Monday, July 31, 2006

Healthy, Wealthy and Wise

I've plugged this book before, for anybody who wants to explore the free market argument and approach to our healthcare system's problems.

Russ Roberts hosts a podcast with one of the authors, John Cogan. These arguments need much wider exposure.

Friday, July 28, 2006

Hey Stupid, Buy THIS!

Granted business school was a tad overrated, but I did learn that consistently insulting your potential customers is not a good marketing strategy. Nobody in Hollywood took the same courses I did, I guess. The latest attempt to sell something to people while simultaneously telling them they are stupid is Talladega Nights: The Ballad of Ricky Bobby. "The story of a man who could only count to #1." Can't count. He's stupid. I got it. Ricky Bobby. Caricature southern-sounding name. Hick. Got that too. Betcha Rick Bobby is amusingly a religious man too. Bingo. Watch the trailer.

Now, yours truly is not a racing fan so I could be totally wrong, people may love this film but seems a stretch to me. What little I do know is that racing fans take the sport pretty damn seriously, and they might not take kindly to the over the top caricature of their passion for it. Or they might not. Or the comedic brilliance of Will Ferrell will supercede the generally insulting tone. Who knows, but it seems a risky move if not a downright stupid one.

True Fiscal Sense Takes Two

Amity Shlaes gives the 2003 tax cuts their due but also cautions that spending restraint ought to go with it. Caution: when reading just ignore the silly notion that defending a right written into the Constitution or advocating for a centuries old institution for organizing and perpetuating society are impulses.

More Economically Obtuse Attacks on Big Retailers

Despite a similar law in Maryland, the infamous "Wal-Mart law", being declared invalid by a federal court, the Chicago City Council has gone ahead and passed their own version of the law, which mandates increased wages for workers at large retailers. No doubt this law will get challenged and struck down, but in the meantime, you can bet there will be no development by Wal-Mart, Home Depot and the like within the city limits of Chicago. These firms may well choose to open stores just inches across the city lines and give the tax revenue that there presence creates to smaller suburban towns.

New York has not made the same mistake as Maryland or Chicago...not yet at least.

And ironically, as I was typing this out I just got a call from a friend who was going over his weekend plans with me, which included a quite common practice of NYCity-folk...making that 20 minute drive to the Costco/Home Depot/Stew Leonard's big box trifecta in Yonkers.

One would think that our elected officials simply can't be that obtuse about economic reality that they could entertain such a law, but apparently it is so. Russ Roberts gives you more lowdown.

Wednesday, July 26, 2006

Pork Overview

The Club for Growth Blog has done us regular taxpayers a huge favor by listing the full vote tally of each and every worker in the Lower Chamber of the Great Sausage Factory on the 19 'Flake Amendments', which were an ever so modest attempt to rein in the profligate and wasteful spending of our hard-earned wages that goes on in that august (cough) body.

I've crunched a few numbers at the state level and here are some high level results:

Top 10 Anti-Pork States (measured by anti-pork votes per LCoGSF worker)
1. New Hampshire
2. Colorado
3. Wisconsin
4. Arizona
5. Idaho
6. Utah
7. Tennessee
8. Minnesota
9. Nevada
10. Georgia

Top 10 States Where Republicans Vote Like Republicans (anti-pork votes per Rep. LCoGSF worker)
1. Wisconsin - Cheeseheads, not porkheads
2. New Hampshire - "Live Free of Pork or Die!"
3. Tennessee - volunteering to forego your tax dollars
4. Colorado
5. Minnesota
6. Utah
7. Georgia
8. Arizona
9. Nevada
10. South Carolina

Top 10 RINO Breeding Grounds* (fewest votes per Rep. LCoGSF worker)
1. Connecticut
2. Virginia - "Virginia is for Lovers...of Government Pork!"
3. Michigan
4. Alabama - "Roll Tide...of Pork!"
5. Pennsylvania
6. Missouri - let's rename it the "Show Me the Federal Dollars" State!
7. Kansas - What IS wrong with Kansas that they need to suckle at the government teet so?
8. Washington
9. New York
10. Ohio
* had to have more than 1 rep. to qualify (one rep. RINO breeding grounds are Alaska, Montana, West Virginia, and Arkansas)

The average Republican voted against pork 5.1 times on the 19 anti-pork Flake Amendments. The states whose Democratic delegation beat the Republican average: Utah (14) and Tennessee (7.4).

Top 10, I Mean 4, Democrats Who Hate Pork More Than the Average Republican:
1. Bean (IL-8) - 19/19
Cooper (TN-5) - 19/19
2. Matheson (UT-2) - 14/19
3. Ford (TN-9) - 13/19

The average Democrat voted against pork 0.55 times on the 19 Flake Amendments. The one state whose Republican delegation did not beat the Democratic average: Connecticut (0.2).

Top 10, I Mean 112, Republicans Who Love Pork More Than the Average Democrat:
Are you crazy, I am not going to list 112 names here, but all went 0/19. All 112 may not truly love pork, but they either think 1) you don't care, 2) you're too stupid to figure it out, or 3) you do care and you are not too stupid, but they don't care what you think.

Random Dishonorable RINO Mention: My high school buddy, Mike Ferguson (NJ-7) who loves pork (3/19) more than Barney Frank (5/19)!

