" Where economics isn't just a job, but an adventure"
Quote of the Week
General Norman Schwartzkof was asked if he thought there was room for forgiveness toward the people who have harboured and abetted the terrorists who perpetrated the 9/11 attacks on America. His answer...
"I believe that forgiving them is God's function. Our job is simply to arrange the meeting.”
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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
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
OCTOBER JOBS 271,000
October Job's Report 11-5-2015 The job's report for October blew away expectations; 271,000 jobs were created when the street was expecting only 183,000 and the unemployment rate dipped to 5.0%, the lowest since 2007. The teenage unemployment rate was down to 15.9% and by ethnic group, American Asians were the lowest at 3.5% and blacks were the highest at 9.2%. This is a direct function of education where Asians have the highest level of education and blacks the lowest (charts below). The long term unemployment rate (those unemployed for more than 26 weeks) accounted for 26.8% of the unemployed. The labor force participation rate is at a 38 year low of 62.4%; this the amount of the civilian non-institutionalized population that is in the labor force. What I find disconcerting about this number is that there are approximately 150 million people working who are supporting the rest of the US population which totals 318 million (chart below). That's correct, less than 1/2 of the population is supporting the entire population. The number of marginally attached workers(those people who haven't looked for a job in 4 weeks) is down to 1.9 million people, down 276,00 from the previous year and the number of discouraged workers was 665,000. the average workweek for all employees was 34.5 hours and for manufacturing workers up to 40.7 hours.Average hourly earnings are $25.20/hour which are up 2.5% for the year and is surpassing inflation.
The Dow had its narrowest trading range of the day with only 53 points separating the high from the low. With that said, the Dow finished up 1 point to close the day and week at 17,813. This comes after Tuesday's surprising 20 point gain after being down triple digits in the pre-market. The early Down decline was a function of Turkey shooting down a Russian fighter bomber, however a lack of extreme tensions from Russian alleviated fears. However, if you feel the best judge of future behavior is past behavior, and I do, you can certainly expect a response from Putin and Russia. The situation is full of potential pitfalls. Since Turkey is a NATO member this incident immediately increases tensions between the Western alliance and Russia. Given the past two days, it appears that seasonal stock market trends are overcoming geopolitical fears on Wall Street as traders push stock prices mostly higher as they often do in the days leading up to and following Thanksgiving. History has shown that Turkey Day week has been historically bullish for stocks with markets gaining over .5% on the average. Stocks have also been up 82% of the time on the Wednesday before Thanksgiving in the past 50 years, and were higher 70% of the time on the Friday after Thanksgiving, according to data from Schaeffer's Investment Research. (USA today). On the economic front, durable goods orders in October rose a much better-than-expected 3%, weekly jobless claims fell more than forecast, and personal spending inched up just 0.1%
Let's talk about gas prices and taxes. Nationwide, the average cost of a gallon of regular gasoline is $2.06. In NH, I filled my tank today at $1.99. What you may or may not know, there is both a Federal and state tax on gas. The federal tax is 18.4 cents/gallon and NH state tax is 23 cents for a total of 41.4 cents. Let's subtract this from $1.99 and that gives us the cost we're paying for gas without taxes which is $1.576. Now divide .414 by $1.576 and multiply by 100 and you have the percentage gas tax of 26.2%. That's right, we're paying gas tax of over 25%, and there are members of Congress(democrats and Bernie Sanders) who want to raise it even more. Good grief. You can also thank Maggie Hassan for a 4 cent raise in our state gas tax in the past year.
After advancing 90 points on Friday and coming off its biggest weekly gain of the year, the Dow is down 10 points at the midday,trading at 17,817. The market was up on Friday primarily as a result from European Central Banks Chair, Mario Draghi, that the bank’s inflation target of 2% remains a distant dream with the current inflation rate in the EuroZone at just 0.1%. The policy menu in front of the bank includes an expansion of the current program of bond buying from 60 billion euros a month to 80 billion or so; an extension of the life of the program beyond the current September 2016 limit, and a further drop in the bank deposit rate. The broad U.S. stock market kicks off the week up 1.5% for the year after last week's big rally. In deal news, U.S.-based Pfizer (PFE), maker of Viagra, and Ireland-based Allergan (AGN), maker of Botox, confirmed their blockbuster merger, which the companies value at $160 billion. The newly formed company will be domiciled in Ireland for tax benefits, in a so-called "tax inversion" transaction that has come under fire in the U.S. Here's a novel idea President Obama, since we have the highest corporate tax rate in the world, maybe a revision of the tax code is in order so that US companies will keep their corporate HQ here in the states. Oil is up to $42.49 today, up close to 4% on news that Saudi Arabia is going to seak to stabilize prices. This generally means curtailing production. It's no secret that a massive supply glut has caused global oil prices to fall this year as inventories steadily increase. But what's less widely known is that the oversupply problem has gotten so bad that oil tankers waiting to be offloaded are piling up off the U.S. Gulf Coast because there's nowhere to put the crude. That, of course, is great news for American drivers. National average gasoline prices have dropped to $2.10/gallon, down by 75 cents from a year ago, according to AAA. U.S. prices could slip below $2 by Christmas nationwide for the first time since 2009, according to AAA.
