Sunday, November 16, 2014

Oil prices and the economic recession of 2007-08 - James D. Hamilton 16 June 2009

Oil prices and the economic recession of 2007-08 - James D. Hamilton 16 June 2009

Past oil price spikes associated with Middle East conflicts and OPEC embargos were each followed by a global economic recession. This column argues that the onset of the current economic downturn of is also partly attributable to a sharp increase in the price of oil. Moreover, the interaction of high oil prices and housing problems contributed to the severity of the downturn.

Big oil price increases that were associated with events such as the 1973-74 embargo by the Organization of Arab Petroleum Exporting Countries, the Iranian Revolution in 1978, the Iran-Iraq War in 1980, and the First Persian Gulf War in 1990 were each followed by a global economic recession. The price of oil doubled between June 2007 and June 2008, a bigger price increase than in any of those four earlier episodes. Blinder and Rudd (2009) argue that this oil prices hike had very different effects than those in the 1970s. But to what extent were these most recent oil price increases a factor that contributed to our current economic problems?

In April, I presented a paper at a conference at the Brookings Institution entitled Causes and Consequences of the Oil Price Shock of 2007-2008 (Hamilton 2009). In that paper, I looked at both what caused the dramatic increase in oil prices and what role that oil price spike may have played in the subsequent economic downturn.

The paper examines a number of different models that had been fit to earlier historical episodes to see what they would have predicted for US spending patterns and GDP over 2007-2008. The approaches surveyed include Edelstein and Kilian (2007), who examined the detailed response of various components of consumer spending, Blanchard and Gali (2007), who studied the extent to which the contribution of oil shocks has significantly decreased over time, my 2003 paper (Hamilton 2003), which emphasized the role of nonlinearities, and a model-free data summary of the observed behavior of different economic magnitudes following this and previous oil shocks. Although the approaches are quite different, they all support a common conclusion; had there been no increase in oil prices between 2007:Q3 and 2008:Q2, the US economy would not have been in a recession over the period 2007:Q4 through 2008:Q3.

The implication that almost all of the downturn of 2008 could be attributed to the oil shock is a stronger conclusion than emerged from any of the other models surveyed in my Brookings paper, and it is a conclusion that I don't fully believe myself. Unquestionably, there were other very important shocks hitting the economy in 2007-08, most notably the problems in the housing sector. But housing had already been subtracting 0.94% from the average annual GDP growth rate over 2006:Q4-2007:Q3, when the economy did not appear to be in a recession. And housing subtracted only 0.89% over 2007:Q4-2008:Q3, when we now say that the economy was in recession. Something in addition to housing began to drag the economy down over the later period, and all the calculations in the paper support the conclusion that oil prices were an important factor in turning that slowdown into a recession.

There is also an interactive effect between the oil price shock and the problems in housing. Lost jobs and income were an important factor contributing to declines in home sales and prices, and the biggest initial declines in house prices and increases in delinquencies were in the areas farthest from the urban core, suggesting an interaction between housing demand and commuting costs. Once house price declines and concomitant delinquencies reached a sufficient level, the solvency of key financial institutions came into doubt. The resulting financial problems turned the mild recession we had been experiencing up until 2007:Q3 into a much more severe downturn in 2008:Q4 and 2009:Q1. Whether those financial problems were sufficiently insurmountable that we would have eventually arrived at the same crisis point even without the extra burden of the recession of 2007:Q4-2008:Q3 is a matter of conjecture. But it seems to me that oil prices indisputably made an important contribution to both the initial downturn and the magnitude of the problems we’re currently facing.

It is also interesting that the observed dynamics over 2007:Q4-2008:Q4 are similar to those associated with earlier oil shocks and recessions. The biggest drops in GDP come significantly after the oil price shock itself. What we saw in earlier episodes was that the drops in spending caused by the oil price increases resulted in lost incomes and jobs in affected sectors, with those losses then magnifying other stresses on the economy and producing a multiplier dynamic that gathered force over subsequent quarters. The mortgage delinquencies and financial turmoil in the current episode are, of course, not the specific stresses that operated in earlier downturns, but the broad features of that multiplier process are surprisingly similar to the historical pattern.

Sunday, October 19, 2014

Oil Price Drop - Over Supply or Economic Downturn


Since June the price of Brent North Sea Crude Oil has dropped from about $115 per barrel to $85 per barrel as of last Friday October 17th. This reason for this $30 per barrel drop has been stated to be related to a number of factors such as global economic slowdown, the strength of the US Dollar, or an over-supply because of the increased production in the US. I found an article in this weekend's Economist that gives the data to better understand the situation

Oil Price Drop - Information from the Economist, Cheaper Oil Both symptom and balm

Here are some data from this article:

1) A $10 per barrel drop transfers around 0.5% of world GDP from oil exporters to oil importers. This means that oil exporters like Russia have seen a significant drop in their Gross Domestic Product, GDP.

2) The International Energy Agency said it expects global demand to rise by just 700,000 barrels a day down 200,000 barrels a day. So this suggests a little economic slowdown but still growing demand, hardly a recession.

3) Since January 2013 the world is producing about 3 million more barrels per day. During this period the OPEC countries have increased output by about 1 million more barrels per day while the Non-OPEC countries have increased by about 2 million barrels per day.

4) The US production has increased to 8.8 million barrels per day, up 13% in a year.