More Income Inequality

Via Instapundit, I see that Mickey Kaus wonders where and when the meeting was at which the MSM-Democratic Establishment decided that income inequality was the issue of issues going forward, and on which I commented here (oh, and here).

Does he sense that income inequality is the political loser that I do? I don't know because he chooses to go after a logical inconsistancy or, 'intellectual dishonesty' if you will. Intellectual dishonesty coming from establishment political party types? Really? Cue your best Claude Raines impersonation. Actually, the focus on income inequality is astoundingly good news. It means that we are really talking openly and honestly in our national political dialogue, because for too long our political dialogue has talked about addressing something called "poverty" when what it really meant was "income inequality." The truth is that we don't really have poverty in modern day America, we have income inequality. Poor by American standards is enormously comfortable by current standards in most places around the globe and by historical standards anywhere. Our biggest social problems seem to be how to make triple-bypass surgeries and miracle cancer-fighting drugs affordable for cops, teachers, welders and other middle class folks or how to make sure that teenagers learn to read, write and do math in the five hours a day they sit in large classrooms before they go off to play football, basketball, or the trombone. The world, quite rightly, wishes they could have such pressing problems. Not to say that we should not be addressing these issues, we should. If you are not moving forward you are falling behind. But let's have some perspective and communicate honestly. The focus on income inequality as opposed to poverty is a start.

Tuesday, July 25, 2006

Hezbollah's Broken Windows

I ripped this fairly dispassionate analysis off from elsewhere in the blogosphere:

"And since Israel's actions strike many Lebanese and others in the Middle East as excessive, the current attacks are an excellent recruitment tactic for Hezbollah. Thus Israel's chosen path is unlikely to produce long-term security for Israeli citizens."

While it may not produce long-term security (and I am not sure what will) that does not mean that its 'excessive' force is a bad strategy. In a very basic sense it is pretty good strategy based on a truism that you hear over and over again in corporate boilerplate - the nature of almost any organization is based on the quality of its people. Losing trained people hurts. If Israel kills 1000 trained and seasoned Hezbollah militants and Hezbollah instantly recruits 1000 new militants, Hezbollah is weaker (unless it has access to already developed human capital, which makes me wonder if there is like a 7-11 somewhere in Lebanon where displaced terrorists have "Will Kill Jews for Food" signs...hmm). Same with destroying Hezbollah's war materiel. Sure they can just get more rockets from Iran and Syria, but Bastiat's Broken Window Fallacy tells us that those replacement rockets mean resources cannot be used elsewhere for other purposes. And Hezbollah may reconstitute somewhere else if you scatter them. Same applies, they need to interweave themselves among a new populace, rebuild and modify infrastructure to suit their operations, and redraw plans based on a new operating base. All of this takes time and effort, again resources that could have been directed elsewhere for other projects or aims.

Short of neutralizing the animating hatred, or other motivation, of one's enemies or of eradicating them altogether, wiping out their assets and setting them back years in terms of human capital and organizational effectiveness is a fine strategy.

Luttwak on Hezbollah

I highlighted some strategic thinking by Edward Luttwak a while back. Well, today Luttwak takes to the Op-Ed pages of the WSJ to suggest an, way to deal with Hezbollah. He says bribe Bashar Assad of Syria to do a Paulie Walnuts on Hezbollah. Well, give Luttwak points for out of the box thinking. The strategy seems so outlandish to our modern sensibilities but it has a long and distinguished history. The British were masters at it back in the day - offer a bribe to a local thug to do your dirty work to eliminate other pesky local thugs. What is missing though in Luttwak's plan is the final element of the strategy...after the pesky threat is eliminated, stiff the thug on the bribe and tell him his reward is he gets to live. We here in the US used to be pretty good at this as well before we got in touch with our feminine sides.

Monday, July 24, 2006

What's Next? Businesses That Make Profits?

I didn't get a chance to blog this last week, but there was big news in the institutional money management business and the area of "social investing." TIAA-CREF dumped the Coca-Cola Company from its list of companies that qualify for investment in its social index. To be fair, TIAA-CREF simply followed the advice of their consultants and made no particular judgement of Coke themselves, but the fact that they follow these silly consultants so blindly is not to their credit. I have never been a fan of "social investing" as a good investment strategy but in terms of advocacy or activism, it's A-OK by me because it is a market-based approach (rather than a gov't imposed solution). Nonetheless, the decision to dump Coke shows the extreme that this notion can be taken by the consultancy/NGO bureaucrat/activist mindset and the slippery slope that this concept was bound to start sliding down. Social investment began as a way to indentify for divestment businesses that engage in activities that are long-standing taboos of religious constituencies or broadly accepted cultural taboos like gambling, alcohol or pornography, so that churches and certain groups can be sure that their investments don't support activities they profoundly disagree with. But the expansion of criteria to trendy, manufactured crises and the bugaboos of elitist nannies, like child obesity, reveal the same unfortunate 'mission creep' that infects government agencies, NGOs, and activist groups in general. Give these people a deserved inch and they will find myriad dubious crises to confront and forever be raising the bar on what constitutes social responsibility. Social investing has gone from a way to cater to investors with deeply held beliefs to the aggressive promotion of pet causes (usually collectivist causes, go figure). That is fine by me, after all it is a market-based approach and I'd rather have that than something like Nick Kristoff's sugary beverage tax. Nonetheless, the social investing movement is going to be a victim of its own success, where gatekeepers with a missionary zeal and a bureaucracy's ambition to widen its net will hijack a good idea. The result will be new directions and new tactics that are far removed from the original intent and increasingly at odds with the core constituents' interests. Dumping Coke could be a sign that we are well along that path.

