" Where economics isn't just a job, but an adventure"
Quote of the Week
In the late 19th century, JP Morgan was cruising the Hudson river with his 165 foot yacht, the Corsair. He was in the process of brokering a deal between the various railroad companies. One of the RR exec's asked, "Pierpont, wonderful boat you have, what's something like this cost?." Morgan's reply:
If you have to ask, You can't afford it!
Click on the pictures to enlarge
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
As I write this, the market is down 70 points, 17,027, shortly after the market's open. The down market appears to be a function of global tensions in the Ukraine and Gaza, in addition to profit taking. ON CNBC's squawk box, Cramer stated that he was very bullish on Go Pro, and after the initial frenzy, so am I. Cramer feels they will have excellent earnings this quarter which they will announce Thursday July 31. He also thinks that some new uses for the camera, such as time lapse photography and pet cams (seeing the world from your dogs point of view) will add to their sales.
What I want to talk about today is interest rates and what they mean to you. There are a number of sayings on Wall street, such as "Don't fight the FED", (see 7-18's update), and "The FED is known to take away the punch bowl, just as the party is at it's wildest". Currently the Federal Funds rate (see FED Speak) is at .25%. What does this mean to you? The Federal Funds rate (the rate one bank charges another on an overnight loan), affects all other short term interest rates, such as the Prime Rate (the rate big banks give their best customers on short term loans), Home Equity Line of Credit (HELOC's), car/boat loans, personal loans and interest rates on CD's and savings. In other words, as rates increase, so too does the cost of borrowing money (savers also realize greater earnings). What of mortgage rates (long term loans)? Mortgage rates are usually 2-3% higher than the yield on the 10 year government bond (currently around 2.47%), and while not always, they usually follow short term interest rates. The yield on any government bond is inversely related to its price; in other words as the price of the bond decreases (usually as a result of inflation fears), the yield increases. The reason why the FED would raise rates is inflation, and right now the FED is signalling that they are going to raise interest rates in mid 2015. If you look at the chart bottom left, interest rates and inflation appear to move in unison, this is known as the Fisher Effect and is not surprising. As the inflation rate increases, (FED policies are data driven), the FED increases interest rates, thereby making borrowing more expensive, and slowing down an overheating economy and putting the breaks on inflation. Inflation figures will be released by the government on Tuesday. Tomorrow, the causes of inflation.
Ritalin anyone? With the Dow up 78 points, Wednesday, down 162 points on Thursday, and up 123 points on Friday, the Dow and investors are showing signs of being manic-depressive. I'm sorry, the new politically correct term is bi-polar. Thursday's downturn was on geo-political concerns stemming from the downing of a Malaysian Air 777 over the Ukraine, and the Israeli invasion of the Gaza strip. However, despite this drama, the market advanced 123 points on Friday. It appears that the downing of Malaysian flight 17 is, at the time, not going to be the cause of a major international incident, and the incursion into Gaza will be short lived did not overwhelm favorable economic news on Friday. Time Warner advance 11 points, on buyout speculation, Google shares rallied more than 20% on favorable quarterly sales and profits (not to mention a favorable outlook) and a merger of drug companies AbbVie and Shire. Also on Friday, the Leading Economic Index increased 0.3 percent last month after an upwardly revised 0.7 percent rise in May. This makes the 5th month in a row of increases. The leading economic indicators (LEI) are a gauge of 12 metrics that tend to forecast future economic activity (usually 3-6 months in the future. Some of the LEI's are manufacturing activity, Retail sales, Inventories, building permits and new business startups.
The Dow was up 5 points for the day finishing at 17060, just 8 points short of a new record. The market was significantly higher right after the open, but moderated after Janet Yellen's (FED chairperson) comments about the economy. Not that she said anything bad, but she said nothing new which was what investors were hoping. In other words, she re-affirmed that quantitative easing would continue until November, and interest rates would be data driven but are not expected to rise until mid 2015. If you look at the attached chart, many investors feel that the recent bull market has been FED driven, stocks have increased as the FED's balance sheet has increased (the FED buying government bonds to increase the monetary base) and the cessation of this will not bode well for stocks. Keep in mind, correlation does not mean causation, and many analysts will argue (including myself) while the FED's policies have helped the economy and the market, the rise in the market was also due to profit margins. A note worth mentioning is that Yellen also stated that this has been the slowest recovery since the Great Depression and is due to the fiscal drag, in other words the poor fiscal policy of the Obama Administration. China's GDP for the 2nd quarter was 7.5%, greater than what was expected and is seen as a plus for Wednesday's market.