5) The Russian production is currently 10.6 million per day so a $30 per barrel takes about $300 million per day out of their economy.

The bottom line: The main driver is supply is exceeding demand with a secondary driver being a slowing global economy. This should have a long term positive impact for the US economy.

Saturday, October 11, 2014

Brent oil tumbles, gold falls as dollar races higher

This week saw some significant changes in the value of oil, gold, and the US dollar. The value of these inversely correlate and as the value of the US dollar relative to other currencies goes up the price of oil and gold goes down. I found this article on this topic to demonstrate it.

The money that would be going into these commodities has to go somewhere so I have a short section called Where Will The Money Go. At the end is This Day in History for October 4th, what a difference a day can make.


Brent oil tumbles, gold falls as dollar races higher

Commodity prices mainly sank last week as the dollar soared on strong US payrolls data, while many markets were also weighed down by abundant supplies and weak demand, dealers said. Brent oil tumbled on Friday to two-year troughs, gold carved out the lowest level so far this year, and cocoa slid on profit-taking from recent 3.5-year highs that were forged on output fears linked to Africa’s Ebola outbreak.

“That, not least, is also due to current concerns about a slowdown in global growth and its potential negative impact on demand at a time where the dollar continues to go from strength to strength.” The European single currency dived on Friday to $1.2501, its lowest level since late August 2012. A stronger greenback makes dollar-priced commodities more expensive for buyers using weaker currencies, which tends to dent demand and push prices lower.

Oil also slid Thursday after Saudi Arabia, the biggest producer in the Opec oil cartel, announced lower prices for the fourth straight month in a bid to hold onto market share. Brent slumped Friday to $91.48 a barrel, which was last witnessed in June 2012. New York crude had tumbled Thursday to $88.18 - a level last seen in April 2013.

The market was hit again by concerns about a glut of global supplies, which have overshadowed ongoing geopolitical jitters in key oil-producing regions. “Despite unresolved geopolitical tensions in Russia, Iraq and Syria, Brent prices have steadily declined over the last two months, as the combination of strong North American production growth, weak global demand growth and lower Opec disruptions led to a build in petroleum inventories,” wrote Goldman Sachs analysts.

Gold fell below $1,200 per ounce for the first time this year, as robust US payrolls also dimmed haven investment demand, dealers said. “The stronger-than-expected economic data saw a renewed appetite for risk among investors, with gold prices selling off sharply today as investors pulled out of the perceived safe haven in search of higher yielding assets,” said Sucden analyst Kash Kamal.

The glamorous metal slid Friday to $1,191.46, a level last seen on December 31, 2013. Sister metal silver hit $16.72, the lowest point for four and a half years. “The strong dollar and waning safe-haven demand weighed on all precious metals prices and led to investor selling,” added analysts at British-based research consultancy Capital Economics.


Where Will The Money Go:

Money tends to flow between commodities, bonds, and US Stocks. With money leaving commodities it tends to move toward bonds and stocks. Money moving to bonds keeps yields low. Money moving to stocks props up prices.

The more that oil prices drop the happier I get as it lowers gas prices helping us consumers and takes money away from countries like Iran, Venezuela, and Russia.

Saturday, September 6, 2014

ECB and US Treasury Bonds

ECB cuts rates to ward off euro zone deflation threat

(Reuters) - The European Central Bank cut interest rates to new record lows on Thursday, unexpectedly lowering borrowing costs to try to lift inflation from rock-bottom levels and support the stagnating euro zone economy.

The ECB cut its main refinancing rate to 0.05 percent from 0.15 percent. ECB President Mario Draghi had said after the ECB's last rate cut in June that "for all the practical purposes, we have reached the lower bound".

In a landmark speech on Aug. 22, however, Draghi said indications from financial markets showed inflation expectations "exhibited significant declines at all horizons" in August.

Euro zone inflation slowed to 0.3 percent last month, sinking deeper below the ECB's target of just under 2 percent and raising the specter of deflation in the euro zone.

On Thursday, the ECB also said it had lowered the rate on bank overnight deposits to -0.20 percent, which means banks pay to park funds at the central bank, and cut its marginal lending facility - or emergency borrowing rate - to 0.30 percent.

Markets now turn their attention to ECB President Mario Draghi's 1230 GMT (0930 EDT) news conference, at which he is expected to give a more detailed explanation of the ECB's decision.


European Central Bank and US Treasury Bonds - Comment

Note the refinancing rate of 0.05% and the overnight deposit rate of -0.20%. Imagine losing 0.2% on your money for a deposit. As interest rates are reduced in Europe the interest rate on bonds also goes down. This makes the interest rate of the US Treasury Bonds look attractive. The net effect is money flowing from Europe to the US that offsets the action of the Federal Reserve.

The bottom line is as long as the ECB is keeping interest rates low, US Treasury Bond interest rates will stay low. In the future when ECB policy change and interest rates start to rise the impact will be that US Treasury Bond interest rates will rise.


Math Exercise

Rugs or Miles
Are their more square inches in a carpet 15 yards by 5 yards or feet in a 20-mile run?

ANSWER - Feet in a 20 mile run.