Friday, July 21, 2006

Energy Heresy and Humanity

Numerous recents events have conspired to urge me toward this post. The first is being without power for a few days after Tuesday night's storms here in the NYC area, then the press coverage of states abandoning the 55 mph speed limit, and finally, this post I wrote about how it is that we don't 'waste' water in this country. It got me thinking about how that young woman's skewed thinking is the exact same view that pervades our thinking about energy, which prompted me to go back and reread the best book on energy I've ever read. The essence of my post on water as it relates to energy is right there on page 3, illuminating the first of Huber and Mills' seven heresies:

"'Energy supply' is determined not by 'what's out there' but by how good we are at finding and extracting it. What is scarce is not raw energy but the drive and the logic that is able to locate, purify, and channel it to our own ends."

You may have noticed that the death of the 55 mph speed limit has been getting press lately(maybe because some limits are going up toward 80 or 85 mph and safety scolds are howling). Huber and Mills put the 55 mph speed limit in its historical context as a tactic of what they dub "the Lethargists":

"...the national 55 mph speed limit slowed people down and thus limited how far we drove."

The Lethargists is how H&M describe the doomsday predictors like Paul Ehrlich and Amory Lovins that wanted to reduce energy consumption not by promoting efficiency but by mandating terms of our use of resources and thus denying us a certain lifestyle:

"Slower trips, dimmer bulbs, smaller refrigerators, and such aren't more efficient; they're slower, smaller, darker - they nudge us toward a less frenetic, peripatetic, and physically expansive way of life. Perhaps it is a good thing. But it is not more efficient, it is more sedentary, calm, and quiet - in short, more lethargic."

People paid no attention to the 55 mph speed limit almost from the get-go, but the recent headlines indicate a positive - that we have killed it off completely and in fact have metaphorically rejected its premise, we don't want lethargy. That point was driven home being without power for a few days. Sure it was inconvient but I discovered that the loss was deeper. In the sticky, humid July weather I was sluggish and sweaty, less inclined to play wrestle with my kids, less inclined to hug my wife, less inclined to do anything helpful or positive. And when the sun went down I gazed upon my family's faces illuminated by the faint hue of candles. I don't see my wife and kids all day long, I don't want to see them at night lit faintly by candlelight. I want to see those faces under blazing lights as if it were noon and I want to be cool and comfortable and ready to play wrestle, give horsey rides, hugs and all that. Slower, smaller, darker etc. is not a good thing, it, in fact, sucks.

And that, my friends, is the essence behind our pursuit of ever more abundant energy - we want to have richer, fuller lives, pack more things into our lives, travel more places, meet more people, communicate more often, save time, defeat illnesses, enhance leisure, etc. Huber and Mills:

"Humanity is destined to find and consume more energy, and still more, forever."

Lethargists are always with us. Let's continue to be on guard against them and clearminded about what they want, and clearminded about what we want. Huber and Mills's heresy is our humanity.

Thursday, July 20, 2006

Summer Drinking

Heard about those storms that whacked the Northeast on Tuesday night, knocking out power to thousands? Well, the Baseball household was one of the thousands affected and the power is still not on. The resulting frustration of having to live in the sticky heat without A/C is a great excuse, beyond the normal ones, to imbibe cool refreshing alcoholic beverages. Beer, of course, is great, but I am trying to do something about those love handles that Mrs. Baseball affectionately but admonishingly pinches now and again. So what are some of my "go tos" for casual weeknight imbibing?

Muscadet - about as uncomplicated and unpretentious a wine as you can get, and delicious too, and it's a wine you can drink alot of. Yes it's French, but it is from way out west near the city of Nantes where they aren't really French, they're celtic, so it wins a pass.

Any Spanish Rose - get over the pink wine heeby-geebies, the Spaniards make delicious, refreshing stuff from almost any region, so you can't go wrong.

I raise a glass to my readers!

It Really Does Take a Village

More On Income Inequality

Great timing Prof. Mankiw. A day after Rubinomics warrior Steve Rattner took to the pages of the WSJ to raise the alarm over income inequality, and was taken on by Donny Baseball here, Greg Mankiw puts a little thought experiment out there for us all to consider regarding income inequality. The concept is very clear and very simple, some labor is a commodity and some labor is a value-added good. Some labor is a simple softwood 2x4 and some is heat-treated, weather-resistant, enhanced-density, application specific engineered lumber. Some labor is a Ford Taurus and some labor is a Porsche Boxster. And the difference in labor is the same as the difference in those products, it all comes down to the inputs.

Unfortunately I think some people see such a statement as making an argument in favor of the inherent difference in personal worth (the Bell Curve thesis essentially applied to human value), and thus recoil at the notion. It is not making such an argument, it is merely making a clinical statement about how skills, not people, are rewarded in the marketplace. It is not that some people are inherently worth more or less as humans, just that the particular skills that some people possess are rewarded more than the skills that others possess. I think that part of the reason that certain people get so worked up over income inequality is that they fail to make this distinction and thus can't fail to have their egalitarian sensibilities offended. Such people also seem to not realize that the marketplace is mutable, the value of skills changes and the skills that people possess change. It is people that have a view of economic strata as generally fixed that see income inequality as this great societal bane.

