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

Undercover in Burma


Undercover in Burma
by Michael Perelman

My former student, Ryan Libre, snuck into Burma to meet with the Kachin Independence Army.

He is one of my favorite students, even though he has a long-standing incomplete in one of my classes.

Our local weekly has a short story about his work.

I had to simply smile at this…the juxtaposition of an educationally demanded obligation and the enthusiasm and grit of his student. In an existential sort of way I am glad the incomplete has not been changed to a zero in the long standing department.

Perhaps Ryan can recieve the credit when the University grants him his honorary degree for accomplishments in the real world. I can’t see much money in such things.

Update: (links by MG) rdan here: Look for the jade mines (juan) and the danger the gas pipelines represent to these people (MG).

About me
Ryan Libre
Published work
Pulitzer Center
Youtube feature
Alert net
Tim Patterson’s blog…Kachin photos on BBC

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Sky is not falling on Social Security

The above table is from the National Academy of Social Insurance’s (NASI) Social Security Brief: Social Security Finances: Findings of the 2009 Trustees Report, a valuable summary from a group broadly supportive of traditional Social Security. If Social Security really was in a serious crisis you would expect the right hand column to show steady increases, a policy of ‘Nothing’ which deducts one year of potential revenue or cost savings from any given ‘fix’ should make the gap for the next year wider. And we can see that pattern in the years from 1993 to 1997. When Krugman said Social Security was in trouble back in 1996 he was right. When people like Bush made the same claim in 2004 they were wrong, the earth had moved under their feet. When I first starting blog commenting back in the 2001-2002 period I was pretty damn confident that the economy would simply grow out of crisis.

Well eight years of Bushonomics has made me more wary but on the whole still hopeful, because after all we are still way improved from where we were in 1997. On the other hand you can’t deny that the current recession is not helping. Something that is even more apparent if you examine the DI (Disability Insurance) component of Social Security in isolation from the OASI (Old Age/Survivors) component.

Last Sunday Coberly and I released the first iteration of the Northwest Plan which outline two different methods of fixing a combined OASDI program via payroll tax. One called ‘Tenth Now’ starts a fix in 2010 and gradually raises payroll tax by 0.1% for 20 years and then freezes the rate until 2053. The other called ‘Trigger’ instead targets the date that Social Security falls out of Short Term Actuarial Balance which under current projections is around 2028. ‘Trigger’ which in reality is just a modified version of our previous plan of ‘Nothing’ is a better policy option. But only if you combine OASI and DI into OASDI (as is usually done). But ‘Nothing’ is not really a plan for DI which actually fell out of Short Term Balance last year and has been running cash deficits for two years before that. So as soon as Coberly gets done running the numbers we expect to release an actual policy proposal for a Real Social Security Fix which I am tentatively calling ‘DI Now/OAS Trigger. The DI Now component will set some small increases for DI in place, while the OAS Trigger will continue to target Short Term Actuarial Balance as the trigger point for action.

The Northwest Plan is not the last word but what it does is establish a basis for pricing other plans. With NW Plan numbers in hand we can reasonably ask say what the cost of avoiding an increase in retirement age would be, or what the cost of avoiding a switch from wage based indexing of initial benefits to price based indexing. What are workers actually being asked to sacrifice to avoid the NW Plan price? I think when workers get that answer they will opt to stick with traditional Social Security and ante up the quarter.

The initial version of the NW Plan is in the hands of some people at SSA, as soon as we have spreadsheets for DI Now/OAS Trigger using 2009 numbers that will get forwarded on as well. But the truth is that we can fix Social Security for literally pennies a day per worker and don’t need to pay attention to hysterical Henny Penny’s. Social Security is mostly not broken and the part that kinda is (DI) is fixable. And we have (or will shortly) numbers to prove it.

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Herds and rational behavior


Brett Steenbarger at Trader Feed has an interesting take on rules of the market for the current decade of market of stocks.

In the chart, I’m looking at a moving window of 60 days and counting the number of days within that window that either have 2/3 or more of stocks traded as advances or 2/3 or more as declines (NYSE issues only). So we’re looking at relatively one-sided days in which advances lead declines (or vice versa) by a ratio of roughly 2:1 or better.