There are 12 inches in a foot, and 1,760 yards in a mile.  There are 105,600 feet in a 20-mile run.  There are 97,200 square inches in a carpet 15 yards by 5 yards.
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My Bathtub
My bathtub has two water faucets, a drain, plus a leak.  The cold-water faucet, by itself, fills the tub in 20 minutes.  The hot water faucet, by itself, fills the tub in 30 minutes.  With both faucets turned off the drain can empty the tub in 16 minutes.  The leak, by itself, will empty a full tub in 2 hours.  How long will it take to fill the tub if I leave both faucets turned on and the drain open?

ANSWER - 80 minutes -

In 24 hours the cold-water faucet can fill 72 tubs.  In 24 hours the hot water faucet can fill 48 tubs.  The drain can empty 90 tubs in 24 hours.  The leak can empty 12 tubs in 24 hours.

Therefore in 24 hours we have 72 plus 48 minus 90 minus 12 = 18 tubs in 24 hours.  Therefore one tub would take 80 minutes to fill.
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Sweet Tooth
Tom can eat 27 Chocolates in an hour, John can eat 2 Chocolates in 10 minutes and Kate can eat 7 Chocolates in 20 minutes.

How long will it take them to share and completely eat a box of 120 Chocolates while watching TV?

ANSWER - 2 hours

In 1 hour Tom eats 27 – John 12 – Kate 21 which = 60 Chocolates in one hour.  Therefore 120 divided by 60 = 2 hours.

Sunday, August 24, 2014

Global Economic Growth Summary

Global Economic Growth Summary

Economic growth ground to a halt in much of continental Europe in the second quarter. Real Gross Domestic Product in the Euro-Zone was essentially flat, with GDP down in Germany, France, and Italy. Industrial production also fell in Europe in the second quarter as big declines in May were not fully reversed in June. However, the European Union’s production expectations index, still in positive territory in July, suggests that May’s big decline in industrial production
overstates the weakness. The Markit PMI (purchasing managers index) for the Euro-Zone suggests slowing but still-slightly-positive growth in manufacturing.

The proximate cause of the recent economic weakness in Europe is the hit to consumer and
business confidence caused by tensions between Ukraine and Russia. The (German) ZEW Economic
Sentiment Index has fallen sharply since January and in July suffered its largest one-month decline since 2012. But the weakness also reflects the slow underlying growth rate caused by high government debt, demographics, and structural rigidities. When the trend rate of growth is only 1-2%, it doesn’t take much of a negative shock to drag the growth rate down to zero.

Off the European continent, growth is much better. Real GDP in the United Kingdom has grown
at an above-trend rate for six consecutive quarters, raising year-over-year growth to 3.2%, the highest
among major developed countries. Growth has also been strong in Ireland. Ireland hasn’t reported
second-quarter data yet, but real GDP was up 5.1% year-over-year in the first quarter.

Economic weakness is not confined to continental Europe. Real GDP declined sharply in Japan
in the second quarter, albeit not as much as feared. The April 1 increase in the Value-Added Tax shifted economic activity from the second quarter to the first quarter. GDP declined at a 6.8% annual rate in the second quarter after rising at a 6.1% rate in the first quarter. Industrial production in Japanese manufacturing, which rose 11.2% from November 2012 to January 2014, has fallen 7.1% since then. Elsewhere in Asia, there is still no growth in manufacturing in Korea. Industrial production in Korean manufacturing was at the same level in June 2014 that it first reached in February 2012. Growth in industrial production has perked up in Australia, India, and Taiwan. Growth seemed to be picking up in China in May and June, but a series of weak data reports in July and a weak “flash” PMI report for August have called that pickup into question. Year-over-year growth in industrial production in July, at 9.0%, wasn’t bad, but construction was down year-to-date, and electricity generation was up just 5.3% year-over-year, its lowest growth rate since March 2013. In Chinese manufacturing, growth is concentrated in motor vehicles and consumer electronics.

Aside from the British Isles and a few countries in Asia, the only significant bright spot in the global economy is North America. Real GDP in the United States was reported to have risen at a 4.0% annual rate in the second quarter after falling at a 2.1% rate in the first quarter, and recent data suggest that second-quarter growth will be revised up. Industrial production in U.S. manufacturing rose 1.0% (seasonally adjusted) in July, pushing the year-over-year growth rate up to 4.9%, the highest in more than two years.

The Canadian economy is also doing well. Industrial production in Canada was up 4.7% year-over-year in May (latest data available). Canada shares some of the competitive advantages of the United States and benefits from strength in the U.S. auto market. Industrial production isn’t growing quite as fast in Mexico as it is in the United States and Canada, but Mexico is doing far better than the rest of Latin America, and recent reforms boost the prospects for faster growth in coming years.

There is a tendency among some market analysts to dismiss the current weakness in Europe and other parts of the world as “just geopolitics,” implying that underlying economic fundamentals are fine and that economic growth will go back to “normal” when geopolitical problems abate. There are two problems with that argument. First, underlying fundamentals aren’t that great and neither is the new “normal.” Second, geopolitics is an ever-present part of the global economy and has always played a role in causing the economic fluctuations we call “cycles.” Every U.S. recession since 1973 (and perhaps earlier) has been triggered by an oil price shock, and all of those oil shocks have been caused, at least in part, by geopolitical events. Today, persistent geopolitical problems, especially in the Middle East and North Africa but also in Nigeria and Venezuela, are keeping oil prices perhaps $15/barrel higher than they would otherwise be.

