Archive for May, 2009

Not Hard To Swallow

Friday, May 29th, 2009

The Economist, a British publication, has an interesting way of comparing the relationship between the world’s currencies using a deceptively simple gauge called the Big Mac Index. As I’m sure you know, McDonalds makes the Big Mac and requires that it meet rigorous standards regardless where you purchase one. The culinary experience should be reliably similar anywhere you go. That makes it somewhat unique, given that McDonalds sells them in franchises spread across 120 different countries around the world. This ubiquity has enabled The Economist to track the relative cost of this signature sandwich in American dollars for 20 years. Currently the value is approximately $3.54 here in the U.S., just $3.30 in England, a beefy $4.38 if bought with Euros, and a staggering $5.60 in Switzerland. The implication points to the relative valuation between currencies and conclusions attached thereto. Does that work out to a penny for each calorie?

Need We Ask Y?

Thursday, May 28th, 2009

I suppose the Baby Boomers will also take credit for starting the trend toward naming certain groups of people based on their age.  We have Gen-Xers, the Millennial Generation, ad nauseum.  But I will succumb to this vile habit and discuss that cohort currently considered to be comprised of America’s 21 to 32 year olds, aka Generation Y.  Many theories about demographics suggest this group hardly matters because they don’t have enough money to make a difference.  But of those that are employed, did you know almost half of them are already married (49% according to a recent MetLife poll), and 46% have kids?  Did you know over half (53%) are living paycheck to paycheck and that almost 3 of every 4 (73%) are very concerned about making ends meet?  Their numbers may be relatively small, but it still involves a lot of folks, and the social burden they could represent if we don’t right this economy will only add to that faced by the Boomers themselves as they begin to retire.

Strange Attractors and Mean Reversions

Wednesday, May 27th, 2009

While chaos reigns, rips, and roars all around us, we tend to prefer, both individually and as a group, to simply ignore it.  After all, if nothing was predictable, we couldn’t be sure a floor was there to greet our feet when arising each morning.  Rarely do things get so out of control that we decide they need our attention right now.  Rarer still do things get so chaotic that the results force themselves upon us before we can react.  This latter group takes several forms:  accidents, natural disasters, or good luck to name a few.  What we end up doing is living in a world of average behavior where things tend to cluster around a norm, rarely drifting too far one way or another.  Within most systems this norm is called the mean.  In dynamic, chaotic systems it may be called a strange attractor.  The stock market is often likened to the latter.  Thus we see, when it reaches certain extremes, that it will ultimately tend to return to the norm, toward the centerpoint of a strange attractor.  Hence we must always be vigilant when constructing our portfolios that we don’t accept extremes as the norm since a really mean reversion can wreak havoc with your portfolio, making your interest in investing seem like a strange attraction indeed.

Heros of Economics: Noah

Tuesday, May 26th, 2009

In my pantheon of great economists, Noah has a front row seat.  He was the original contrary investor.  Everyone knows a boat is a hole in the water the owner of which constantly tries to fill with money.  Imagine what the ark cost!  And all the time everyone around was constantly saying the same thing,  “Noah, you fool, it ain’t gonna rain!”  So good riddance.  He also had enough sense not to put all the big critters on the same side.  If creationists have their say then you can just guess what would happen with elephants and gigantisauruses all huddled together.  That’s the second lesson of contrarian thinking attributable to Noah.  When everyone runs to one side of the boat, you had best beat feet to the opposite.  With so many problems confronting the global economic system today, that may be hard to do, but keep an eye out for any break in the storm.  Those shoals ahead might just be the tip of something big about to emerge.

Counting Bean Counters

Friday, May 22nd, 2009

When the Bureau of Labor Statistics, a branch of the U.S. Department of Labor, released their employment report on Friday, May 8, it showed huge losses in jobs across almost every sector of the economy.  They break jobs down into various categories to help define where weaknesses may exist.  So we saw, unsurprisingly, that construction shed 110,000 jobs.  Manufacturing dropped 149,000.  A goulash labeled trade, transportation, & utilities saw 126,000 positions disappear.  Professional and business services reported a combined 122,000 drop.  Other sectors like information, financial activities, and leisure & hospitality saw declines in the tens of thousands.  Only two groups rose.  The field of education & health services gained 15,000.  Government was the big winner, up 72,000.  Now I don’t begrudge a man a job, but governments don’t always produce things I consider of value.  The gains in government jobs seen in April related mostly to hiring for the upcoming 2010 census.  It’s a down-payment really, since they expect to hire about 1,400,000 temps to get the job done.  With that many bean counters involved, I suspect a few are being hired just to maintain a census of the census workers.

Giving Credit Where It’s Overdue

Thursday, May 21st, 2009

Is it just me, or do you feel a breeze?  Maybe calling it a gale would be more appropriate, but it’s the overdraft.  We have been experiencing a financial typhoon which continues to wreak havoc over a wide swath of the global population.  While this storm has many causes, one of them is the persistent over-consumption by Americans in the first part of this century.  According to a study made by Dynan and Kohn of the Federal Reserve, starting around the year 2000, our domestic income began to stagnate even while we increased our debt.  They demonstrate an increase in personal debt to income ratios from 94% in 2000 to a staggering 133% by 2007, meaning a higher portion of earnings went to servicing debt rather than new consumption.  What did we do?  Kept borrowing!  Mintel Comperemedia reports Americans were inundated with 8 billion new offers to sign up for a credit card in 2006 alone.  For the three years starting in 2003, we borrowed $2 trillion by refinancing or opening home equity lines of credit.  When jobs were lost and values of both property and portfolios plunged, the bills came overdue.  Now the party is over and too many of us have a hangover.  Perhaps the Fed didn’t remove the punch bowl soon enough.

Hey Buddy, Wanna Buy Something?

Wednesday, May 20th, 2009

I so often discuss the level at which Americans consume their goods and services that you might say it appears to be a fixation.  While not that, it has been a fixture of our nation’s economic health for quite some time.  Some hypothesize the aging of the Baby Boomers has been a driving force as, over the years, they gradually earned more and spent it.  Strong evidence supports this conclusion.  Since the early 1980s when this cohort started moving into a period of maturing family formation and higher wages, spending for goods and services, as well as homes, increased at a faster pace than GDP via the use of ever increasing amounts of debt.  By 2006, spending reached its apogee, accounting for 76% of GDP, the highest level recorded since records began being compiled in 1947.  But demographics also demonstrates a diminution in desire to buy stuff as we age past a certain point, one which the Boomers are now rapidly approaching.  Will we possibly reach a point where they are disinclined to buy some things, or even anything?  Recent retail sales data has been disappointingly low, even negative.  How will we grow without them?