After advancing 112 points based in part on good news from the financial sector, the Dow is back up over 17,000, closing at 17,055 after advancing 112 points. Citi Group handily beat earnings at EPS(earnings per share) of $1.24 as opposed to expectations of $1.05. In addition, Goldman Sachs (the largest investment bank on Wall st), released an upgraded target for the S&P 500. Analysts there now think the blue chip index will hit 2050 by year's-end instead of 1900 as reported by CNN. Yo may have noticed the price of gas being somewhat cheaper, this is a function, in part, of oil going slowly from $107/barrel to Monday's closing price of $101. Gold was down closing at $ 1309/ounce. Gold and oil typically move in the same direction. The reason being that when oil increases in price, this is seen as contributing towards inflation and oil is a hedge against inflation. In other news, GoPro was down $2 on an article from Barron's that felt it was overvalued, however it has recovered $1.25 on pre-market trading. In pre-market trading on Tuesday, oil is down under $100/barrel and the Dow is up 22 points spurred in part by excellent earnings from America's largest bank, JP Morgan that reported earnings of $1.46/share as opposed to expected earnings of $1.30.
After dipping, 71 points on Thursday, the Dow recovered 28 points on Friday finishing the day and week at 16,944. The S&P 500 was down .7% for the week, and the Dow was down .6% sparking rumors of a market correction. A correction occurs when the market retreats more than 10% and a bear market is when there is a 20% correction. The Russell 2000 index of small cap stocks was down more than 4%. Small caps tend to be more volatile and act more as a leading indicator of the market. Market capitalization equals the stock price times shares outstanding and a small cap stock has a market cap under $2 billion, (this definition varies amongst brokerage houses). Second quarter GDP figures are due out later this month and will be watched closely after the 1st quarter was a negative 2.9%. The typical Principles text defines a recession as 2 consecutive quarters of negative GDP. However, the actual definition as given by NBER (National Bureau of Economic Research) is A significant decline in activity, spread across the economy, lasting more than a few months, visible in industrial production, employment, real income and wholesale-retail sales; NBER is the non-profit agency located out of Cambridge which determines when we enter and exit a recession. The financial section will be in focus next week after Wells Fargo reported earnings in line with expectations this week. JP Morgan, Bank Of America, Goldman Sachs and Citibank all report next week.
The Dow finished the day close to 17,000 at 16,986, up 79 points. However brace yourself, the Dow is down over 160 points in pre-market trading because of fears in Europe. The catalyst was Portugal's 2nd largest bankEspirito Santo Financial Group, that missed a bond payment. This contagion quickly spread on fears that if it happened to one big bank, it can happen to others. Why are we so concerned with Europe? Simple, 50% of all sales of fortune 500 companies are abroad. As I've said before, we are a global economy and what happens in little Portugal (roughly the size of Maine), affects us. Reuter's reports that "A surge of Republican pressure is bringing the Federal Reserve's long-held independence into question again, as conservative lawmakers seek to place the U.S. central bank under tougher scrutiny." This is exceptionally myopic and foolish. An independent FED is essential to the health of our economy (see FED Speak for a more in depth analysis), if not for the very simple fact that politics are not involved. There is no doubt in my mind that if it was not for the actions of the FED and Ben Bernanke, we would have been in a second depression during the recent financial crisis. The FED minutes that were released Wednesday indicated that quantitative easing would end by November and interest rates will not be raised until mid 2015.
June Jobs Report The jobs numbers are out and they are excellent. June represents the 5th month in a row where the economy created more than 200,000 jobs. In June, 288,000 jobs were created and April figures were revised to 304,000 new jobs. The unemployment rate dropped to 6.1%, the lowest since 2009 and the labor force participation rate remained constant at 62.8% for the 3rd month in a row. But get this, the long term unemployed (those unemployed more than 6 months), dropped by 293,000. This is a function of an improving economy and the cessation of extended unemployment benefits (being able to collect unemployment for 99 weeks) in January. The real unemployment rate (which includes marginally attached and part-time workers) dropped to 12.1%, also the lowest since 2009. However, there are some storm clouds on the horizon in the form of the Federal Reserve raising short term interest rates, however, inflation, so far, hasn't been a problem (under 2%) and the increase in rates is expected possibly by the 2nd quarter of 2015. The concern is, with jobs increasing faster than expected, more people are working, making money, and prices (inflation) could rise faster than expected. Notice how expectations pay a major role in the economy.
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.