If peace were to miraculously break out in the Middle East and North Africa, oil prices would drop sharply. This would severely damage the economies of Russia and Venezuela, perhaps forcing the Russians to re-evaluate their involvement in Ukraine and prompting Venezuelans to elect a new government that would rebuild their declining oil industry. That would further lower oil prices. Given the paramount importance of oil prices to economic growth, this would provide a significant boost to global growth rates. I wouldn’t hold my breath, but one can always dream.


TRIVIA

Month & Year
Take the number of days in a leap year, add the number of months having 30 days, divide by the number of doughnuts in a Baker’s Dozen, add the number of days in March, add the square root of 9, and divide by the number of days in a week.  Which month are you left with and what year is it?

ANSWER – September of 2014

The numbers used are – 366, plus 11, divided by 13, plus 31, plus 3, divided by 7 = 9.  And of course, it is now 2014.  (All of the months have 30 days except February.)
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Teamwork
Three workers are laying a brick wall.  John can lay 1,000 bricks in three hours.  Kate can lay 1,000 bricks in two hours.  Tom can lay 1,000 bricks in six hours.  How long will it take them to lay 2,500 bricks if they work together as a team?

ANSWER – 2 1/2 hours

How many bricks can be laid in six hours?

In six hours John lays 2,000 bricks.  Tom lays 1,000 bricks.  Kate lays 3,000 bricks.  Therefore, in six hours they individually lay a total of 6,000 bricks.

This means it will take 2 1/2 hour to lay 2,500 bricks by working together?
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My Allowance
On Monday I spent a quarter of my allowance on clothes.  On Tuesday I spent one third of my remaining money on a CD.  On Wednesday I spent half of my remaining money on candy.  On Thursday I spent my last $1.25 on a beer.  How much is my allowance?

ANSWER - $5.00

Working backwards.
• On Thursday I had $1.25.
• On Wednesday I had $1.25 X (1 divided by one-half) = $2.50.
• On Tuesday I had $2.50 X (1 divided by two thirds) = $3.75.
• On Monday I had $3.75 X (1 divided by three quarters) = $5.00.

Saturday, August 9, 2014

Economic Data

ECONOMIC DATA - VANGUARD

This week's economic data continued to signal improvements across the economy—from manufacturing to services to consumer borrowing. The markets, however, were more focused on developments in a number of hot spots in the Middle East and the ongoing tensions between Russia and the West.

For the week ended August 8, 2014, the S&P 500 Index was up 0.3% to 1,931 (for a year-to-date total return—including price change plus dividends—of about 6%). The yield on the 10-year U.S. Treasury note fell 8 basis points to 2.44%, for a year-to-date decrease of 60 basis points).

Services sector strengthens further

The ISM Non-Manufacturing Index rose to 58.7 in July, the highest level since 2005. (A reading above 50 indicates that the sector is expanding.) Among the equally weighted components of the index, the strongest gains were seen in business activity and new orders, but increases were seen in employment and supplier deliveries as well.

In total, 16 non-manufacturing industries reported growth, thanks to a stabilization or improvement in market conditions, with utilities alone reporting a contraction in activity.

Across-the-board improvements in factory orders

New orders for manufactured goods rose 1.1% in June, a stronger than expected rebound from the previous month's –0.6% reading. Orders for durable goods—manufactured products expected to last for three years or more—rose 1.7%, helped by the often volatile transportation segment, which saw a surge in orders for commercial and defense aircraft and parts.

Other segments made healthy gains as well, including machinery, computers, and electronic products, which bodes well for business investment. Orders for nondurable goods rose a more modest 0.6%. Compared with a year earlier, overall factory orders were up 2.5%.

Trade deficit narrows

The U.S. trade deficit (exports minus imports) shrank 7% in June to $41.5 billion compared with a revised figure of $44.7 billion for May. Exports inched higher on increased sales of commercial aircraft, automobiles, and pharmaceuticals.

However, more of the drop in the deficit was due to imports. Record-high food imports were offset by declines of more than $1 billion in both automobile and cell phone imports. With the recent energy boom in the United States, petroleum imports also fell, hitting their lowest level in more than three years.

"The shrinking trade deficit in June is supportive of stronger growth in the second quarter," said Vanguard economic analyst Vytas Maciulis. "It means that the next estimate of second-quarter gross domestic product may be revised up from the initial reading. However, while exports are likely to remain strong, the strength of domestic demand is the wildcard in the trade balance outlook."

Consumers continued borrowing for big-ticket items

Consumer credit, excluding mortgages, climbed $17.3 billion in June to a total of $3.2 trillion, according to data released by the Federal Reserve. That represents an increase of 6.5% over the previous year, a little off the 7.4% gain reported for May.

The lion's share of the rise was due to consumers taking on more nonrevolving credit, a category that includes automobiles, appliances, and student loans. Revolving credit, which includes credit card debt, expanded by $942 million, suggesting consumers are still reluctant to significantly increase their discretionary spending.

Productivity swings higher

The productivity of U.S. workers climbed by 2.5% on an annualized basis in the second quarter, according to a preliminary estimate from the Labor Department. That increase follows on the heels of a downwardly revised figure of –4.5% in the first quarter, the sharpest drop in productivity in more than 30 years.

Unit labor costs were unusually volatile as well, rising by only 0.6% in the second quarter compared with a revised first-quarter estimate of 11.8%.

Year over year, productivity was up 1.2% and unit labor costs rose 1.9%.


