Relevant and even prescient commentary on news, politics and the economy.

Best Economy in Six Years!

While the recent news about real GDP growth has been pretty good, Lawrence Kudlow overstates the case again:

If former President Clinton had overseen this economy, he’d have held daily Rose Garden news conferences to mark the occasion … Real GDP has grown at 3 percent or better for ten straight quarters, averaging 4.1 percent at an annual rate for the best performance since the middle 1980s.

If one looks at NIPA table 1.1.1 provided here and take the arithmetic average of real GDP growth from 2003QII to 20005III – one sees this 4.1%. But do the same for 1997QIII to 1999IV and one gets 4.5%. And yes, Bill Clinton did oversee this economy.

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Chipping Away at Roe

Senator Schumer is stunned that Samuel Alito wishes to chip away at a woman’s right to choose:

WASHINGTON – As a Reagan administration lawyer in 1985, Samuel Alito made clear his hope that the Supreme Court would one day overturn a landmark ruling that established abortion rights. But Alito, now a Supreme Court nominee, argued against an all-out assault on the Roe v. Wade ruling, fearing such an assault would fail. Instead, he recommended a policy of “mitigating its effects” by trying to persuade justices to accept state regulations on abortions … Sen. Charles Schumer, D-N.Y. and a member of the Senate Judiciary Committee, called the memo “stunning.” “These latest revelations cast serious doubt on whether Judge Alito can be at all objective on the right to privacy and a woman’s right to choose,” Schumer said.

While I agree with Senator Schumer’s concerns, such curtailments may occur even if the Senate rejects Alito’s nomination:

WASHINGTON – The news in Wednesday’s Supreme Court argument over New Hampshire’s parental notification abortion law was that the John Roberts era may be one in which the right to get an abortion is further curtailed. At least at first blush, Roberts – hearing his first case as chief justice on abortion restrictions – seemed to be trying hard to save the New Hampshire law from being declared unconstitutional, as it was by two lower courts. What was perhaps even more important was that Justices Anthony Kennedy and Sandra Day O’Connor – both of whom back abortion rights in general – also hinted that they, too, would try hard to salvage the New Hampshire law.


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Speculation and Oil Prices

Some have argued that at least part of the rise in oil prices over the past two years is due to speculation, rather than fundamental changes in supply and demand. For example, a paper that I just finished reading by Antonio Merino and Alvaro Ortiz (“Explaining the so-called ‘price premium’ in oil markets“) calculated that fundamental changes in supply and demand should only have driven the price of oil to perhaps $35/bbl. during 2004. As the chart below illustrates, oil prices have remained far above that level for the past two years. Merino and Ortiz suggest that the rise in prices above this “fundamental” price level is largely the result of speculative activity in the oil futures markets.

But I have to admit that I’m somewhat puzzled by this whole notion of speculation driving up the spot price of oil. Here’s my question, which I acknowledge may be simply a reflection of my ignorance about how commodities futures markets actually work: how can speculation systematically keep the spot price of oil high? Put another way, are speculative bubbles possible in the oil market in the way that they are possible in other asset markets? I’m not convinced that they are.

Let us tentatively (i.e. I’m open to other definitions) define speculation in the oil markets as the buying of oil futures contracts – specifically, by people who don’t really want to take physical delivery of the oil – with the hope of selling that oil in the spot market at some future date at a higher price. A speculator hopes that when the contract expires (or at some point along the way), he or she will be able to sell the oil committed in the contract for a price greater than the contract price.

Speculative bubbles can and do come up in all kinds of asset markets. But isn’t the ownership of a commodity futures contract different from owning an asset like a stock, because doesn’t that futures contract actually give you a bunch of actual oil at some point down the road? And when that happens, won’t you have to find a buyer for the oil who actually needs to use the physical stuff, if you can’t use it yourself?

I am probably missing something simple here, but it seems like this is a fundamental difference between speculation in a paper asset (like stocks or bonds) and in the futures market of a physical commodity. For speculation in a commodity to actually affect the spot price of that commodity, it seems to me like that speculation needs to actually result in the physical removal of some of that commodity from the market at some point, thus decreasing the actual physical supply of the stuff.

If that’s the case, then the only type of speculation in the oil markets that could actually affect the spot price of oil must take the form of actual physical storage of oil.

