Thursday, July 31, 2008

Is oil's reckoning day finally coming?

I don't believe demand in developing countries can drive oil price this high in such a short period of time. Speculation, flight to quality or safety,  in time of crisis and rising inflation, or whatever you call it, is the ultimate culprit.  Now, various indicators seem to point out we are finally near the reckoning day: the bubble burst time.
According to WSJ's commodity report,
The market has taken on a distinct chill...with funds looking to sell oil futures outnumbering those seeking to buy for the first time since early 2007, and most of the long-term money betting that oil prices will continue to sink.

Perhaps the best glimpse of the changed sentiment can be seen in traders' prices for oil far into the future. In late May, contracts reaching out to 2016 were all selling for more than the then-current price, which was around $130 a barrel. That trend held until the middle of this month.

The curve has since sharply reversed, so that contracts for oil four or five years from now are going for less than the current price. Trading on the Nymex has tilted toward short sellers, or those betting that prices will go down, according to the most recent report by the Commodity Futures Trading Commission.



Also, according to Paul Krugman, high oil prices reduces demand with a delay. First, people don't think the high price will sustain, so they keep their driving behavior or still buying big SUVs; after a while, people gradually realize this time is for real, so started to shift their habits, then you see a big demand drop.  Krugman summarizes this in a nice graph, a modified version of the demand curve:

Ed Glaeser: State of the city

Edward Glaeser, a prominent Harvard economist on urban economics and cities, talks about how gas price affects the behaviors of Americans living in the suburbans, and why fast growing cities such as Atlanta, Dallas, Houston, and Phoenix offer an astonishingly high standard of living for ordinary Americans.

Monday, July 28, 2008

Property rights and China's future of development

Land reform and establishing a more clearly defined property rights will become the imperative for China's next stage of development. Watch this video and you will know why. 
Also read my recent piece on China's prospect of catching up the US.

Charlie Rose Conversation with Mohamed El-Erian

El-Erian, PIMCO's co-CEO and former CIO at Harvard Management (courtesy of Big Picture).

Another ripple effect of high gasoline price

WSJ reports: high gas price causes Americans to cut back driving, reducing Federal fuel tax income, which is the financial source to repair and maintain highways and mass-transit systems.
A report to be released Monday by the Transportation Department shows that over the past seven months, Americans have reduced their driving by more than 40 billion miles. Because of high gasoline prices, they drove 3.7% fewer miles in May than they did a year earlier, the report says, more than double the 1.8% drop-off seen in April.
[Before its collapse last year, the Interstate 35W bridge in Minneapolis was part of the one quarter of the nation's bridges that are considered either 'functionally obsolete' or 'structurally deficient.']
The cutback furthers many U.S. policy goals, such as reducing oil consumption and curbing emissions. But, coupled with a rapid shift away from gas-guzzling vehicles, it also means consumers are paying less in federal fuel taxes, which go largely to help finance highway and mass-transit systems. As a result, many such projects may have to be pared down or eliminated.

Monday, July 21, 2008

Meltzer: Keep the Fed Away From Investment Banks

Alan Meltzer, economist and historian on the Federal Reserve thinks it's a mistake for the Fed to expand regulatory power to include investment banks. A clear rule on capitalization would suffice.

"In its 95-year history, the Fed has never made a clear statement of its policy for dealing with failures. Sometimes it offered assistance to keep the bank or investment bank afloat. Other times it closed the institution. Troubled institutions have no way to know in advance whether they will be saved or strangled. The absence of a clear policy statement increases uncertainty and encourages problem institutions to demand loans and assistance. Large banks ask Congress to pressure the regulators. Taxpayers pay for the mistakes."

It's an excellent piece. Read full article here from WSJ.

Sunday, July 20, 2008

$4 Oil: Police Patrol on Foot

Another story of high oil price altering people's behaviors (source: NY Times)

As gasoline soars past the $4-a-gallon mark, police chiefs in towns and cities across the country are ordering their officers out of the car and onto their feet in a budgetary scramble.


Chief Jones budgeted about $60,000 for fuel in the fiscal year that ended last month; the department spent $94,000. This year, he budgeted $163,000 — a large line item in a budget of $3.8 million.

The Houston Police Department exceeded its gasoline budget of $8.7 million last year and expects to spend $11.3 million this year. San Diego, which budgets fuel costs citywide, already expects to exceed its budget for the fiscal year that started July 1 by $1.5 million.


Saturday, July 19, 2008

Obesity, technological Change and Price Theory

Why so many people are obese in rich countries?   Price theory surely offers you a good explanation. Listen to this Bloomberg interview here.

Friday, July 18, 2008

Krugman on L-ish economic prospects

Paul Krugman explains why he thinks current recession will take longer time to recover, aka L-shaped, than 1990-91 and 2001 recessions.

But if the experience of the last 20 years is any guide, the prospect for the economy isn't V-shaped, it's L-ish: rather than springing back, we'll have a prolonged period of flat or at best slowly improving performance.

