" Where economics isn't just a job, but an adventure"
Quote of the Week
I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.
In other words he is a value investor who invest in an undervalued and well run company for the long term -JT
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BLOG Topics 2013
January Do Protected Seals lead to Depleted Fish Stocks February Prohibition: Profits to Cartels & Increased Violence 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?
Blog Topics 2014
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 wealth 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 The Department of Education and wasted Money October The Financial Follies of the EPA
The Dow had it's best day in 4 years as it climbed more than 420 points to finish the day at 17,778; Santa Claus has come to town, compliments of the Federal Reserve, low oil prices and possible trade with Cuba (over $11 million people 90 miles from Florida). At the conclusion of the FOMC meeting ‘Patience’ replaced ‘considerable time’ Wednesday and US markets loved the Federal Reserve’s choice of wording. Instead of a promise to keep rates at the current near zero level for a considerable length of time, the statement from the Fed’s Open Market Committee said that the Fed “can be patient in beginning to normalize” its monetary stance. Still-elevated unemployment and inflation well below the bank’s 2% target give the Fed the flexibility to take a gradual approach to increasing rates. Tuesday's CPI showed that prices declined .3% in November because of lower energy and food prices. In her 2:30PM press conference, Fed chair Janet Yellen added more details to the statement. The Fed isn’t likely to begin to raise interest rates before the next couple of meetings. That puts the first interest rate increase in April, at the earliest She also said that the Fed won’t be in any hurry to push interest rates higher even after the first increase. “The timing of the initial rise in the Fed funds target, as well as the path for the target thereafter, are contingent on economic conditions,” she said. “Monetary policy will still be very accommodative for a long time” after that first increase. From a technical analysis standpoint, the Dow has broken it's downward trend and while you may see some profit taking today, a Dow 18,000 is a target. In the premarket, the Dow is up 21 points This really hurts to say, but I agree with the Obama on normalizing relations with Cuba. A number of Republicans in Congress are playing ridiculous party politics (and yes I'm a registered Republican) and criticizing the move because of human rights violations. Before you go any further, check out China's human rights record and I think you'd agree that it's worse than Cuba. I think the benefits of trade with Cuba far outweigh the costs for them and us alike. Oil was volatile yesterday, after increasing four percent, it finished the day down 4% closing under $55/barrel. Oil is currently trading at $55.42, up $1.31.
Everything that could go right yesterday did and the Dow finished the day at 17,356, up 288 points. The day started with a stabilization of the ruble as the Russian equivalent of our treasury department sold foreign currencies on the open market. Even tho Russia isn't a major trading partner with the US, it's our 28th largest partner (Canada is first), it is a major partner with many European nations that are some of our major partners. In addition, news of a normalization of relations with Cuba after one-half century of embargos. Even tho 100,000 Americans/year are granted visa's to visit Cuba, all trade is banned. What industries will benefit; literally all beginning with travel and tourism and financial. Americans will now be able to use their credit cards in Cuba whereas previously, they could only use cash. Cuba's infrastructure is archaic at best and it suffers approximately 125 power outages/day. It's infrastructure needs to come into the 21st century (many would be happy with late 20th century) and this is a plus for construction companies (Cuba has huge nickel deposits and the US has literally none), also, Cubans love American cars and there will be an overall increase in Cuban's quality of life. And let's not forget, Americans want Cuban cigars and rum. What else helped the market was the stabilization of oil prices and comments from the FED that interest would remain at current levels for at least the next 4 months. However don't break out the champagne yet. If you look at the Dow YTD chart (above), the Dow is still trending down and today's trading could be telling. In other economic news: plunging prices at the gas pump pulled down U.S. consumer prices (CPI) by the largest amount in more than five years last month, the Labor Department said Wednesday. The consumer price index fell 0.3% as gasoline prices fell for the fifth straight month. Twenty minutes into the trading day, the Dow is up 220 points on continued exuberance from the FED, trade with Cuba and oil is up to $57/barrel.