If it is indeed the case that speculation that affects the spot price must take the form of the physical storage of oil, this could:

  • explain why inventories of oil worldwide are relatively high right now. I.e. maybe speculation does explain high oil prices, but it’s not speculation in the futures markets, but rather speculation by those with storage capacity, e.g. oil producers, refiners, transporters, etc.;
  • invalidate the econometric technique used by many researchers (e.g. Merino and Ortiz) in which the stock of inventories is taken as a reflection of fundamental supply and demand changes;
  • explain why other researchers who use a different technique (e.g. Pelin Berkmen, Sam Ouliaris, and Hossein Samiei of the IMF) have found that speculation in the futures market has not had a significant effect on the spot price of oil. It’s not that speculation in the futures markets hasn’t happened to affect the spot price over the past two years; it’s that such speculation CAN’T affect the spot price of oil.

I need to think about this more, and as I said, I realize that I’m probably just missing something. I would welcome any additional information about how oil futures contracts work, and how they could actually affect the spot price of oil without physically putting more oil into storage.


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GDP 3Q Revision

This morning the BEA released an updated estimate of GDP in the July-September period of 2005.

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 4.3 percent in the third quarter of 2005, according to preliminary estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.3 percent… The major contributors to the increase in real GDP in the third quarter were personal consumption expenditures (PCE), equipment and software, federal government spending, and residential fixed investment.

…The preliminary estimate of the third-quarter increase in real GDP is 0.5 percentage point, or $12.9 billion, higher than the advance estimate issued last month. The upward revision to the percentage change in real GDP primarily reflected upward revisions to residential fixed investment, to personal consumption expenditures for nondurable goods, to equipment and software, and to nonresidential structures that were partly offset by an upward revision to imports of goods.

So clearly the economy continued to plow doggedly ahead during the summer of 2005, thanks a large part to consumer spending and residential construction. But it wasn’t just consumers driving economic growth – business investment spending contributed a respectable amount to growth, as did government spending (though obviously the latter is not necessarily a good thing). The only weak spot in the whole report really seems to be export growth, which was basically non-existent. But all in all, a strong report.


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Senator Lieberman Drinks the Kool Aid (Iraq Edition)

Kash has been doing a very good job of keeping us abreast of some real reporting on the sad state of affairs in Iraq. When I saw the title of this article, which was, “Bush, Rumsfeld: Iraq Strategy is Working”, I thought that it would be nothing more than the tired old White House talking points:

President Bush said Tuesday that “it would be a terrible mistake” to pull U.S. forces out of Iraq and that politics should not play any part in a decision about withdrawal. “We will make decisions about troops levels based upon the capability of the Iraqis to take the fight to the enemy,” Bush said in El Paso, Texas. “I will make decisions on the level of troops based upon the recommendations of commanders on the ground.” The argument against withdrawal was echoed in Washington by Defense Secretary Donald Rumsfeld, who said quitting the war would allow insurgents to prevail and put the United States “at still greater risk.” “Quitting is not an exit strategy,” Rumsfeld said at a Pentagon news conference. On the other hand, Rumsfeld made clear that the time has arrived to wean the Iraqis of their dependence on American support for security – whether it’s guarding Iraq’s borders or protecting its power plants.

I know, I know – HOHUM. So let’s hear from a Democratic Senator:

Joe Lieberman, D-Conn., who recently visited Iraq, said Tuesday, “I’d like the president tomorrow to restate our goals and begin to let the American people know we’ve got a plan. And as I found last week, I believe the plan is working,” he said. Lieberman also warned against withdrawing U.S. forces too soon.

Unbelievable! We Democrats rightfully complain that too few Republican Senators speak up against the dishonesty from this White House in their very politicized conduct of the Iraq mess. But maybe we should start complaining about those Senate Democrats who have clearly had too much Kool Aid.

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The Iraq We’ll Leave Behind

Froomkin also reminded me about this depressing tidbit out of Iraq: “Human rights abuses in Iraq are now as bad as they were under Saddam Hussein and are even in danger of eclipsing his record, according to the country’s first Prime Minister after the fall of Saddam’s regime.

“‘People are doing the same as [in] Saddam’s time and worse,’ Ayad Allawi told The Observer. ‘It is an appropriate comparison. People are remembering the days of Saddam. These were the precise reasons that we fought Saddam and now we are seeing the same things.’ ”

I shudder to imagine the sort of country that the US seems likely to leave behind as US troops are gradually withdrawn over the next year or two. The fact that none of this is at all surprising – many people were predicting that this is exactly what would happen before Bush even launched the US invasion of Iraq – is of little comfort.