If it wasn't clear before, it should be clear now, Obamacare doesn't work and it has been a huge failure. United Healthcare (one of the big 4 insurance agencies) announced today that it is closing down it's Obamacare exchanges as a result of it's inability to realize a profit given the current requirements of Obamacare. Think about that, rates next year are going to raise by about 16% and they don't believe that they could realize a profit; that, to me, is frightening. In addition, according to an analyst on CNBC, the Blue Cross Blue shield non-profit exchanges that were set up to fund/provide Obamacare are in the red and will likely shut down too. The announcement is the latest in a string of bad news for President Obama's signature health law. A dozen cooperative insurers set up and funded by Obamacare have failed this year, the remaining insurers are hiking premiums by double digits for 2016. Also, a key federal program designed to cushion health insurers' risks in the exchanges has a massive shortfall and will pay out only 12.6% of insurers' claims for 2014. There is still more. The administration announced that only 10 million people will be covered by the exchanges in 2016 which is little more than this year and far short of the 48 million uninsured at the laws inception Simply put, it is a massive failure and we are paying for it.
In other news, after rallying 248 points yesterday, The Dow is trading sideways today, up 32 points at the midday, at 17,769. Holding down the Dow is UNH, United Healthcare, as it was down over 5% after its announcement that profits would disappoint because of Obamacare. The rally in recent days has been a bit of a surprise, as stocks have surged on the heels of Friday's terror attack in Paris, daily manhunts for terrorists in France and Belgium, as well as ongoing terror threats from jihadists. In addition, the threat of rate hikes had previously proved to be a negative for stocks. Oil briefly dipped below $40 before closing at $40.25, down over $1. The dollar remained at $1.07/Euro and the average price of a gallon of regular gas is down to $2.115.
Go figure. After the FED minutes were released today from the last FOMC meeting which indicated that a rate hike in December is almost guaranteed, the market shot up to finish the day 248 points higher to close at 17,737. The minutes showed that the central bank's most important members believe a rates hike next month would be appropriate. What this does is remove uncertainty (which the market hates) and shows that the economy may not be that bad (I still think we're in for a recession next year). Also contributing to the rally was Apple. It's stock rose over 2.5 percent after Goldman released a note saying the company's shares will rise 43 percent in the next 12 months. That's an extremely bullish statement and GS has an excellent track record, particularly when it comes to Apple. Investors also took the overnight Paris raid as a positive, said Peter Cardillo, chief market economist at First Standard Financial. "I kind of suspect what we're seeing here is what happened on Monday with the situation in Paris." French police carried out a large-scale operation in the northern Paris suburb of Saint-Denis on Wednesday morning, which lasted nearly six hours. The successful raid "sort of puts in the sense that the G-20 is taking a unified stance," Cardillo said. Robert Pavlik, chief market strategist at Boston Private Wealth, echoed Cardillo's comments. "Maybe that added a semblance of confidence," he said, adding that these types of attacks usually have a temporary effect on financial markets.(CNBC).
Everyone is trying to predict a bottom for oil after last weeks inventory data showed that gains were larger than expected (Compliments of mild weather and a very sluggish economy). It was down about $1 today to finish at $40.6/barrel. The dollar slipped to $1.07/Euro and the average retail price of a gallon of regular gas is down to $2.13/gallon; in NH it's $2.10, Mass $2.14 and California $2.78. Why so high in California, taxes and regulation compliments of liberal democrats that control the state. If you asked me to define financial irresponsibility, I would say in one word, California.
