Dollars and Jens
Wednesday, June 30, 2004
Oil prices are down below $36; a technical analyst has commented that it's "testing resistance", which tends to mean it will go back up, unless it doesn't, in which case it won't.

I've recently seen "pro-forma earnings" defined as "how well the company might have done if it hadn't done as badly as it did".

In all honesty, neither term has to be as meaningless as I've made it out to be, but, in practice, they often are.

Federal Reserve Open Market Committee action
The FOMC statement retains the "measured pace" language; the good bits are
Although incoming inflation data are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors.
The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters are roughly equal.
The stance, more dovish than consensus, moved November futures by 10 basis points.

Oh, and they raised rates a quarter point. But that is so not the news.

Key Financial News
I assume you've already seen the big news, but here it is anyway: oil inventories are up again.

You didn't think I was talking about the interest rate hike, did you? Surely, that doesn't count as "news".

Saturday, June 26, 2004
inflation and durable goods
On a related note, last night's Nightly Business Report included a complaint by Alan (sp?) Sloan of the Wall Street Journal that the cost of housing included in the CPI by way of imputed rent, with any difference between the cost of a house and the cost of housing treated as an investment. I'm absolutely with Washington on this one. The cost of buying a house has been rising a lot faster in the past several years than have rents; this is because interest rates have been down. It might then be appropriate to factor this in by including not the sticker price of a house, but the mortgage payment necessary to buy that house; this (combined with the other ancillary ongoing expenses of keeping a home that get passed on by landlords to renters) is exactly what the government calculation ends up doing.

As interest rates drift higher — though I'm starting to side with the school of thought that they will drift with a pace that, to conventional wisdom, seems surprisingly measured — the ratio between housing prices and rents will start going the other way. So, of course, will the ratio between the costs of buying a home and those of financing one. That will be the time to acknowledge a decrease in the ability of a dollar to pay for current expenses.

(It's clear that this is a related note, right? All durable goods are, to the extent durable, a bit of an "investment", though I'd hold that term at arms length if the good can't be easily rented out or resold in a somewhat liquid market. "Savings" seems semantically closer, but in the identity I recited last night, this would count as investment. If I buy a car that I intend to resell in a few years, I might reasonably view half of it as an investment, but most goods that aren't houses won't be durable enough for the distinction between costs of purchase and current costs of ownership to be as big as it is for housing.)

Friday, June 25, 2004
federal deficits
The federal government deficit = non-government savings (of net financial assets). That's fact, not theory, a.k.a. an "accounting identity."
So writes one Thomas Nugent, concluding that
Domestic savings are low because the budget deficit is too low.
Now, Steve jump in if I get this wrong, but I believe the accounting identity he's reaching for is that net private savings minus investment is equal to the government deficit. Household savings can go to feeding the beast in Washington, or they get lent to companies that can either sit on it, or use it to buy factories and other capital goods that will spit off returns in the future. While Nugent is right, later, to distinguish between savings on a personal scale and savings on an economy-wide scale — though the comment that "[the government] can't run out of money because it creates it" is just painful — net real savings is possible through the purchase of durable goods, capital or consumer, that will generate much of the benefit being purchased several years after the purchase date.

My inclination is to suppose that a higher federal deficit would lead to some increase in private savings, but I don't see the benefit to this; insofar as savings has a benefit external to the saver, it would have to be through this kind of real savings, and it would be more than offset by any federal deficit capable of creating it.

The real problem is that the real consumption of resources by the government — viz. its spending — competes with the private sector for resources that the private sector can almost always allocate to more efficient uses. Because of arguments like the tenable ones made by Nugent — but made better by Ricardo — I think it often matters less whether they're financed by taxes or debt than most commentators seem to assume; I tend to support tax cuts because they lead to a political brake on spending growth, and not the other way around.

Wednesday, June 23, 2004
Taleb’s book, which is full not only of infuriating meanderings and off-putting self-importance but also of extreme brilliance, changed the way I think about investing.
This is Glassman, on "Fooled by Randomness", a book I read a few months ago after having picked it up and started it a year or two ago. I'm not sure I like agreeing with Glassman, so I'll just note that I didn't mind the meanderings.

Monday, June 21, 2004
Freedom Funds
I've been told that Principal is planning to launch a new set of funds of funds to allow 401k users to choose a single fund for their retirements. I assume this is similar to Fidelity's "Freedom Funds", where one tells them at what date you plan to retire, and they funnel you into the appropriate fund. The "Freedom 2030 fund", for example, contains mostly equities, but by 2029, it'll be mostly fixed-income.

I don't think retirement planning can be reduced to a single variable, though. Instead, it requires two. Other than how far you are from retirement, I think your asset allocation should take into account how much you have relative to how much you'll need. If you have 15 years until retirement, figure you need $500,000, and you have $400,000, you may want to stick the vast majority into bonds (preferably inflation-protected) and guarantee that you'll meet your target. On the other hand, if the same fifty-year-old gagged on the idea of a six-figure retirement account, you'll need to take some prudent risks in the stock market. You might also consider whether you can work beyond age 65.

A certified financial planner will suggest that two variables won't cut it -- you might want to consider, for example, whether you'll be doing anything between now and then, such as add more money, or fund a kid's education -- but two variables strikes me as a lot closer to adequate than one does.

Saturday, June 19, 2004
I was wandering around the AEI site the other day, and I encountered an interesting summary of the Chinese economy. Interesting to me, anyway.

Thursday, June 17, 2004
S&P projections — statistics abuse
My brother put up a post on the other blog that involved a lot of handwaving around statistics. "That's absurd," I thought, "but I can top it." So I present you here with the results of my S&P500 extrapolations.