Let's start with housing.

According to the widely used Case-Shiller index, average U.S. home prices fell 17 percent over the past year. Yet we're in the process of deflating a huge housing bubble, and housing prices probably still have a long way to fall.

Specifically, real home prices, that is, prices adjusted for inflation in the rest of the economy, went up more than 70 percent from 2000 to 2006. Since then they've come way down — but they're still more than 30 percent above the 2000 level.

Should we expect prices to fall all the way back? Well, in the late 1980s, Los Angeles experienced a large localized housing bubble: real home prices rose about 50 percent before the bubble popped. Home prices then proceeded to fall by a quarter, which combined with ongoing inflation brought real housing prices right back to their prebubble level.

And here's the thing: this process took more than five years — L.A. home prices didn't bottom out until the mid-1990s. If the current housing slump runs on the same schedule, we won't be seeing a recovery until 2011 or later.


Wednesday, July 16, 2008

A conversation with Martin Feldstein

NPR's On Point got some great stuff recently.  Yesterday, Martin Feldstein was on the hotbed.  Host Tom Ashbrook was tough on Marty, and listeners were quite upset.
Where Is the Economy Heading?  


It's a battle zone out there in the US economy. Lines at the door of American banks, in photos that look out of the 1930s. Home foreclosures still surging. The federal government stepping in big to try and brace up Fannie Mae and Freddie Mac. Fears of worse to come. This isn't the picture economist Martin Feldstein had in mind when he began advising Ronald Reagan on tax cuts, deregulation, and supply side economics in the 1980s. But it's what we've got.
This hour, On Point: Heavyweight Harvard economist Martin Feldstein on the fix we're in, and what comes next for the US economy.

America, still much race divided...

Monday, July 14, 2008

A conversation with George Soros

(Source: NPR)
Billionaire investor, philanthropist, and political player George Soros made his fortune riding the winds of high finance.

Now, he says, the global economy is blowing out of a tremendous bubble. Not a normal bubble, but a "superbubble" that's coming apart in a superbust.

Soros was there for the dawn of the hedge fund and the high-leverage finance that's now coming back to bite -- in housing and oil and debt and a credit crunch. We're in for financial destruction and a breakdown of world order, he says. Oh, great.

Saturday, July 12, 2008

GSEs bailout coming?

This NYT article analyzes a possible takeover of Fannie Mae and Freddie Mac by the Federal government if things get worse.

Below graph explains the role of Fannie and Freddie in housing market.

(click to enlarge; source NYT)

But Federal government won't have to do so. All the government has to do is to talk to reassure investors the two GSEs have the government backing. With government's assurance, the companies should have no problem raising more capital in the market. But the equity share may be more diluted. It's not good for stock holders.

So what about moral hazard? In my view, GSEs are created semi-government institutions and they have never existed in the first place. But since they are already here, government will have to bail them out. Yes, even at Taxpayers' expense. Imagine the Federal government let Fannie and Freddie go under, it will jack up mortgage rate and foreign investors will lose confidence in all government-issued bills or bonds. The US will fall into severe recession right away. In order to avoid future bailouts, after the crisis, plans should be devised to make GSEs completely private, cutting off government ties once and for all.

Bill Gross Denies Lehman Rumor

PIMCO's Gross denied Lehman rumor and said the company is continuing to trade with Lehman. Will Lehman be another Bear Steans? I remembered days before Bear's collapse, its CEO came out denied rumors outright. So will you rather trust Gross? But note that this time the big difference is Lehman has the Fed's backing.

Watch Bill Gross interview on CNBC:

(click above picture to watch)

An Authoritarian Olympics

In order to clean up air for Beijing Olympics, a lot of industrial plants are ordered to shut down.  This can only happen in an authoritarian state like China. Thirty years of market reform, the government still has not learned how to respect property rights, and rule of law is not there to protect the interest of businesses.  Why the business should take government's order?
We all want cleaner air, but this is not how you achieve it.  So I label Olympics 2008 "an authoritian olympics".
BusinessWeek has more on the story.

Wednesday, July 09, 2008

Trends of China's Property Market

An analyis from WSJ on China's property market after Olympics.  I suspect that there will be a big fall of prices in all cities that had crazy runups in recent years. I do not believe China's fast economic growth and urban migration could justify the price surge, especially when the stock market is crashing.  The graph of Shenzhen's property price trend might be a leading indicator.

Beijing Cooldown?

After Games, Trends Point to Property Growth
By J.R. WU

BEIJING -- The run-up to this summer's Olympics ignited an explosion of new commercial and residential space in the Beijing market over the past two years.

The Chinese capital has given itself an urban facelift that includes skyscrapers and sports stadiums, a new third terminal in Beijing's international airport, bigger park space and a more expansive subway system -- ingredients for a modern metropolis.

However, the construction boom has been accompanied by fears that once the games end on Aug. 24, Beijing could plunge into a property slump.


