Tuesday, January 6, 2015
Withdrawal as Registered Investment Advisor
As of December 2014 I have filed for withdrawal as a Registered Investment Advisor
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.
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.
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.
=============================================================================
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.
=============================================================================
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.
(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.
=============================================================================
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.
=============================================================================
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.
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