September « 2009 « Citizen Economists

Unemployment Falls in 16 States; Steady in 7 Others

By Eldon Mast, on September 21st, 2009

Since early May we’ve continued to reference the peak and then improvement in new claims for unemployment. This past week was no exception. As recovery takes hold more and more states are seeing encouraging labor situations.

In states around the nation’s capital unemployment is falling or holding steady.

Maryland’s rate has remained at 7.2 percent since June. In Virginia, the rate has now dropped to 6.5 percent in August from 6.9 percent in July.

William F. Mezger, chief economist for the Virginia Employment Commission, said job claims were down as the pace of layoffs in his state decreased in August. “We had over 7 percent unemployment in June,” he said. “We probably won’t see it again in ‘09 the way it looks.”

Nationally the report this week showed that initial claims fell another 12,000 in the Sept. 12 week on top of the surprising 19,000 drop in the Labor Day week.

With unemployment rates now falling in 16 states, the confidence spike should continue with consumers, small business, builders and investors.

Money Market Funds Lose Treasury Backing

By Trace Mayer, on September 21st, 2009

IS THE TREASURY OUT TO KILL MONEY MARKET FUNDS?

Tim Geithner, the Goldman Sachs Secretary of the Treasury, has gone on record as saying that the government will withdraw its $3 trillion backstop guarantee from the money market fund industry, on schedule, this September 18.

While I am for any reduction in the government’s role in the economy, this decision is pretty interesting. Why would they do it now, when even a cursory examination of the real economy shows that things are shaky and rocking the boat on investor confidence seems a bit of a gamble?

I will try to answer that question, but only after stepping back to 2008 when I was told by a friend of mine in the most rarified air of high finance that he and all his peers had pulled all their cash out of money market mutual funds in March of 2008. They had done so because of the large quantities of suspect paper littering the portfolios of the funds, much of it anchored to commercial real estate and syndicated portfolios of consumer loans.

As of mid-year 2008, 40% of outstanding corporate paper was held by money market mutual funds. The funds had taken on this paper as a way of trying to boost their yields and therefore gain a competitive advantage.

Another friend, an executive of a very large mutual fund company, confirmed that what lurked under the hood was ugly indeed.

In September of 2008, these concerns were made tangible when one of the largest U.S. money market funds, the Reserve MMF, “broke the buck.” Which is to say that the fund’s net asset value had fallen below the $1.00 benchmark that money market funds traditionally hold the line on. When the news broke, the public started heading to the exits, which is why the government had to step in with a deposit guarantee.

For the record, money market fund sponsors are under no real obligation to maintain a $1.00 NAV. Rather, that has become customary – a selling point, if you will – with the fund sponsors under no hard obligation to assure their NAVs don’t fall below that level. They hold the line at $1.00 because they know that it is very much in their interest – and the interest of their industry – to do so, even if that means they have to step up to the plate and provide the cash required to repair any holes in their balance sheets to avoid breaking the buck.

Interestingly, though breaking the buck is seen as something of a “black swan” event, it actually happens with great regularity. In fact, according to one study, over one-third of all money market funds have had their NAVs fall below $1.00 since July 2007. The only reason this news didn’t leak out to the public, causing the sort of run experienced by Reserve, was because the fund sponsors were able to quickly rush in with the necessary cash infusion.

Which brings us to September 18 and the expiration of the government’s guarantees.

While the money market funds have clearly reduced their exposure to the worst sort of paper, a fact you can see in the steep downward slope of their yields over the last couple of years – the higher the risk, the higher the yields – they are still sitting on huge chunks of risky paper.

Glance at the prospectus of your favorite money market fund, and you might find, as I just did by looking at that of one of the world’s largest money market funds, that 38% of the portfolio is made up of CDs issued by foreign banks, 9.9% in short-term corporate paper, and 12.3% in medium-term paper, much of it hitched to the fates of portfolios of car loans, insurance companies, and a variety of corporate entities.

In exchange for taking on that risk, you would have earned, so far in 2009, a yield of 0.55% on your money. Yes, just a hair over half of one percent. Of course, out of that handsome return, you’d have to pay your taxes, cutting the return well below even today’s purportedly reduced inflation levels.