Oddly though it is people whose skills have been highly rewarded in the marketplace that also adopt the conceit that there are inherent differences in worth. How else to explain highly accomplished people who would advocate to what extent you and me can drink certain beverages, or smoke, or contact with health insurers for a customized policy, or drive as many miles as we would like in our Ford Expeditions?

Wednesday, July 19, 2006

More NYC MTA-Union Farce

This is the farce that results when you permit critical services to be monopolized by a socialist, racially divisive, slash-and-burn labor union.

What is particularly illogical about this demand is that the coverage of Viagara and of female contraception is not analogous. Viagara is a corrective to a medical deficiency. Male impotance is a deficient medical condition. Female contraception is not a corrective. Being a healthy woman of child-bearing age is not a deficient medical condition. That is why most health plans do not cover female contraception. As well, such coverage would amount to a subsidy of contraceptive users by non-users. The cost of female contraception would be spread across the entire insurance pool so as to result in higher premiums for all, thus females (and males) who choose not to use contraceptives would be subsidizing females that do. So here we have one group of not sick people demanding sudsidized non-corrective treatment for their non-sickness from others, both sick and not-sick, by claiming an injustice because sick people are getting a corrective treatment for their sickness. This is an example of how politics has infected the healthcare market and made it, well, as just plain crazy as our politics.

Also, from my experience it would hardly seem that the female employees of NYC subway system are a population subset in tremendous need of contraception.

God Help Us

A US Senator that appropriates billions of dollars of US taxpayer money, imitates the drunk college kids and halfwit hopeless hedge fund wannabes that trade on stock tips from Jim Cramer's "Mad Money" disgrace on CNBC.

Bloomberg notes the danger to our republic that is Senator Kit Bond.

The Battle is Joined

My view of Henry Paulson's appointment as Treasury Secretary was an expansive one, that Paulson is not merely Bush's TreasSec for what's left of his presidency, but he will be the quarterback of what will be the Republican Establishment's battle against the economic vision of the Democratic Establishment. Bob Rubin and his Hamilton Project is the locus of that vision. In today's WSJ, in lieu of Holman Jenkins, we get the battle cry of the Hamilton Project and Rubinomics via Steven Rattner. (Rattner is yet another limousine liberal sent over from Central Casting to pound the Hamilton Project/Rubinomics vision home.)

The battle cry is income inequality, on a par with global warming for deadly serious business in Rattner's mind. It is apparently an outrage of biblical proportions that some people's incomes are growing faster than others in this country. Aside from the fact that income inequality is perfectly consonant with the founding ideals and longstanding cultural heritage of the US, it is only the most outlandish economic theories that purport income inequality to be damaging to society. Furthermore we seem to know what is causing income inequality in this country, increasing economic returns to education and specialized, technical skills and decreasing returns to lack of skills and minimal levels of education. So the root of this putative problem is something that for decades we have all agreed is a good thing - more knowledge. Rattner admits this and incongruously, at least to me, calls for more education and training. Why he would advocate more of something that contributes mightily to his ultimate societal bane is a curious thing. So in addition to being a non-problem (in the sense that it is neither incongruant with American ideals, not economically damaging, nor caused by pernicious forces) it is a political loser. An enduring political strategem of presidential electoral politics is to ask voters if they are better off than they were four years ago. Note it is not to ask voters if they are better off relative to other people, because people don't evaluate their lot realtive to others ("Sure it was a good year, we took that vacation and got a new flat screen but that sonofabitch down the street took TWO vacays and bought a wider screen than me. Revolt! Throw the bums out" I don't think so.). While people may bristle at the thought of $3 gasoline while Exxon's CEO makes tens of millions or recurl at underfunded pensions while corporate execs get somewhat lavish payouts, they don't internalize it into loathing and contempt for the system, but mostly see it rationally or fatalistically. Most people don't make serious attempts to gauge their well-being relative to others, but hear of it only during election cycles from those who want their vote.

So beyond these fatal flaws, what are the policy responses that are required to combat income inequality? Beyond education and training, there are only three other policy planks mentioned in Rattner's editorial: wage insurance, higher minimum wages, and repealing the 2003 tax cuts.
This is pretty thin gruel for the economic celebrity chefs of the Democratic Establishment to be pumping out. Wage insurance? We have wage insurance for things like suffering a disability, but the reason we don't have wage insurance for, say, your job getting outsourced or made obsolete by the Internet is because nobody will insure the risk of the world changing. Wanting this type of wage insurance is akin to yelling, "stop the world I want to get off." The world changes and technological advanements continue apace. How can you insure a travel agent's wages if nobody could possibly foresee Expedia? You can't and that is why nobody will. Thus wage insurance of this kind is charity, taxpayer-funded charity because government will be the only provider.

Higher minimum wages as a policy plank goes against the overwhelming consensus of economic thought. Sure, once in awhile a study will come out that rattles the consensus momentarily, but the prevailing view seems to persist, higher minimum wages are more damaging than beneficial. Bottom line, it is a hard sell and not entirely innovative.