After advancing 248 points on Monday, the Dow is up 48 points today trading at 17,532 at the midday; However it is down from it's high of 17,562. It's been a roller coaster ride for the Dow for the past 4 months. Investors are looking past the Paris terror attacks and are focusing on earnings. There was some good news on the profit front, as Wal-Mart and Home Depot beat earnings and guided higher. While continuing to aggressively compete with the likes of Amazon. Walmart warned investors last month that its profit in fiscal year 2017 could drop 6% to 12%, news that sent its shares plunging but they're up 4.5% today. Not only this, but markets around the world are in rally mode for the 2nd straight day, even in Europe where the largest gains were in the French stock market were in France, where the CAC 40 jumped 2.1%. Elsewhere in Europe, Germany’s DAX index gained 1.8%. London’s FTSE 100 was up 1.6%. Japan officially announced that its economy is in a recession after its 2nd consecutive quarter of negative GDP (see recessions in FED speak) However, the Nikkei 225 index rose 1.2% on expectations for further stimulus measures by the central bank as a result of the recession. After rallying after the Paris attacks, oil has retreated and is testing the $40 level, currently trading at $40.71/hour. The dollar continues to gain against the Euro trading at $1.06/Euro, gold also retreated to $1064/oz and the price of a gallon of regular gas nationwide is down to $2.15.
In other new's, Barrack Obama never ceases to amaze me. Despite the fact that France confirmed that some of the terrorists were able to sneak into Europe with Syrian refugees, Obama re-affirmed today that he still plans on letting 10,000 Syrian refugees into the United States despite the fact that a coalition of 25 democratic and republican governors stated they don't want the refugees.
(see December 2013 blog) After dropping 56 points yesterday, the Dow dropped another 254 points today to finish the day at 17,448. Investors reacted to a short drop in oil prices, down to $41.71/barrel as a result of a weekly inventory increase and obvious slowing demand, and comments from the European Central Bank that suggest more stimulus may be on the way which is indicative of a poor economy. What I found to be particularly disconcerting today was that orders for new RR cars, combined with durable good orders are down. This is indicative of a recession and I'm still predicting that for 2016 (see recession in FED Speak). Also giving investors pause are fresh fears about valuations, which have climbed back into overvalued territory following the big rally off of the August lows. Draghi's comments to the European Parliament on Thursday have Wall Street guessing that the ECB will consider lowering interest rates further and extending the duration of its bond-buying program; generally this would buoy prices but Draghi's comments were eclipsed by high stock valuations.
In other news, the economic myopia of CNN never ceases to amaze me. In an article today about black unemployment, they make the inuendo that blacks lag behind whites in unemployment, pay and wealth because of discrimination. They lag behind whites because of education, lack thereof (see above employment report). if minimum wage workers want to increase their pay, it is simple, education and work ethic (see December 2013 blog).
People at or below the federal minimum are:
Disproportionately young: 50.4% are ages 16 to 24; 24% are teenagers (ages 16 to 19). Mostly (77%) white; nearly half are white women. Largely part-time workers (64% of the total). (Bureau of Labor Statistics)
First and foremost, to all the Veterans and current service men and women , Thank you! Your service and dedication is appreciated beyond words. Pictured below are my Dad 150th combat engineer's and my 4 uncles on my Mom's side.
In yesterday's trading, the Dow finished at 17,758, up by 27 points after being down most of the day. In Wednesday's pre-market, the Dow is up over 60 points and is following most world markets. Investors seem to be watching and following the latest indicators from China, which showed industrial output grew 5.6% in October compared to a year ago, down from 5.7% in September. Retail sales grew 11% in October, slightly higher than 10.9% for September. In addition, 11/11, singles day in China, which is the biggest shopping day of the year is smashing records again, with total transactions already surpassing $10 billion. Within the first eight minutes, customers had spent $1 billion on Alibaba's (BABA, Tech30) popular shopping platforms, Taobao and Tmall. The results are boosting shares premarket in Alibaba, JD.com (JD), and Yahoo (YHOO, Tech30), which owns a large stake in Alibaba. Bellweather Macy's, posted mixed results but doesn't seem to be hurting the market. They beat profits but sales were down over 5%. In the premarket, they are down close to 10% ($4). Oil remains in a trading range currently selling at $43.78/barrel, The dollar remains strong against the Euro at $1.07, gold is also steady at $1088/oz and the average national price of a gallon of gasoline is still at $2.21/gallon.
In other news, a number of fast food, minimum wage workers protested last night in Boston during rush hour in support of a $15 minimum wage. Obviously I feel that this is bad economics (see my August blog). In Seattle, where there is a $15 minimum wage, workers are asking their bosses to cut back on their hours so they don't loose their government welfare benefits. There is currently a bill in the Massachusetts legislature to increase the minimum wage to $11, and then $15 within 3-5 years. I think this bill is called the NH Economic stimulus bill since you will see an exodus of businesses to NH.
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 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.