As of September 2009, there was $3.58 trillion in money market mutual funds, of which just shy of $2 trillion is sitting in taxable non-government funds. But that money is starting to move: over the last month, money market mutual fund redemptions have been on the rise – with assets falling by a significant 15.3%. With the government pulling its guarantee, and given the risk associated with the money market funds, I have to wonder how many more investors might also decide to pick up stakes in the days and weeks just ahead?

And where might all that money head? Most likely, given the cautious nature of money market fund holders, into FDIC-insured accounts and CDs, and into Treasury funds and instruments. That, of course, helps the banks, and it helps the government meet its aggressive funding needs, while simultaneously taking pressure off interest rates.

All of which may explain why the Treasury is pulling the plug on its money market fund guarantees. And, perhaps, in the process pulling the plug on the non-government money market funds.

If you are aware of a money market fund sponsor that relies on its non-government money market funds for a sizable percentage of its income, it might make for an attractive shorting candidate.

Finally, I have a question for those of you who are parking money in taxable money market funds at this point, especially those that are not invested in Treasuries. And the question is this, “Are you out of your mind?”

Recognizing big, emerging trends in the economy and in the markets – and getting in ahead of the crowd – is how smart investors can profit even in times of crisis. And that’s what The Casey Report focuses on, whether it’s shorting a bond insurer standing squarely in the way of the economic avalanche or buying into grains before their prices shoot up. One of our current favorites is a play on rising interest rates, a trend that is already baked in the cake. Click here to learn more.

[Editor's Note: Due to unnecessary risk for inadequate reward on Wednesday 16 September 2009 I closed my PayPal money market fund which was yielding a whopping 0.05% APY. Mr. Galland of Casey Research elucidates the reasoning behind this decision very well. In addition to just holding the FRN$ balances over the last few months I have also been moving into gold, silver and platinum and I am sure most of you know how to buy silver, etc. but this is especially important with silver trending towards backwardation. As the liquidity in money market funds evaporates this could put further pressure and perhaps hasten the coming market crash. Make sure your capital is safe and liquid.]

Where is India in Internet Adoption?

By Ajay Shah, on September 18th, 2009

Where is India in terms of usage of the Internet? One way to think about this question is to look at specific application areas. I saw two fragments of evidence today:

Online trading

Writing in Hindu Business Line, Rajalakshmi Sivam has interesting information about the share of online trading on NSE:

	2006	Today
Number of trades	20%	33%
Rupee turnover	15%	25%

Railway tickets

Writing in Business Standard, Sharmishtha Mukherjee says that 34% of the tickets sold by Indian Railways were sold online.

Ordinarily we might have thought that the rich trade on the stock market, and have better Internet connectivity. So one might have expected a bigger share for Internet commerce with online trading. But it’s quite striking to see the proportion of online trading at NSE (33%) line up almost exactly with the proportion of online ticketing at IR (34%). IR users are likely to not have broadband at home: they’re probably using Internet cafes.

Three other areas are of interest to me in thinking about this:

Does someone know about the extent to which banking transactions have shifted to the net?
Does someone know about the extent to which airline tickets are purchased over the net. Speaking for me, perhaps 80% of my air travel gets done through cleartrip.
Is there traction with craigslist in India? The few times that I have looked, I’ve not been impressed at the liquidity.

Turning to supply side concerns, there are two problems. The first is bandwidth. India does fairly badly on broadband, owing to policy impediments. We’re all waiting for the 3G rollout to get a quantum leap in bandwidth.

The data above, for NSE trading and Indian Railways, is the picture that we’re seeing in pre-broadband India. I think that in the coming five years, a full quarter of the households of India will have a broadband connection (either through a computer or through a smartphone), and that will generate profound change.

The second constraint is development talent. By and large, most websites done in India are just bad. It seems that computer programmers in India do not get the Internet. There’s probably too much of mechanical use of tools and techniques learned on Windows PCs; there’s probably too much Microsoft in the formative years of young people. More study of good quality systems is called for [link]. The best role model that I show all software developers, about a decent e-commerce website, is cleartrip. A bunch of people who get this need to start a hall of shame for badly designed web systems and e-commerce systems in India. My suggestion for the first case study to write up there is: `Bhuvan’ by ISRO.

Flawed Market in College Football Scheduling

By David Barr, on September 18th, 2009

As a Badger football fan it’s pretty hard to get excited about Wofford this weekend. But it’s not hard to understand why the school schedules games like this. As this article from Sports Madison.com states, the extra home game is worth millions of dollars to the athletic department. Wofford does not expect the Wisconsin to make the return trip.