Repealing the tax cuts? Well, the case for the tax cuts is better made elsewhere and more than I have space for here, so let me just say that this is a hard sell too. The economy is in good shape and whether the tax cuts helped get us there (they did) or not, the solons of Rubinomics are asking Americans to take a flyer. If people intuitively know that X, Y, and Z got them somewhere but don't know the magnitude of contribution of any of X, Y, or Z, asking them to continue forward doing only X and Z is to propose a risk. People will not choose that path. So, while my personal view is that repealing the tax cuts is terrible economic policy, I think it is also bad political strategy.

I would think that smart chaps like Rubin and Rattner could at least come up with policy planks that are either good economics or good politics (maybe even both) but to go 0 for 2 is a little underwhelming given the brainpower brought to bear here. But therein lies the rub, I don't think the brainpower is really being brought to bear. People apply the utmost of their skills to reach their own goals and meet their own needs. This is a collolary to Milton Freidman's hierarchy of care in spending money. Aside from power over your life, Rubin and Rattner's needs have been met, their personal goals have been achieved; their best thinking has been brought to bear for them, lesser thinking is inevitably being brought to bear for society.

UPDATE: Wow, to further illuminate my argument, Larry Kudlow obligingly posts a fuller description of Uncle Milty's four types of spending. Thanks LK.

Tuesday, July 18, 2006

Winning Slogan for '08: "Veto Machine"

The bellweather for the issue of wasteful federal spending is Amtrak. Not that a one-off grab of taxpayer money via an earmark by a back-bencher is excusable (it is definitely not), but Amtrak is a decades old, embarrassing failure of a persistent sinkhole of taxpayer funds. It goes so far beyond indistinguishable little hands in the cookie jar. So when there is not even a pretense of a debate over funding for Amtrak, you know where the taxpayer stands in the minds of our sausage factory shop foremen. The abuse of taxpayers continues unabated and the brief sweet nothings whispered into our ears by the Republican majority in the Great Sausage Factory are now just the bitter memories of a dopey naive dreamer. Kinda like this girl.

The conventional wisdom is that congressional Republicans know they are in trouble and are buying votes anyway they can with obscene porkbarrel spending. I think the truth is more that congressional Republicans feel quite powerful and quite safe in sticking it to taxpayers. We face a mortal enemy and an existential threat in radical Islamism and weapons proliferation and the Democrats, generally speaking, are lost in LaLa land when it comes to how to deal with this threat, so the go-along-get-along politics is in full swing because most Republicans see themselves sticking around for awhile and thus are focused on granting and giving favors and rising up the leadership ranks. So what is the battle strategy? Snipe a few of the biggest culprits and elect anybody who dubs themself the "Veto Machine" to the Oval Office in 2008. The advice is free. Who will take it? Rudy? McCain? Hillary? Warner?

Broad Shoulders? Really?

NYC firefighters rush into burning skyscrapers and Chicago firefighters...complain the sirens are too loud.

From the 10K filing of a public company that makes the sirens:
"The Company has been sued in Chicago, Illinois by firefighters seeking damages claiming that exposure to the Company’s sirens has impaired their hearing and that the sirens are therefore defective. There are presently 33 cases filed during the period 1999-2004, involving a total of 2,498 plaintiffs pending in the Circuit Court of Cook County, Illinois."

Kinda hurts the tough guy image, to say nothing of the fact that loud sirens are necessary to warn traffic and pedestrians thus saving lives. I doubt the Chicago Fire Department really wants to kill people on their way to a fire. This smacks of an unholy collaboration between the firefighters union and trial lawyers.

Friday, July 14, 2006


More on Rosneft IPO: I just watched an interview on Bloomberg of a mutual fund manager talking about the Rosneft IPO. I admitted that the whole thing is ugly, but that "it is too big to ignore" so investors are holding their nose and swallowing. That is the sort of dangerous rationale that loses fortunes, but that is what global liquidity has brought us to. Beware.

Isreal-Lebanon: In the 1980s there was a really cool punk bar in NYC called Downtown Beirut, which attempted to be as scruffy as possible, I guess in an attempt to imitate a war zone. It was perhaps a bit shameful to commercialize the tragedy of Lebanon, but I was a young whippersnapper and I didn't care. It was a sign of the times, and blessedly so, that in the 1990s the bar became anachronistic and shut down. I hope it stays that way.

Finally, the world sure looks a mess. Iran is heading toward the bomb. North Korea is firing missiles at either Japan or Hawaii. The Middle East looks about to explode. Oil is rising. Stock markets are falling. Terrorism continues in the world's major cities. Remember, the time to buy is when the blood is in the streets. I leave it to you to detect the metaphorical red stuff.

Wednesday, July 12, 2006

Caveat Emptor x100

I agree with the reasoning and the conclusion of Matthew Lynn's take on the Rosneft IPO. But Holy Mamaloney if ever there should be a "Buyer Beware" sticker on something it should be on these shares. Investors may make money in Rosneft and I will be happy to be proven wrong, but if investors lose money they will thoroughly deserve it. Where to begin? The Russian state stole these assets from their previous owner, what gives prospective shareholders the idea that the Russian state won't steal from them (you don't have to perpetrate outright theft to steal from shareholders, there are a thousand small ways to screw your shareholders)? Russia is notoriously corrupt and increasingly authoritarian (although was never very open and liberal to begin with). The Russian state is placing all its bets for Russia's future on the energy sector rather than diversifying the economy. Do you think that if things don't go swimmingly and they need some extra cash they will continue to share and share alike the fruits of the nation's energy resources.