ENGLISH LANGUAGE

You think English is easy?
1. The bandage was wound around the wound.
2. The farm was used to produce produce.
3. The dump was so full that it had to refuse more refuse.
4. We must polish the Polish furniture..
5. He could lead if he would get the lead out.
6. The soldier decided to desert his dessert in the desert..
7. Since there is no time like the present, he thought it was time to present the present.
8. A bass was painted on the head of the bass drum.
9. When shot at, the dove dove into the bushes.
10. I did not object to the object.
11. The insurance was invalid for the invalid.
12. There was a row among the oarsmen about how to row.
13. They were too close to the door to close it.
14. The buck does funny things when the does are present.
15. A seamstress and a sewer fell down into a sewer line.
16. To help with planting, the farmer taught his sow to sow.
17. The wind was too strong to wind the sail.
18. Upon seeing the tear in the painting I shed a tear..
19. I had to subject the subject to a series of tests.
20. How can I intimate this to my most intimate friend?

Let's face it - English is a crazy language. There is no egg in eggplant, nor ham in hamburger; neither apple nor pine in pineapple. English muffins weren't invented in England nor French fries in France . Sweetmeats are candies while sweetbreads, which aren't sweet, are meat. We take English for granted. But if we explore its paradoxes, we find that quicksand can work slowly, boxing rings are square and a guinea pig is neither from Guinea nor is it a pig.

And why is it that writers write but fingers don't fing, grocers don't groce and hammers don't ham? If the plural of tooth is teeth, why isn't the plural of booth, beeth? One goose, 2 geese. So one moose, 2 meese? One index, 2 indices? Doesn't it seem crazy that you can make amends but not one amend? If you have a bunch of odds and ends and get rid of all but one of them, what do you call it?

If teachers taught, why didn't preachers praught? If a vegetarian eats vegetables, what does a humanitarian eat? Sometimes I think all the English speakers should be committed to an asylum for the verbally insane. In what language do people recite at a play and play at a recital? Ship by truck and send cargo by ship? Have noses that run and feet that smell?

How can a slim chance and a fat chance be the same, while a wise man and a wise guy are opposites? You have to marvel at the unique lunacy of a language in which your house can burn up as it burns down, in which you fill in a form by filling it out and in which, an alarm goes off by going on.

English was invented by people, not computers, and it reflects the creativity of the human race, which, of course, is not a race at all. That is why, when the stars are out, they are visible, but when the lights are out, they are invisible.

Thursday, July 24, 2014

Economy Update

It is another interesting week for geo-political events. Investors are focusing on corporate earnings that are coming in at fairly strong. This week I found an article that provides an update on the economy. At the end is a section called This Really Happened.


Economic Update:

Global economic growth, as measured by industrial production, accelerated significantly through 2013. Year-over-year growth in global industrial production slowed to just 0.7% in February 2013. By February 2014, it was up to 3.7%. This acceleration was due almost exclusively to recoveries from the November 2012 cyclical troughs in Europe and Japan. These recoveries more than offset a deceleration in China. Growth neither accelerated nor decelerated significantly in the rest of the world.

The only region where growth might still be accelerating is North America. Industrial production in U.S. manufacturing has grown at a 4.2% annual rate since last July, versus a 1.7% rate over the prior 12 months. While the second quarter’s 6.7% annualized quarterly growth rate was partly a temporary rebound from the first quarter’s weather-depressed levels, some of the recent strength reflects the ongoing replacement of a very old vehicle fleet and the continued boost in economic activity from increased U.S. natural gas production. Growth has also accelerated in Mexico, reflecting both increased motor vehicle production for the U.S. market and an improving policy environment. Industrial production in Mexican manufacturing, which was up just 0.4% year-over-year in December 2013 (based on seasonally adjusted data), was up 4.8% in May 2014. Unfortunately, the acceleration in North America is being largely offset by outright declines in industrial production in Brazil and Argentina, leaving the “stabilization” theme intact globally.


This Really Happened

When his .38 caliber revolver failed to fire at his intended victim during a hold-up in Long Beach, CA the would-be robber, James Elliot, did something that can only inspire wonder.  He peered down the barrel and tried the trigger again. This time it worked.  Good-bye Mr. Elliot.

After stopping for drinks at an illegal bar, a Zimbabwean bus driver found that the 20 mental patients he was supposed to be transporting from Harare to Bulawayo had escaped from his bus.  Not wanting to admit his incompetence, the driver went to a nearby bus stop and offered everyone waiting there a free ride.  He then delivered the passengers to the mental hospital, telling the staff that the patients were very excitable and prone to bizarre fantasies.  The deception was not discovered for three days.

When a man attempted to siphon gasoline from a motor home parked on a Seattle, WA street by suck-ing on a hose, he got much more than he bargained for.  Police arrived at the scene to find a very sick man curled up next to the motor home near spilled sewage.  A police spokesperson said that the man admitted to trying to steal gasoline, but he plugged his siphon hose into the motor home’s sewage tank by mistake.

Saturday, July 12, 2014

End of Federal Reserve Quantitative Easing

This week the Federal Reserve announced that it will most likely end bond purchases and end what has been called Quantitative Easing. The article authored by Jeff Cox is given. My comments on what this means follows. At the end is a section called Food For Thought.


Fed Minutes: QE likely to end with final $15B reduction in October, Jeff Cox, @JeffCoxCNBCcom

Federal Reserve officials indicated at their June meeting that the monthly bond-buying program could end sooner rather than later—with an October exit growing increasingly likely.