A simple change in market structure could net millions for the University and provide fans infinitely more excitement. Currently, the school charges the same price for every game. But as anyone who has every tried to buy a ticket from a scalper, not all games have equal value. Charging more for games against marquee opponents would give the school incentive to schedule tougher non-conference opponents.

Can Private Health Insurance Work?

By David Barr, on September 18th, 2009

Efforts to fix our health insurance system have found no found shortage of critical flaws in the “market”. I have yet to hear a coherent argument for the continued existence of private health insurance. Health care differs in three critical ways from traditional markets. Taken together I doubt that it is even conceivable for a private market to exist for health insurance.

In a true free market those who got sick and couldn’t afford care would be left to die or suffer the consequences of their conditions. This is a rational, yet morally abhorrent policy. Even the most die hard free marketers don’t advocate this. The unwillingness to condemn the poor to preventable death is the first significant obstacle to a functioning private health insurance market.

The second critical obstacle is the great variation in expected health care costs. Insurance markets are designed to protect individuals from significant deviations from expected costs. Consider auto insurance, every driver faces some risk or an accident, but few expect to total their car in a given year. By pooling risk, the small percentage of drivers that do suffer serious crashes can avoid financial ruin.

But this logic in no way applies to health insurance. Many people suffer conditions that have high known costs. If you are HIV positive or have Diabetes or are paraplegic medical costs are not an unexpected catastrophe, they are a known expense of life. Only the richest individuals can cover these costs out of pocket. Insurance can’t solve this problem only subsidies can.

Timing is the third critical difference between health insurance and traditional health markets. For insurance to function a claim must be tied to a specific instance. A fire, a car accident, a death are all discrete events that can be placed at a specific moment in time. The bulk of health care spending is spent treating chronic conditions. Who’s to say exactly when a person developed high blood pressure or depression. Furthermore, health conditions incur costs that continue long beyond the length of an insurance contract.

Efforts to twist private insurance around these three restraints are destined to produce warped markets and twisted incentives. The regulations currently oozing through congress will make life better for many people, but they do not address the fundamental incoherence of private health insurance.

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Is Economic Growth Causing the Chinese to Become Discontented or Just More Optimistic?

By Winton Bates, on September 17th, 2009

In my last post I suggested that the reasons why rapid economic growth has not resulted in increased average life satisfaction in China over the last couple of decades have more to do with rising aspirations than with increased income inequality. In this post I want to consider those issues further.

My first point is that in recent years the Chinese have been about as satisfied with life as people in most other countries with comparable income levels. This shows up clearly in charts in Angus Deaton’s article, ‘Income, health and well-being around the world’ (“Journal of Economic Perspectives”, 22 (2)).

Second, survey evidence is not consistent with growing discontent caused by rising inequality – or by anything else. According to recent Gallup data about 66 percent of Chinese are satisfied with their standard of living and 83 percent say that their standard of living is getting better. A paper by Nicole Naurath show that in 2008 over 80 percent of Chinese claimed that economic conditions were getting better in the city or area where they live and that it was also getting better as a place to live.

Third, there is evidence that life satisfaction in China is more strongly influenced by satisfaction with income growth (i.e. satisfaction with income now compared with income in the past) than with either absolute or relative incomes. The results of a study by Lina Song and Simon Appleton do not support the view that dissatisfaction with relative income is a major cause of social discontent in China (“Life Satisfaction in Urban China”, IZA DP: 3443, 2008).

Fourth, Andrew Deaton found in his cross-country study, cited above, that while level of per capita income has a positive effect on life satisfaction, economic growth has a negative effect. His results suggest that it would be normal for the negative effect of economic growth to outweigh the positive effects of increases in income levels in countries that are experiencing rapid economic growth (see Table 2 in his article). Deaton argues that his results are consistent with life satisfaction responding to the long-term average income, as in a permanent income model of life satisfaction.

Fifth, the ratings that the Chinese give to the quality of their lives five years ago and five years into the future suggest that large upward revisions are occurring in their aspirations. The Gallup data for 2008 indicates that the Chinese rated their lives five years ago less highly than just about every country in the world outside Africa. The rating they give to their lives five years ahead is higher than that in some western European countries. When they appraise their current quality of life in five years time they will realize that they still have somewhat further to go before attaining “the best possible life”. But they are not likely to become discontented while they continue to experience the economic growth they have come to expect.