Apparently there aren't enough sound investment opportunities around that equity investors would entertain investing in this smorgasbord of noxious risks.

Typical Youthful Misconception

I was drawn to read this because I too spent a fair amount of time travelling around India as a younger pup, was beguiled by it and have a pang in my heart from afar over the terrorist attack yesterday in Bombay. But this stuck out:

"When there's no rain, that means there's no water, which means there's no flushing toilets and plenty of cold water bucket baths (which are actually quite nice in the heat). It means that doing daily things requires more thought and planning. Disposing of a tampon is a pain. You don't let the water run for no reason--ever! The other day the warden of the apartment complex told us the water would be on for one hour. It was like Christmas. It has made me realise how wasteful we are in 'the West'. Wars will be fought about water, and we leave the taps on, steep ourselves in bubble baths, wallow in extravagant pools--water is precious."

Water is indeed precious, that is why in the West smart people have applied themselves to making sure we have access to plentiful amounts of it, and our political and economic systems are setup to enable that. Now, I know India is a dry place, but you would be hard pressed to convince me that we have vastly more water available here in the US to "waste" than over there. What we have is a greater capacity to convert available but unusable water to usable water. What we have is modern collection and distribution infrastructure, advanced filtration and purification technologies, and the standard of living to pay for ample, clean water thus rewarding those who can solve the inherent challenges of utilizing a scarce resource. Under a less open political and economic system, we might not have all that water. We do not "waste" water in the West, rather we go to great lengths to create vast amounts of it in usable form and we then use it in direct relation to its subsequent availability. What we take for granted is not water, but the democratic free market capitalist system that enable us to convert precious, scarce resource into abundant everyday commodities.

India is emerging from decades of statist control of the economy and corruption so deeply imbedded that it has choked individual enterprise of any meaningful scale off in the crib. Hopefully that will change and the millions of incredibly smart and talented Indians will be free to surmount their water shortage by way of free enterprise and diffuse self-interested actions emerging as order. Bastiat said, "Paris gets fed." Hopefully someday we can say that "Bombay gets washed."

You can forgive a young person this error, I would have likely said the same silly thing in my younger days of wanderlust.

Tuesday, July 11, 2006

More on the Jobs Data

Caroline Baum is a Bloomberg columnist that I enjoy reading. She's smart and always has an insighful and unorthodox take on the markets and economics. (I like her also because I witnessed her call Morgan Stanley chief economist Stephen Roach, "Mr. Gumpy" to his face.)

Nonetheless I can't understand what she is talking about in her latest column on last week's jobs data. I made the argument in my previous post that slowing jobs data is totally logical given the unemployment rate and higher wages, companies can end-run these challenges by growing foreign operations. Baum thinks this is a weak argument. Her first salvos in making her point are these:

"Construction employment has shown virtually no growth in the last four months, further corroboration of cooling in the residential real estate market. The number of retail jobs has fallen for the last three months, which could be a response to the downshift in consumer spending in the second quarter. Temporary help services jobs, which employers use to address fluctuations in demand and which don't carry the same financial burden as a permanent hire, have been in decline all year."

Well, construction has been growing at a torrid pace for years, why should it be troubling that it is not growing anymore? Slowdown perhaps, but maybe it is plateauing, who knows? Perhaps it is because the US residential construction business is the domain of illegal immigrants and companies have been raided by the Feds recently. Like I said, who knows? And four months? Pretty thin substance to hang your hat on. Retail jobs falling? Well, it rained yesterday too. Retail jobs are highly volatile and week to week fluctuations are as normal as the weather. Temp help? Businesses I follow have been bringing their temp folks on full time as salaried employees, which would cause temporary jobs to decline as they are replaced by full-time needs. No alarm bells there.

Then this: "In fact, government was the largest source of job creation last month, which is hardly an indication of a robust labor market."

Government jobs become overrepresentative in the data under two scenarios, first when there is a recession and the government, which is relatively insensitive to economic conditions, continues hiring in the absence of private sector hiring, and, second, after an expansion when the private sector has lured workers from the public sector with higher-paying jobs that then have to be refilled (all while gov't is expanding its spending due to the tax revenues brought in by the expansion). Government hiring can be, and in this case IS, indicative of a tight labor market.

Fortunately, because Baum is Baum, we get to more substantial arguments than those weak databites:

"we have an easy way to tell whether it's lack of demand or lack of supply that's behind the slowdown in hiring to an average of 108,000 a month (total employment, including government) in the second quarter from 170,000 in the previous nine months. ``The proof of the pudding is in the pay,'' says Jim Glassman, senior U.S. economist at JPMorgan Chase & Co. ``If labor is in short supply, labor pay rates should be rising.'' As it turns out, ``unit labor costs are rising less than inflation,'' he says.