"Participants generally agreed that if incoming information continued to support its expectation of improvement in labor market conditions and a return of inflation toward its longer-run objective, it would be appropriate to complete asset purchases with a $15 billion reduction in the pace of purchases in order to avoid having the small, remaining level of purchases receive undue focus among investors," the minutes stated.

"If the economy progresses about as the Committee expects, warranting reductions in the pace of purchases at each upcoming meeting, this final reduction would occur following the October meeting."

That puts the end to quantitative easing at the front end of market expectations. This is the third QE cycle in a program that has stretched the central bank's balance sheet to $4.4 trillion.

Markets showed little reaction to the news, with stocks maintaining modest gains and government bond yields slightly higher, with the two-year note momentarily touching a three-year high.

"Everything was expected, I think the markets continue on," Ernie Cecilia, of Bryn Mawr Trust, told CNBC. "I don't think there was anything that troubling, certainly from a market perspective, or that surprising, from a market perspective."

The Fed at its June meeting voted to reduce the program another $10 billion to $35 billion, while keeping its target funds rate near zero.

Minutes indicated little taste for increasing rates ahead of schedule, with market expectations that the first hike probably won't come until mid-2015 despite improving economic data that has seen both unemployment and inflation at or near the Fed's target levels.

"The Committee again stated that it currently anticipated that it likely would be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continued to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remained well anchored," the minutes said.

There is an active debate over the timing of the Fed's first rate hike, with some arguing the central bank is prepared to move more quickly than markets might expect.
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Comment:

It is about time. The economy is stable to growing and these bond purchases are raising our national debt. It will be good to reduce our national debt by $4.4 Trillion once these bonds mature.

The real question is what does an investor do with this information? The answer is since this has never been done before, nobody really knows. If something happens it would most likely impact bond yields and stock prices. I believe that 3 scenarios exist:

1) Free market reign supreme and nothing really happens to bond yields or stock prices.
2) The economy is not ready for this move and economy starts to shrink lowering bond yields and stock prices go down due to money flow into bonds.
3) The demand for bonds goes down raising bond yields and stock prices go up due to money flow into bonds.

If the growth in the US Gross Domestic Product is higher than the 10 year US Treasury bond yield then scenario 3 makes sense. If the growth is the same or lower then scenario 1 & 2 make sense. It is important to relax, watch it unfold, and have a plan regardless of which scenario occurs.


Food For Thought

A Swiss hotel chef lost a finger in a meat-cutting machine and submitted a claim to his insurance company.  The company, expecting negligence, sent a claim adjuster to investigate.  The Adjuster tried the machine and also lost a finger.  The chef’s claim was approved.

An American teenager was in the hospital recovering from serious head wounds received from an on-coming train.  When asked how he received the injuries, he told police that he was simply, “trying to see how close he could get his head to a moving train before he was hit.”

A man walked into a Louisiana Circle-K, put a $20 bill on the counter, and asked for change.  When the clerk opened the cash drawer, the man pulled a gun and asked for all the cash in the register, which the clerk promptly provided.  The man took the cash from the clerk and fled, leaving the $20 bill on the counter.  The total amount of cash he got from the drawer was $15.  (If someone points a gun at you and then gives you money, has a crime been committed?)
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“The difference between stupidity and genius is that genius has its limits.”  Albert Einstein

Sunday, June 22, 2014

Summer Stalemate and Happy Father's Day

Happy Father's Day to all of the Fathers, may it be a special day. At the end is a segment on the history of the day.


Summer Stalemate

In the game of chess, a stalemate occurs when neither side can win. This same thing is happening this summer between stocks and bonds. This summer we have seen some significant events in Europe with Russia and Ukraine and in Iraq. In the past this would have sent stock prices lower and bond yields lower. This summer both stock prices and bond yields have held relatively steady.

This has been somewhat surprising as some large investors and hedge fund managers have invested in financial derivatives like options and futures contracts with the result being financial loss. These experts believed that they had sufficient insight and could predict the future.

The best strategy for the summer stalemate, and in general, is to keep the appropriate portfolio blend of high quality investments that matches an individual's risk level. If an event occurs that creates a loss in stock market indexes of 10% or more, a prudent investor shifts temporarily and takes advantage of it. Personally, I hope the summer stalemate continues.


Father's Day History - Wikipedia

Father's Day was inaugurated in the United States in the early 20th century to complement Mother's Day in celebrating fatherhood and male parenting.

After the success obtained by Anna Jarvis with the promotion of Mother's Day in the US, some wanted to create similar holidays for other family members, and Father's Day was the choice most likely to succeed. There were other persons in the US who independently thought of "Father's Day", but the credit for the modern holiday is often given to Sonora Dodd, who was the driving force behind its establishment.

Father's Day was founded in Spokane, Washington at the YMCA in 1910 by Sonora Smart Dodd, who was born in Arkansas. Its first celebration was in the Spokane YMCA on June 19, 1910. Her father, the Civil War veteran William Jackson Smart, was a single parent who raised his six children there. After hearing a sermon about Jarvis' Mother's Day in 1909, she told her pastor that fathers should have a similar holiday honoring them. Although she initially suggested June 5, her father's birthday, the pastors did not have enough time to prepare their sermons, and the celebration was deferred to the third Sunday of June.