That isn't likely to happen. Property agents say the market may see higher vacancy rates and lower rents and sale prices in the months immediately after the Olympics, but they expect spaces to be filled eventually because Beijing remains a key city for doing business in China.

Property prices in Beijing, like those in the rest of China, have been falling from their spectacular highs, and they may correct further. The main reason for the cooling is the government's tightening over the past two years.

Speculation that housing prices are on their way down is helping to depress prices, says Ben Christensen, head of research in Beijing at property agent Jones Lang LaSalle.

"In Beijing that's sort of compounded by uncorrelated speculation that after the Olympics, prices are going to plummet," he says. "I don't see that. Nobody in the property industry sees that happening because there is no reason for it."

Much of what is going on in the Chinese capital is telling of a broader national trend -- rising incomes, urban sprawl and the growing sophistication of Chinese consumers underpinning demand for one of the world's hottest real-estate markets.

Migration of people from rural areas into cities looking for better jobs, bigger homes and higher living standards is driving urbanization across China. Foreign companies in China and domestic companies going global want high-grade buildings for their China headquarters.

But the big problem for China in recent years has been that prices rose too quickly to be sustained. "The government wants property prices to decline," says Lehman Brothers economist Mingchun Sun. "But they don't want to see a collapse of the property market because it is still one of the growth engines for the economy."

While Beijing's property market is tracking the national trend of a gradual cooling, policy makers are finding their biggest headaches in places like the southern boomtown of Shenzhen, just across the border from Hong Kong. A steep rise in prices in markets such as Shenzhen helped prompt the government to aggressively curb credit, land sales and mortgages nationwide during the past two years.

The growth in Beijing's property prices peaked in October 2007 at 15.1% and has been steadily slowing to 12.4% in May, based on data of China's 70 large and midsize cities from the National Development and Reform Commission. Shenzhen's swings have been sharper, with the rise in property prices dropping from nearly 21% in August 2007 to 2.5% in May.

Once property prices return to more affordable levels, demand from home buyers should kick in again, supported by individual income growth, which is rising 15% to 20% each year in China, Mr. Sun says.

If Beijing policy makers switch their focus from fighting inflation to shoring up weaker economic growth, the ensuing monetary easing would likely boost property prices again.

The average sales price now in Beijing's high-end residential market is estimated at 24,010 yuan ($3,500) per square meter, compared with 15,838 yuan at the end of 2006, according to Jones Lang LaSalle.

Mr. Christensen says prices in the high-end residential market should start to stabilize by year's end as investors evaluate their property investments more thoroughly. The bottom for prices in this market segment could be around 20,000 yuan per square meter, he says.

Jones Lang LaSalle says the new supply in Beijing's high-end residential and retail markets will roughly triple -- or more -- this year from last year. New luxury residential space will grow 30.4% this year to include 10,301 more units, compared to 11% growth in 2007. New supply in the retail market will rise 64%, or 1.4 million square meters this year, compared to 16% last year.


Tuesday, July 08, 2008

Obesity in China

As hard as it is, I still can't believe China is linked to obesity: it's the byproduct of getting rich; maybe increased car ownership too (source: WSJ)

Obesity in China Becoming More Common


In a development with implications for China's work force and economic growth, a new study says more than 25% of adults in the country are overweight or obese and that the number could double over the next 20 years.

The report, based on data collected from 20,000 patients in China over the past 15 years, says obesity has increased 1.2% a year among men in that time -- higher than the rate for adult men in the U.S., U.K. and Australia.

With the population at 1.3 billion, that means an additional 11 million Chinese adults are becoming overweight or obese every year. In addition, 12 million to 14 million adults are becoming at risk for diabetes and hypertension annually, says study author Barry Popkin, director of the obesity center and professor of global nutrition at the University of North Carolina at Chapel Hill.

"When you have this many people becoming diabetic and hypertensive, you think about the health-care costs and it's pretty staggering," says Dr. Popkin. The study is set to be published today in the health policy journal Health Affairs.

The study suggests that the problem may be accelerating. And the reasons for the rise in obesity isn't because of increased consumption of fast food or other Western foods in China, Dr. Popkin says. Rather, improving living standards mean that growing numbers of Chinese can now afford vegetable oil, beef and dairy-food sources that until recently had been too costly. A more sedentary lifestyle for many Chinese plays an important role as well.

Obesity-related costs are likely to lead not only to drastic increases in direct medical costs, but also to indirect costs like decreased worker productivity and absenteeism.

Health-care costs could also have implications for companies looking to invest in China. Many companies provide medical care for workers, and thus they could end up footing much of the bill for obesity-related costs, Dr. Popkin says.

Those costs could prompt companies to invest in less-costly markets, such as Vietnam, and ultimately slow the Chinese economy. "U.S. labor costs skyrocketed and people are moving away from investing here," says Dr. Popkin. "It's the same issue in China."