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Good Questions

Dan Froomkin asks some good questions today:

What does it say about the president of the United States that he won’t go anywhere near ordinary citizens any more? And that he’ll only speak to captive audiences?

President Bush’s safety zone these days doesn’t appear to extend very far beyond military bases, other federal installations and Republican fundraisers.

…I’ve written a lot about Bush’s bubble before. In particular, I’ve wondered if Bush suffers from being so sheltered from dissent, and I’ve raised the question of whether taxpayers should be funding presidential events to which the public is never welcome.

Why is this happening? Is it related to the widespread public dissatisfaction with his policies, particularly in Iraq? Is Bush reluctant to appear before an audience that might not clap at his applause lines? Is he afraid of dissent? Are his aides shielding him against his will? Is it just a matter of stagecraft, to avoid any incident that might lure the media off message?

We don’t know, of course, because no one has actually asked the White House to explain.

I don’t know the answers to Froomkin’s questions more than anyone else outside Bush’s inner circle. But I do know this: whether it’s his choice or his advisors’ choice, Bush’s apparent fear of meeting people who disagree with him suggests insecurity, weakness, and intellectual mediocrity.


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Interest Rate Update

After a rise in long-term interest rates earlier this fall, they have fallen back down a bit over the past week or two. Meanwhile, short term rates have been on a steady upward march all year. The result is that there is now virtually no difference between long-term interest rates and short-term interest rates. The chart below illustrates.

As you can see, it is rare for short-term interest rates to be as high as or higher than long-term interest rates, a phenomenon known as an “inverted yield curve”. And unfortunately, those episodes have historically corresponded to periods immediately preceeding a recession. (The US experienced recessions in 1982, 1990, and 2001.)

There are a few possible reasons for that correspondence. First, it is likely that low long-term interest rates (at least relative to short-term rates) are the result of some pretty pessimistic thinking on the part of bond market participants. Low long-term rates suggest that they think that the economy is going to slow, which will cause the demand for long-term borrowing in the economy to fall, and which will force the Fed to lower short-term rates in the not-too-distant future.

Secondly, banks make a lot of their money by borrowing at lower short-term rates and lending at higher long-term interest rates. If that differential disappears, then the financial incentive to lend money disappears. And as banks lend less money, the economy tends to slow.

So I would put this in the category of Not-Very-Good-Signs for the economy in 2006.


UPDATE: For more details about the phenomenon of the inverted yield curve, see James Hamilton at Econbrowser.

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Politics: Steve Young for Congress

Those of us living in California’s 48th Congressional District are suffering election fatigue. Our Representative, Christopher Cox, is the new SEC Chairman and his congressional seat is vacant.

We will now be voting in our third election in just over two months: October 4th was the district primary and November 8th was the California statewide special election. The General Election is Dec 6th.

Steve Young for Congress

The 48th District has historically voted Republican and will likely go to Republican John Campbell. But Democrat Steve Young has a chance. Young has an excellent organization and it is possible that the GOP vote will be split between Campbell and Minuteman founder Jim Gilchrist.

I’ve spoken with the Campbell campaign. They told me he is fiscally responsible and strongly supports President Bush’s economic policies. When I started laughing at the contradiction, they knew they had lost my vote.

I believe Steve Young offers a reasonable alternative for change.

A friend of mine attended the Steve Young pancake breakfast this morning and emailed this summary:

My wife and I attended this morning’s pancake breakfast for Steve Young. The turnout was good and supportive of what he is trying to do. There were several speakers that offered their support. Tom Umberg, Frank Barbaro and Pat Kelly were enthusiastic about Young’s chances provided that the Democrats come out and vote. Kelly, who is Secretary Treasurer of Teamsters Union local 952 indicated that a strong effort is needed to have Democrats from all over the nation come to the support of Young. A victory in this traditional Republican area would do a lot to energize the Democratic party.

Again it was stressed that the turnout for this election will be very small. With Gilchrist expected to garner some of the votes that would go to Campbell a significant vote of registered Democratic voters will make Young a winner.

PS – the pancakes were good.

The campaign needs money and volunteers to make phone calls to get out the vote: (949) 640-4400

Best Regards, CR Calculated Risk

P.S. This will be an interesting week for housing data. Both New and Existing home sales will be reported this week and the Q3 OFHEO House Price Index will be released Dec 1st.

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