It did not have much success initially. In the 1920s, Dodd stopped promoting the celebration because she was studying in the Art Institute of Chicago, and it faded into relative obscurity, even in Spokane. In the 1930s Dodd returned to Spokane and started promoting the celebration again, raising awareness at a national level. She had the help of those trade groups that would benefit most from the holiday, for example the manufacturers of ties, tobacco pipes, and any traditional present to fathers. Since 1938 she had the help of the Father's Day Council, founded by the New York Associated Men's Wear Retailers to consolidate and systematize the commercial promotion. Americans resisted the holiday during a few decades, perceiving it as just an attempt by merchants to replicate the commercial success of Mother's Day, and newspapers frequently featured cynical and sarcastic attacks and jokes. But the trade groups did not give up: they kept promoting it and even incorporated the jokes into their adverts, and they eventually succeeded.

A bill to accord national recognition of the holiday was introduced in Congress in 1913. In 1916, President Woodrow Wilson went to Spokane to speak in a Father's Day celebration and wanted to make it official, but Congress resisted, fearing that it would become commercialized. US President Calvin Coolidge recommended in 1924 that the day be observed by the nation, but stopped short of issuing a national proclamation. Two earlier attempts to formally recognize the holiday had been defeated by Congress. In 1957, Maine Senator Margaret Chase Smith wrote a proposal accusing Congress of ignoring fathers for 40 years while honoring mothers, thus "singling out just one of our two parents". In 1966, President Lyndon B. Johnson issued the first presidential proclamation honoring fathers, designating the third Sunday in June as Father's Day. Six years later, the day was made a permanent national holiday when President Richard Nixon signed it into law in 1972.

Kenya Update

I have returned from a trip to Kenya with my daughter Becca. Becca has started a business, Rafiki Kenyan Imports LLC, to help needy families in Kenya particularly in Nairobi and a remote village area about 5 hours outside of Nairobi. The trip gave me an excellent opportunity to investigate investing opportunities.

My view from a corporate investment perspective is that Kenya and neighboring countries should be avoided. While the people we met were wonderful the attitude to corporations is not favorable and corruption appears to be widespread. The country has a fair amount of poverty that provides incentive for people to improve their financial situation by corruption. This means that little incentive exists for a corporations to take a financial risk.

It is interesting that the only US food company present was KFC. So while McDonald's and Starbucks are prevalent in China, they have avoided Kenya. It appears likely that a successful corporation would suffer from interactions with the government including being nationalized.

If you want to go on a Safari, Kenya is a wonderful place to go. If you want to meet wonderful and unique people it is a wonderful place to go. If you want to attend a worship service, lots of churches are present. If you want to invest in corporations avoid Kenya and the surrounding countries.


Kenya - From Wikipedia, the free encyclopedia

Motto: "Harambee" (Swahili) "Let us all pull/pool together"

Anthem: Ee Mungu Nguvu Yetu (Swahili) O God of all creation

Kenya (/ˈkɛnjə/ or /ˈkiːnjə/), officially the Republic of Kenya, is a country in the African Great Lakes region of East Africa. Its capital and largest city is Nairobi. Kenya lies on the equator with the Indian Ocean to the south-east, Tanzania to the south, Uganda to the west, South Sudan to the north-west, Ethiopia to the north and Somalia to the north-east. Kenya covers 581,309 km2 (224,445 sq mi) and has a population of approximately 44 million as of July 2012.

Kenya has a warm, humid climate along its Indian Ocean coastline, with wildlife-rich savannah grasslands inland towards the capital. Nairobi has a cool climate which becomes colder closer to Mount Kenya, which has three permanently snow-capped peaks. Further inland, there is a warm and humid climate around Lake Victoria, and temperate forested and hilly areas in the western region. The northeastern regions along the border with Somalia and Ethiopia are arid and semi-arid areas with near-desert landscapes. Lake Victoria, the world's second largest fresh-water lake and the largest tropical lake, is situated to the southwest and is shared with Uganda and Tanzania. Kenya, along with Uganda and Tanzania is famous for its safaris and diverse wildlife reserves and national parks such as the East and West Tsavo National Park, the Maasai Mara, Lake Nakuru National Park, and Aberdares National Park. There are several world heritage sites such as Lamu; there are also many world renowned beaches, such as Kilifi, where international yachting competitions are held each year.

The African Great Lakes region, which Kenya is a part of, has been inhabited by humans since the Lower Paleolithic period. The Bantu expansion reached the area from West-Central Africa by the first millennium AD and the borders of the modern state comprise the crossroads of the Niger-Congo, Nilo-Saharan and Afro-Asiatic ethno-linguistic areas of the continent, making Kenya a multi-cultural country. European and Arab presence in coastal Mombasa dates to the Early Modern period; European exploration of the interior began in the 19th century. The British Empire established the East Africa Protectorate in 1895, known starting in 1920 as the Kenya Colony. The Republic of Kenya became independent in December 1963. Following a referendum in August 2010 and adoption of a new constitution, Kenya is now divided into 47 semi-autonomous counties, governed by elected governors.

The capital, Nairobi, is a regional commercial hub. The economy of Kenya is the largest by GDP in Southeast and Central Africa. Agriculture is a major employer; the country traditionally exports tea and coffee and has more recently begun to export fresh flowers to Europe. The service industry is also a major economic driver. Kenya is a member of the East African Community. Compared to other African countries, Kenya enjoys relatively high political and social stability.