Based only on trailing price and earnings data, both adjusted for inflation, I've put together five and ten year projections. Both come in, as of late last year, at about 700 in January, 2000 dollars; i.e. by late 2008 and late 2013, the S&P is projected to have dropped by about 30% in real terms from where it is now. If you take to heart that this has significant uncertainty in it, it should be taken as broadly plausible; do not expect a reversion to '90's performance over the next decade.

Taking this outside the domain of its applicability, though, we find something much more interesting. I went back to see what would have been projected five and ten years from each month back into the twenties, and the ten-year projection from January of 1996 and the five-year from January 2001 — i.e. the two projections for January 2006 — are almost identical, at 1085 and 1089 in 2000 dollars. Both of them give a value in the next month that is some 7 to 8% lower; the projections rally gently through the summer of '05, roll over a top in the fall, and fall like a rock in 2006. The ten-year projection stabilizes in the spring of 2007, and it and the five-year are both about 20% lower than January 2006; at this point they part ways, as the ten-year stabilizes and recovers that 20%, while the five year drops another 20% by the end of the summer.

As I say, though, point by point movement-following isn't what this was designed for. That said, if we gently roll across a peak in the fall of 2005, I may be superstitious enough to be unusually well-hedged come the new year.

Sunday, June 13, 2004
How much efficiency will the economy gain from people only having to run the flag half way up and half way down each day? Significantly less than lost on Friday, no doubt.

Lest anyone think this is more than cute, be it noted how seriously economists take effects that don't make the GDP data, such as the wish of a people to honor a fallen hero.

Thursday, June 10, 2004
Legal Harassment
Eliot Spitzer is suing GlaxoSmithKline for fraud on the grounds that they did more to publicize a study that showed promise for Paxil than a study that showed no statistically significant benefit over a placebo. GSK had told the FDA about the second study -- which didn't demonstrate anything actually wrong with the drug -- and even allowed one of the researchers to present the results at a conference. It turns out that this sounds even sillier to someone who knows the drug industry.

Incidentally, I look forward to Spitzer's next political campaign. No doubt his ads will promote all information about him equally, whether or not it supports his election.

Wednesday, June 09, 2004
President Reagan
The May Producer Price Index was to be released on Friday. It was moved up to 2PM on Thursday, then postponed indefinitely. Me, I think they're using the day of mourning as an excuse; BLS was having some trouble getting this number out on time earlier this year.

The CME and CBOT will both be closed on Friday, with the pits failing to open and overnight electronic sessions closing by 8AM. The stock markets will be closed as well.

Update: BLS has acknowledged a problem calculating the PPI, and probably had done so before I posted this. The number in fact won't come out before next Tuesday.

implied fed funds rates
Often I see something like
federal funds futures are currently pricing in 100% probability of a 25 basis point hike at the June 30 meeting and a 19% probability of a 50 basis point hike
and it irritates me a bit. There is no exchange-traded option on these futures — or in any case, results of my attempts to get prices for said options lead me to believe this — so these probabilities are based on the future market's implied 1.2975% fed funds average rate for July.

Now, the interpretation is probably close to correct in this case, and my irritation is mostly irrational. If I were to question the interpretation, I'd suppose some of the traders imagine a somewhat lower probability of a 50 bp hike at the meeting, with some probability of an inter-meeting hike at some point during July. Me, I wouldn't mind seeing a target set at 1.3%; there's no statutory requirement that it be a multiple of 25bp.

More than that, though, I'd like to see prices on the options for the November future. 2.1%, what they're guessing now, is interesting; I'd like to see how that breaks down in terms of probabilities. I'm 100% sure that's not a 60% chance of a 2.0% rate and a 40% chance of 2.25%.

Friday, June 04, 2004
Ladies' night
The state[ of New Jersey]'s top civil rights official has ruled that taverns cannot offer discounts to women on "ladies['] nights," agreeing with a man who claimed such gender-based promotions discriminated against men. (Related item: Many scoff at ruling)
As Miss Hoover once said to Ralph Wiggum in The Simpsons, "The children are right to laugh at you."

Ladies' night follows the same market design as broadcast television: the obvious product (admission/beer resp. programming) is used to attract the profitable product and obvious customers (women resp. advertising viewers) to sell to the real customers (men resp. advertisers). Fortunately for NBC, neither television viewers nor advertisers are yet a protected class, and, regardless of who is supposed to be the victim here, they have no recourse in discrimination law.

Latest Numbers
U.S. employers hired workers at a rapid pace for the third straight month in May, suggesting that the "jobless recovery" may indeed be over.

Nonfarm business payrolls grew by a net 248,000 jobs in May, raising this year's monthly average to 238,000, the fastest pace in four years, the Labor Department reported Friday. That marked the third straight month that employers have added more than the 150,000 jobs economists say is necessary to keep the job market stable.

Payroll-growth figures for March and April, which were already considered strong by many economists, were revised even higher. Employers added 74,000 more jobs than previously thought during those two months. The surge in job creation drew some previously discouraged workers back into the civilian labor force, expanding it by 233,000 to 146.9 million. The unemployment rate, as a result, held steady at 5.6%.
That's taken from the Journal. You can read the BLS release for free.

The stock market is up.

Wednesday, June 02, 2004
The Olympics
I was just reading about the ancient Olympic games, and ran across the following paragraph:
Later, in the Hellenistic and Roman periods, pensions for athletes became more formalized and could actually be bought and sold.
I had assumed that securitization was substantially more modern.

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