DOW 1 DAY CHART
After being down 120 points pre-market, the Dow was up more than 200 intraday and closed down 112 points to close at 17,068, down more than 5% from its intraday high of December 5. It was a bad day for the Russian ruble. At its low point Tuesday, the ruble tumbled 23.2% vs. the U.S. dollar – marking an all-time record low for the Russian currency against the U.S. dollar. AT its weakest level, $1 = 79 rubles (chart below). Earlier in the trading day, West Texas Intermediate crude oil was down another 4.1% to a new 5½-year low of $53.60 a barrel, but trimmed that steep loss later in the day and closed up 2 cents to $55.93 a barrel in New York. Oil is currently down trading under $54/barrel. Not unusual, with the flite from equities, bond prices have increased which has brought the yield on the 10 year bond close to 2%. This is an important metric since mortgage rates are tied to this particular bond yield. The market turbulence now engulfing Russia could have an upside: it could boost the odds of more monetary stimulus from bankers around the world, including the European Central Bank, says Joe Quinlan, chief market strategist at U.S. Trust. In accordance with this, all ears will be turned toward the FED this afternoon at 2 since they will be making a statement concerning the last FOMC (see FED speak) meeting of the year. The FOMC, Federal Open Market Committee, is the policy determining body of the FED. The Dow is currently up 45 points in pre-market trading.
Dollar vs Ruble
When the Central Bank of a country raises interest rates (generally to stem inflation), it also has the additive effect of strengthening their currency (see FED speak on strong vs weak dollar). After being relatively weak against the dollar (35 rubles = $1) it has gotten weaker. Yesterday it was $1=65 rubles. The Russian central bank, in what I believe is a galactically stupid decision, increased interest rates overnight from 10.5% to 17% with the hope of strengthening the ruble. It had the opposite effect. What they myopically didn't realize how this would stymie business investment and severely hamper the economy (just imagine the interest rate on your house increasing by 6.5%). As a result, the, it had the opposite effect and it is now $1=75 rubles. The effect on the Dow has been volatile. Yesterday, the Dow opened at 125 points to the positive; however with the decline of the price of oil, so did the Dow finishing at 17,189, down 99. Earlier this morning, the DOW was up 80 points in pre-market trading until the news of the Russian rate hike hit the wires. The DOW in the pre-market went from plus 80, to minus 125 to currently minus 60 (8AM). Russia is obviously headed fro a recession since it's major product is oil (They produce about the same amount as the US. According to Citi Bank, for every $10 decline in a barrel of oil, the Russian economy loses .8% of GDP. Since oil is off close to 60 points from its high, that's a negative 4.8% in GDP; combined with the interest hike of the Central Bank, Russia is clearly in a recession. Oil is currently trading at $54/barrel.
The gains in the Dow from the previous 5 weeks were wiped out this past week as the Dow fell more than 300 points on Friday finishing the day at 17,280. Oil stocks were not the only big losers on Friday -- and that could be a sign that investors are growing more nervous about the overall market and weaker global economic demand. Telecom stocks were also losers. Verizon (VZ, Tech30) fell 1% Friday and is now down 6% this week. Wal-Mart (WMT) finished the day slightly higher. Disney (DIS), Home Depot (HD) and Nike (NKE) were up for most of the day but finished with small losses as the sell-off intensified in the final hour. Oil is at it's lowest price since May of 2009, $57.81/barrel. Keep in mind the reason for that downturn was a near world wide recession, this time, while there is diminished demand, it is mainly because of excessive supply. If you look to the chart on the left, we are still in a long term uptrend. Energy companies cut 29 oil drilling rigs in the United States this week, the most in two years, as oil prices kept sliding. However, there are still 1,546 oil rigs in operation according to Baker Hughs. The all time high was 1609 in mid October of this year. In other news, both the House and the Senate and passed a spending bill that will fund the government until September of next year but not before there were some republican gains; most notably, there were cuts made to the EPA and some of the more restraining language from Dodd Frank was eliminated. According to fiscal times, 3 of the 10 top worst state for taxes are in New England,Rhode Island(5), Vermont(6) and Connecticut(9). The worst states are New York, New Jersey and California, all strongly democratic states. New Hampshire is the 8th best state for taxes (meaning low taxes). The best is Wyoming and South Dakota both Republican states.
