premiums to men under 27 by 77%, 40 year olds, 37% and 64 year olds by 37%.
When Obamacare was 1st released, The Congressional Budget Office predicted that it would cost $900 billion over 10 years. At the time, I made a prediction to my students that I estimate the final cost would be closer to $3 trillion. Three years later, the CBO has raised it's estimate to $1.6 trillion. At this rate, we are on pace to reach the $3 trillion mark. www.healthcare.gov, the official website to sign up for Obamacare had an original cost of $100 million. That cost is now up to $2.6 Trillion and rising. If the government can't manage the costs on a web site, and these costs have trippled since it opened on October 1, how can it possible manage a 2700 page, 4500 provision bill. The words of Nancy Pelosi (see above) are acting as a harbinger of doom: "We have to pass the bill, so we can find out what's in it."
BLOG Topics 2013
January Do Protected Seals lead to Depleted Fish Stocks February Prohibition: Profits to Cartels & Increased Violence for Americans March Increased Minimum Wage & Extended benefits lead to Higher Unemployment April Ethanol from corn & Agflation May Cash for Clunkers lead to Higher Used Car Prices & Wasted Tax Dollars June The Affordable Care Act; Anything but Affordable Part 1 July The Affordable Care Act; The poster Child for False Advertising August Detroit: Higher Taxes + Liberal Benefits = Bankruptcy September No Keystone Pipeline leads to more pollution October Global Warming! Or is it Global Cooling! November Poverty & Benefits December Does Affirmative Action lead to Reverse Discrimination?
The United States has amongst the lowest savings rate for all technological nations. The iOMe challenge is a nationwide competition between Colleges where teams submit a 10,000 page essay on how Americans can improve their savings rates. In addition, teams must produce an approximate 60 second video which complements the essay. If you click on the iOMe logo above, it will take you to Bentley University's 2012 video submission. The faculty adviser for the challenge is John Tommasi and is offered during his Fall EC 351 course, Contemporary Issues in Economics. I'm pleased to announce that on February 15, Bentley was declared the winner of the iOMe video portion of the contest. Congrats to the team members and great job!
EC 3900 Energy Economics
EC 3900, Energy Economics and International Markets, is a 3 credit, Short Term Program, that is offered during Spring semester. After 7 weeks of lecture, the class takes a 10 day educational/cultural tour to France where 80% of their electricity is produced by nuclear power. During the 10 day trip, students travel to, and tour various nuclear facilities Last year's class visited; Marsailles, Aix en Provance, Lyons, Brest and 4 days in Paris.
If there were ever words that can strike fear into the hearts of any man women or child, it's: "I'm from the Government and I'm here to help". On a monthly basis my blog, from an economic standpoint, will explore government laws, decisions and actions, which while well intentioned, had inadvertent results that were either disastrous, or made a bad situation worse. It wouldn't surprise me if you reached the conclusion that congress does two things well, nothing and overreact; and you may ask yourself, do Congressional members vote for what is best for the economy, or what will get them re-elected.