I think the lesson to be learned from consideration of the relationship between average life satisfaction and rising per capita incomes in China is that the failure of life satisfaction to rise with income does not necessarily imply discontent with the consequences of economic growth. Those who suggest that economic growth has led to widespread discontent in China are mistaken. Economic growth has merely cursed the Chinese with great expectations.

Alan Kohler – Gold Hater

By Bron Suchecki, on September 17th, 2009

One to bookmark and shove in his face when gold is $5000. From Gold fever looks incurable by Alan Kohler:

But underlying demand is weak and getting weaker, and supply is on the rise – big time.

Gold is the commodity of craziness.

… gold investors are that unique breed of incurable optimists who don’t want to be paid any income on their capital

… it is not a currency. I can’t go into JB Hi-Fi with a lump of it and buy a TV.

It’s just a commodity they [central banks] got stuck with because it used to be a currency a long time ago and will never be again.

So gold is also the commodity of confusion: is it an investment safe haven or just a commodity? Answer: it’s whatever everyone thinks it is, and right now it’s a haven.

Confidence Spike: Consumers, Small Business, Builders, Investors

By Eldon Mast, on September 17th, 2009

Wednesday saw significant spikes in confidence from four important market groups:

1. The Consumer: On Wednesday the Rasmussen Consumer Index, which measures consumer confidence on a daily basis, rocketed to its highest level in exactly one year.

2. Investors: Also on Wednesday, the Rasmussen Investor Index spiked to its highest level in over a year. Investor confidence is up 28 points since Jan 1.

3. Builders: Confidence among U.S. home-builders rose in September for the third straight month. The National Association of Home Builders/Wells Fargo confidence index bounced to it’s highest level in 16 months.

4. Small Businesses: Economic confidence among small businesses leaped to its highest level in 18 months in August as more owners expressed faith in U.S. economic recovery. According to the latest Discover Small Business Watch, their small business index rose 7.7 points from July, reaching the highest level since February 2008.

It is no wonder 2009 growth is coming on strong and the stock market might just be poised for a major leg up.

Newton’s Third Law and The Dow’s Epic Rise

By Eldon Mast, on September 16th, 2009

“For every action, there is an equal and opposite reaction.”

Newton’s statement implies that in every interaction, there is a pair of forces acting on the two interacting systems. The size of the forces on the first system equals the size of the force on the second system. The direction of the force on the first system is opposite to the direction of the force on the second system. Forces always come in pairs – equal and opposite action-reaction force pairs.

Last September 29th the Dow Jones Index posted its biggest point-drop ever. The drop wiped out $1.2 trillion in market value with the index slumping over 777 points, in the biggest single-day point loss ever.

But almost a year later the markets are up over 50% from their 2008 lows. And there is likely a lot more room for the markets to run even higher.

If one closely analyzes Sir Isaac’s third law of motion and a simple stock chart for the last year, it does not seem far fetched that the market could be poised for a very significant leg up.

(click to enlarge) (Source: Google Finance)

Recession is Over: Positive Economic Data Abounds

By Eldon Mast, on September 16th, 2009

Fed Chief Ben Bernanke said Tuesday that indeed the recession of the past year is over. And positive economic data continues to punctuate assertions that the Q3 growth will be anything but lackluster:

1. On Tuesday, the popular ICSC-Goldman report’s year-on-year measure jumped into positive ground — 1.6 percent for the best showing in a year. The companion Redbook measure also showed sizable improvement in the Sept. 12 week, for the best reading since the spring.

2. A positive producer price report followed showing that the core rate of inflation continues to be quite tame at +0.2 percent, following a 0.1 percent decline in July.

3. More good news followed in the government’s retail sales report for August. Consumer spending made a healthy showing mostly boosted by the clunkermania and higher gas prices. But other retail segments also signaled general health. All said, retail sales jumped 2.7 percent in August.

4. Manufacturing activity in the NY region continues to bounce. On Tuesday the Empire State index was reported to rise nearly 7 points in September to 18.88. New orders rose 6-1/2 points to 19.84 continuing to point to significantly increasing activity in the second half of the year.