In 2000 and 2001, such one-sided days were the exception; because stocks traded in quarter point increments, many issues remained unchanged. The ratio of unchanged stocks to advancers and decliners has steadily fallen over the years. Now, out of over 3000 issues traded, it’s unusual to have 100 unchanged stocks; in 2000, over 500 unchanged issues were the norm.

Interestingly, the ratio of unchanged issues to total issues traded has fallen significantly since July, 2007, so it’s not just decimalization that has led to the shift. Program trading and the inclusion of more stocks in baskets that are traded–not to mention the inclusion of more stocks in ETFs (including leveraged ETFs)–may well account for this phenomenon. Small cap issues are no longer a market backwater.

The average number of issues traded daily since 2000 has actually fallen. Nevertheless, there is far more money–and far more money managers–chasing the same returns. It does, indeed, appear that they are chasing returns in part by chasing each other. Incredibly, we’re getting close to the point where nearly half of all trading days are relatively one-sided. For that to happen, sectors and indexes need to be more tightly correlated with one another.

It used to be called a market of stocks, not a stock market. Now it seems to be a market of stock groups. When the biggest bets are being placed on entire indexes and sectors via futures contracts and ETFs, shares are likely to move in unison. That dynamic does not appear to be changing any time soon.

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CPI Report

I love this. The consensus expectations was for the core CPI to come in at 0.2% this month.

It came in at 0.253%, was rounded up to 0.3%, and the market is selling off on this.

Just remember, betting on monthly economic releases is a suckers game created by the bond and stock brokerage houses to generate volume. They take their cut if the market is up, or if the market is down. They just want volume.

But we are hearing a lot of noise about inflation and inflation expectations and with oil prices threatening $60 I’m even worried about inflation keeping consumer spending from bottoming.

But based on historic patterns, I’m not particularly worried about core inflation. As the following chart shows core inflation tends to moderate for one to two years after recessions end. Moreover, the chart shows that the typical pattern is for the peak core CPI reading to occur around the end of recessions. Yes, their are exceptions but this is the normal pattern.

Second, in a low inflation world firms tend to raise prices once a year, typically at the start of the year. The major exceptions are education, housing and autos that have a different seasonal pattern. But because of this very strong seasonal pattern over half of the annual increase in the not seasonally adjusted core CPI tends to occur in the first quarter of the year. Moreover, if the first quarter increase is less than (or greater than) the prior years’ first quarter increase then the annual change is generally less than ( or greater than) in the prior year. This year the NSA core CPI rose 1.170% as compared to 1.177% in 2008. This implies that their is little reason to worry about a surge in the core CPI this year.

I know that commodity prices are turning up, but that is not that unusual in the early stages of a recovery and is not inconsistent with my earlier observation that the core CPI tend to ease for one to two years into recoveries. One, industrial raw materials account for such a small share of the final costs of most items that rising commodity prices are not a consistent leading indicator of core CPI. Second the pop in commodity prices may just be an example of what I call the “echo effect” or the tendency of money managers and investors to buy what worked in the last bull market even though economic fundamentals have changed drastically and market leadership usually shift to some other sector in new bull markets. This commodity price pop is accompanied by rising raw material inventories, falling raw material backlogs and record low capacity utilization in the raw material sectors.

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Chrysler Dealership Closings

Chrysler eliminating about a quarter of its dealerships is getting a lot of press, but the press seems to be completely ignoring why Chrysler is doing this.

All day CNBC has been talking to Chrysler dealers and not once have I heard them say a word about why Chrysler is doing this.

The reason is simple. The Chrysler dealership network is a highly bloated, inefficient network compared to the Japanese competition.

Chrysler has 3,700 dealers across the country competing against each other for sales and has been talking for years about reducing the number of dealers. Chrysler is the fourth-largest-selling carmaker in the USA. By comparison, Toyota, which is the second-largest U.S. seller and also has three brands, has 1,400 dealers in the USA.

Chrysler said its dealers sold an average of 303 cars last year, compared with the 1,292 sold by each Toyota outlet

So Toyota sells more cars with fewer than half the number of dealers and apparently the numbers for the production of Honda dealers is similar to that of Toyota.

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