Vo.latility is back in the market. On Thursday the Dow was able to snatch defeat out of the jaws of victory. After advancing 225 points after the markets open, by mid-afternoon it had decreased to only plus 30 before recovering and finishing the day up 56 points. The markets swoon began after oil broke $60/barrel to the downside. Oil, after finishing the day at 59.95, is down another 1.83 trading at $58.12. At noontime Friday, the Dow is down 201, points at 17,395. After breaking support at 17,500, its next support level is 17,140 (charts below). Stocks only briefly trimmed losses after a measure of consumer sentiment in December exceeded expectations, rising to an eight-year high. American consumers "are feeling better, and lower gasoline prices will continue to help sentiment, which should be good news for stocks overall, but today it's all about worries that lower demand for oil means slower growth in the rest of the world, and nobody is sure how big that slowdown will be," said Kate Warne of AG Edwards. U.S. wholesale prices declined 0.2 percent drop in the producer price index (wholesale prices as opposed to the CPI retail prices) in November after a 0.2 percent rise the previous month. However the concern over low oil prices is trumping the good economic news. Let me be clear, low oil prices are generally good, but it they're a result of declining world demand as a result of recessions, isn't. In 1975, the Jones act was passed that prohibited and US companies from exporting oil. This law was a result of the OPEC oil embargo of 73/74. However,crude oil prices fell below $60 a barrel for the first time since 2009 and within 2-3 years, we will be producing more oil than Saudi Arabia. Lifting the ban will encourage even more U.S. oil production by guaranteeing U.S. drillers access to global markets they don't now have. With growing worries that low oil prices could cause the U.S. industry to pull back on drilling, there is now a much stronger argument for lifting the ban: saving jobs. As can be expected, environmentalists argue that exporting U.S. crude will lead to more accidents and oil spills and are against the ban (see September 2013 blog).
November Jobs Report
The jobs report blew away expectations; 321,000 jobs were created in November and 2014 is the best year for job creation since 1999. The unemployment rate remained level at 5.8% (people entering the labor force offset job creation which is good for the economy), the real unemployment rate dropped to 11.4% (it was 12.7% 1 year ago) and this is a function of an improving economy and the cessation of extended unemployment benefits in January of this year. The labor force participation rate remained at 62.8%, teenage unemployment remained high at 17.7% (no education or experience) and the long term unemployed shrank to 30.7% of those who are unemployed, also a function of a good economy and no long term unemployment benefits.
Addendum/Illegal Aliens 11-21-2014 There is a disconcerting trend of an increasing number of underemployed workers in the US. These are part time workers who want to work part time but cannot get full time work. Since the inception of Obamacare, this has increased by 35%; part time workers don't get benefits (above graphs). Temporary employment generally increases during a recession, but generally decreases after. This has been a slow recovery and former FED Chairman Ben Bernanke stated that it is a function of fiscal drag. If you look at the middle graph, the highest states with part time workers are also in the top 10 states (graph at right above) with illegal aliens as head of household wage earners. The growing concern is that the part-time job trend is here to stay. The West has a particularly acute problem. Agriculture and forestry are big industries in West Coast states that have lots of seasonal employment, which may help explain their part-time problem, says Chris Tilly a professor at UCLA. Even good state economies are struggling with part-time. Texas has added lots of jobs in the economic recovery and its unemployment rate is below the national average. But there are 72%, or about a quarter million, more unwanted part-time jobs in the Lone Star State than when the recession began (CNN).
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 level 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 3 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 $292 million dollars 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."
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.