Inflation is both a newish arrival and relatively benign according to the Fed, so the fact that wages haven't kept up with inflation doesn't really hit the bullseye. And what does inflation really matter to the availability of qualified workers anyway? The trucking industry is a good example of what has been going on. Trucking has been short of skilled drivers for several years now, way before anybody was talking about inflation. Trucking companies just can't find enough drivers who show up to work, drive safely, etc. for what they are willing to pay. And they can't outsource their jobs, an Indian in Bangalore can't drive a load from Tulsa to Phoenix. So what truckers have been doing is using technology (GPS mainly) to plan more efficiently and optimize use of their capital assets, which are the trucks. It isn't that the trucker is vastly better at driving the truck and thus the source of productivity gains, just that this formerly backwards industry is starting to think like first tier businesses think. The productivity gains are rightly going to the bottom line as return on investment. But even after all that, wages in the trucking business are rising because truckers can leave to become lots of other things and if it was easy to replace a trucker who now wants to be a crane operator then wages would be flat, but it ain't so they ain't.

It is just wages that matter, inflation is a monetary phenomenon and doesn't impringe upon the short term labor pool. Raw wages are the modulator of supply and demand and they have been rising (not to mention pension costs and healthcare costs) because the labor market is tight. Ask any hirer from a CEO down to the local ice parlor owner, good help is hard to find, much more so in 2006 than in previous years.

Monday, July 10, 2006

Jobs Report

The conventional wisdom is that the economy will slow and that will hurt employment. Last week's jobs report seems to confirm this, showing that payrolls increased less than expected. Nowhere in the mainstream economic reportage that I have read did anyone entertain the notion that maybe the economy is slowing because employment is slowing. With official unemployment at 4.6% it is logical to think that the remaining pool of available workers quite possibly are not the sharpest tools in the shed. Also, wages are rising. So faced with either not-so-attractive job candidates or having to pay more (or both), it is not surprising that employers are doing less employing. All else being equal (meaning ignore productivity for now), less hiring means less work means less output means slowing profit growth means lower stock prices. But where folks make the logical leap that might find them eventually in the chasm, is that US employment is not synonomous with US public corporation profitability. Companies can get around the higher pay/unappealling labor pool problem by doing things in other, non-US type places and hiring the people who live in those places. So slowing US economic growth does not necessaily mean slowing profits and thus trouble for the US stock market, albeit the conventional view, dominating the mainstream business and financial media, is that this is exactly the case. It could be, but it doesn't have to be. Corporate profitablility could continue in the face of slowing US economic growth. That it will, and that it will benefit stocks, is the contrarian opinion today.

On another note, last week's payroll report added some fun quasi-controversy into the use and interpretation of this data. As most people who pay attention to the payroll employment numbers know, they are not the only employment numbers. There is the household survey as well. The difference between the two and the relative importance of each is an ongoing source of debate, which was highly visible during the last presidential election. Now we have a competitive source of data, the ADP Report, which in theory should be highly credible. Nonetheless, for this last period the ADP Report "missed by a mile" and now economists and markets are wondering how or if to view its contribution to the employment picture. This is worth watching.

I Guess We Gotta Talk About Rudy

OK, as others have pointed out, the conventional wisdom has officially declared that Rudolph W. Guiliani will seek the Republican nomination as the candidate for the Presidency of the United States of America in 2008. I won't pound the keyboard too much about this because it is, well, simply not that exciting, but I will say that the conventional wisdom about Rudi is wrong and it could very well turn out to be the most destructive form elitist self-denial and/or blissful ignorance since, well, 2004. The conventional wisdom reads like this: "Rudi is a divorced, pro-choice, northeasterner, thus is entirely unacceptable to red state America and thus cannot win the Republican nomination nevermind the Presidency." To those who chuckle that this could possibly be believed, I say "No seriously, I hear this all the time and some very smart people I know actually believe it." Well, to this piece of conventional wisdom, I say "Pshaw" or perhaps even "Poppycock."

As some readers may have gleaned, the ever-ravishing Mrs. Baseball hails from arguably the reddest of red states and I have and do spend a fair amount of time there, and I can safely say that elitist northeastern opinion has coccooned itself inside its charactiture vision of red America as Jesusland, a land inhabited by robotic dopes who wake up each morning, go to bed each night and spend all time in between thinking about nothing other than abortion and plotting how they can deny it to others. Well, newsflash, that's not really what it is like. So if people want to continue to latch onto this ridiculous piece of conventional stupidity that's fine, but a good political strategy it is not. The Democratic Party establishment would be wise to take seriously a politican who has a decent shot at winning in both Oklahoma and New York (and PA, and CT, and NJ). Likewise the Republican Party establishment would be wise to take seriously a politician who is, well, not of the Republican establishment. Therefore, I am convinced that you will not keep hearing this conventional wisdom much longer, there are too many smart people who are paid to win elections who will detect the falsity of this notion early and reject it.

Friday, July 07, 2006

Let a Thousand Fuels Bloom

Hopefully this is the future, B20, E85, ULSD, and traditional mogas all under one roof. Just substitute profitability for the "educational" intent of this project and we'll get there.

Everything They Tell You Is Wrong

Don Luskin lets you in on the secret. Wal-Mart and fossil fuels are GOOD for America and the World.

Foreign Gas Saving Our Ass?

Looks like foreigners and globalization are insulating us from the misguided screwing with our vast and complex fuel supply chain perpetrated by the Great Sausage Factory. Once again capitalism finds a way to keep us safe from the depredations of our statist elite.