Why Retirees are in Trouble - Time, June 30, 2014 Edition

It is that time of year for thunderstorms and the College World Series in Omaha Nebraska. At the end is some historical information on the College World Series.

The topic for this week comes from an article in Time magazine. It gives great information and 5 steps to consider to improve this situation. Take the data with a grain of salt since it is difficult to predict the future. The 5 steps make sense.


Why Retirees are in Trouble - Time

Information:

1) Boomers are Piling into Retirement: 13% in 2012 growing to 18% in 2020
2) The projected year to reach a balance of $0: Medicare = 2026, Social Security = 2033
3) People aren't saving enough income, % disposable income saved: 1970 = 13%, 2013 = 5%
4) Medical Expenses Rise, % out of pocket 70 year old pays: Today = 8%, 20 years from now = 15%
5) Wages aren't closing the gap in 2011 dollars: 1973 = about $15/hour, 2010 = about $16/hour


How to Prepare:

1) Work Longer and delay when you collect Social Security benefits
2) Pool resources - live together with family or friends
3) Auto-deduct retirement savings from your salary
4) Use lower cost mutual funds
5) Tap into the equity of your home by either downsizing or a reverse mortgage


College World Series - Wikipedia

Since 1950, the College World Series (CWS) has been held in Omaha, Nebraska. It was held at Rosenblatt Stadium from 1950 through 2010; starting in 2011, it has been held at TD Ameritrade Park Omaha. Earlier tournaments were held at Hyames Field in Kalamazoo, Michigan (1947–48) and Wichita, Kansas (1949). The name "College World Series" (CWS) is derived from that of the Major League Baseball World Series championship; it is currently an MLB trademark licensed to the NCAA.

On June 10, 2009, the NCAA and College World Series of Omaha, Inc., which is the non-profit group that organizes the event, announced a new 25-year contract extension, keeping the CWS in Omaha through 2035. A memorandum of understanding had been reached by all parties on April 30.
The new contract began in 2011, the same year the tournament moved from Johnny Rosenblatt Stadium to TD Ameritrade Park Omaha, a new ballpark across from CenturyLink Center Omaha.

1947 – Eight teams were divided into two, four-team, single-elimination playoffs. The two winners then met in a best-of-three final in Kalamazoo, Michigan.

1948 – Similar to 1947, but the two, four-team playoffs were changed to double-elimination tournaments. Again in the finals, the two winners met in a best-of-three format in Kalamazoo.

1949 – The final was expanded to a four-team, double-elimination format and the site changed to Wichita, Kansas. Eight teams began the playoffs with the four finalists decided by a best-of-three district format.

1950–1987 – An eight-team, double-elimination format for the College World Series coincided with the move to Omaha in 1950. 1950–1953, a baseball committee chose one team from each of the eight NCAA districts to compete at the CWS. Through 1987 the College World Series was a pure double-elimination event. That ended with the 1987 College World Series.

1988–1998 – The format was changed beginning with the 1988 College World Series, when the tournament was divided into two four-team double-elimination brackets, with the survivors of each bracket playing in a single championship game. The single-game championship was designed for network television, with the final game on CBS on a Saturday afternoon.

Before expanding to 64 teams in 1999, the Division I tournament began with 48 teams, split into 8 six-team regionals. The winner of each regional advanced to the College World Series. The regionals were a test of endurance, as teams had to win at least four games over four days, sometimes five if a team dropped into the loser's bracket, placing a premium on pitching. In the last two years of the six-team regional format, the eventual CWS champion – (LSU in 1997 and Southern California in 1998) – had to battle back from the loser's bracket in the regional to advance to Omaha.

1999-2002 – With some 293 Division I teams playing, the NCAA switched to a 64-team, Regional field in 1999, with 8 National (super) Seed teams, divided into 16 four-team regionals (each team seeded 1 to 4), with the winners of each of the 16 "Regionals" advancing to eight two-team, best-of-three-format "Super Regionals". The eight Super Regional winners advanced to the CWS in Omaha, NE. In 2008, a number-4-seeded Regional team, the lowest seeding possible (akin to a #13-16 seed in college basketball's March Madness) – the Fresno State Bulldogs – won the CWS championship, against the Bulldogs of the University of Georgia, winning two of three in the championship series. While the CWS format remained the same, the expanded field meant that eight super regional champions would advance. The 64-team bracket is set at the beginning of the championship and teams are not reseeded for the CWS. Since the 1999 College World Series, the four-team brackets in the CWS have been determined by the results of regional and super-regional play, much like the NCAA basketball tournament. Prior to 1999, the pairings for the CWS were not determined until after the completion of the regional tournaments.

2003–Present – The eight super regional champions advance into two, four-team brackets. The eight super regional winners are not reseeded for the CWS. Those two brackets play double-elimination with the bracket winners then meeting in a best-of-three championship series. Also, in 2003, the tournament returned entirely to cable television on ESPN, which had been covering all of the other games of the CWS since 1982 (and a partial schedule since 1980).[4] The championship final became a best-of-three series between the two bracket winners, with games scheduled for Saturday, Sunday, and Monday evenings. In the results shown here, Score indicates the score of the championship game(s) only. In 2008, the start of the CWS was moved back one day, and an extra day of rest was added in between bracket play and the championship series.