Wednesday, July 05, 2006

For Now, I Refuse Membership in the Club

Greg Mankiw has been pushing the idea of a Pigovian carbon tax. Let me make the obligatory mention of my respect for and admiration of Prof. Mankiw (and appreciativeness that he has a blog) before I say, we really ought not to jump on a carbon tax bandwagon just yet. Europe is doing it, so let's hang back and study the effects of their policy for awhile. There is a long list of extremely dumb ideas that Europe has pursued that we have chosen not to imitate, to our credit. This seems like one of them. (Naturally, there are also good ideas that Europe has pursued that we haven't imitated, to our discredit, privatizing air traffic control comes to mind, but I digress.)

I don't know if Prof. Mankiw is arguing for a Pigovian carbon tax because it is the most effective form of discouraging use of hydrocarbons presupposing that we have already made the societal decision to discourage hydrocarbon use or because a carbon tax is desirable in itself. I am going to assume that Prof. Mankiw's motivations are the former, because, first, he makes no claim to any expertise in climatology, and secondly, academic economists are in the business of telling us what is efficient not what is desirable; but, sometimes his tone would indicate otherwise so I am not sure but I will give him the benefit of the doubt. The argument for a carbon tax is that it is the best way to compensate for the negative externalities that carbon use imposes on society. Well, if we had any clue as what those negative externalities were and how to measure them, then maybe there would be are a starting point to argue for a carbon tax. But there isn't (see here and here but mostly here), so why be so aggressive in promoting a carbon tax? Prof. Mankiw ought to know the dangers of not communicating with precision on matters of policy.

I would go further and argue that NOT using hydrocarbons would impose severe negative externalities on society. Hydrocarbon-based resources are the cheapest source of energy that we currently have to power our world. This is a world that not only employs enormously "wasteful" machines like SUVs, but also enormously wasteful (no scare quotes) machines like lasers and ultrasound machines. In terms of energy physics lasers are about as truly wasteful a machine as we have devised. However, lasers improve eyesight among other things and ultrasound machines drive down infant mortality, but only by being a massive energy hog. Has anybody factored in the positive externalities of better eyesight and healthier babies? Bigger refrigerators also come in for scorn from the anti-hydrocarbon crowd, but today's fridges are vastly more efficient than yesteryear's models, so we get more space for the same energy use. More space in the fridge means less trips to the store, at least in my house. These are just a few paltry examples of how our mastery of hydrocarbon resources and our development of a whole field of hydrocarbon technology enables us to do things faster, cheaper and better, freeing up time to pursue other advances or simply to live more enjoyable lives. Any tax on carbon would only drive up the costs of countless benefits big and small that hydrocarbon technology provide us. Furthermore a carbon tax would suffer from the same flaws that most taxes suffer from. First, the tax would almost assuredly never go away, persisting long after the intended policy goals were achieved. Second, the tax revenue would augment the spending authority and capacity of politicians, which can only spread further inefficiencies to the broader economy. So I say scrap Pigou and embrace Julian Simon - let hydrocarbon technology flourish to give us more time and more tools to achieve more great feats of human ingenuity.

Finally, my last beef with Pigovian taxes is that they are ammunition for our presumptive betters to get us to change behaviors (precisely because they are so effective) that they disapprove of. Nick Kristoff wants to tax your Coca-Cola because he thinks we are all too fat and presumes to know your molecular biology. Other elitist nannys want to tax a variety of perfectly normal, legal and longstanding behaviors for similarly presumptive and arrogant motivations, and Pigovian taxes are the second tool of choice when they fail to ban such behaviors through legislation. So while Pigovian taxes are effective, they are by no means necessarily desirable for good reasons, both economic and non-economic. Let's make sure that critical distinction is a part of the debate, rather than blindly accepting them as an intrinsic good, an impression that all this club membership talk seems to impart. For now, leave me out of the club.

Efficient Buffett Hypothesis

As Warren Buffett is in the news in a big way again, the old debate on Efficient Market Hypothesis has resurfaced. Greg Mankiw weighs in on it. As much as I respect and admire Prof. Mankiw, I don't think his word on this should be given the weight you would afford his views on macroeconomics. Academic economists add an important component to this debate, but a practicioner's perspective is a critical element that cannot be ignored. Actual investors, managing real money, who have serious fiduciary obligations by necessity know more about this question than the academics. In this category, the grand master is probably this guy. Here's an excerpt from his excellent book, Pioneering Portfolio Management:

"Investors evaluating management alternatives for marketable equity portfolios face a spectrum ranging from generally efficiently priced large-capitalization domestic equities to the frequently mispriced emerging market stocks." Also, "Because Wall Street finds following smaller companies far less profitable...investors face the prospect of uncovering some interesting, mispriced investment opportunities...small capitalization equity managers with an edge have a reasonable shot at generating attractive relative returns."

There you have it. Parts (most) of the market are efficient, and other parts are less so. Like many theories EMH is broadly applicable but breaks down significantly under certain circumstances and and within certain areas of activity. The savviest investors know where it holds and where it breaks down and marshall their resources appropriately.

N.B. Swensen's book referenced above is indespensable for serious, professional investors, and his other book is highly valuable for anyone who takes an active role in the planning and execution of their individual investments.