The Big Picture | May 2004

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Virtual Economies & Game Theory

Monday, May 31, 2004 | 07:05 AM

walrus_logo

Fascinating story at the Canadian magazine Walrus (really, that's the name of it) about Edward Castronova, the economist who "discovered" the virtual world of Everquest On-Line and did a full blown economic analysis on it.

I vaguely recall this story hit either the WSJ or NYT a while ago (thus demonstrating the dangers of being an information whore). Regardless, there's a good column on it over at Slate (Fantasy Economics).

Castronova's discovery:

"He noticed something curious: EverQuest had its own economy, a bustling trade in virtual goods. Players generate goods as they play, often by killing creatures for their treasure and trading it. The longer they play, the more powerful they get but everyone starts the game at Level 1, barely strong enough to kill rats or bunnies and harvest their fur. Castronova would sell his fur to other characters who'd pay him with "platinum pieces," the artificial currency inside the game. It was a tough slog, so he was always stunned by the opulence of the richest players. EverQuest had been launched in 1999, and some veteran players now owned entire castles filled with treasures from their quests.

Things got even more interesting when Castronova learned about the "player auctions." EverQuest players would sometimes tire of the game, and decide to sell off their characters orvirtual possessions at an on-line auction site such as eBay. When Castronova checked the auction sites, he saw that a Belt of the Great Turtle or a Robe of Primordial Waters might fetch forty dollars; powerful characters would go for several hundred or more. And sometimes people would sell off 500,000-fold bags of platinum pieces for as much as $1,000."

As Castronova stared at the auction listings, he recognized with a shock what he was looking at. It was a form of currency trading. Each item had a value in virtual "platinum pieces"; when it was sold on eBay, someone was paying cold hard American cash for it. That meant the platinum piece was worth something in real currency. EverQuest's economy actually had real-world value."

Talk about Supply & Demand: Castronova demonstrated the old saw: the value of a thing is (at times) merely what someone else is willing to pay for it -- regardless of "intrinsic value."

The same thesis applies to any good or service traded, including the bubble in "beanie babies" or the intrinsically valueless dot com stocks . . .

While the internet bubble reached a peak valuation, its collective valuation was several 100 billion dollars; Even if you back out the surviving companies (eBay, Amazon.com, Yahoo!, etc.),you still end up with companies which had market caps in the billions. They were virtually and intrinsically worthless (Pets.com) then, and are literally worthless now (most of the rest).

Given the behavior of humans in crowds, it is little surprise that a virtual world such as EverQuest has a real world valuation:

"He began calculating frantically. He gathered data on 616 auctions, observing how much each item sold for in U.S. dollars. When he averaged the results, he was stunned to discover that the EverQuest platinum piece was worth about one cent U.S. higher than the Japanese yen or the Italian lira. With that information, he could figure out how fast the EverQuest economy was growing. Since players were killing monsters or skinning bunnies every day, they were, in effect, creating wealth. Crunching more numbers, Castronova found that the average player was generating 319 platinum pieces each hour he or she was in the game the equivalent of $3.42 (U.S.) per hour. "That's higher than the minimum wage in most countries," he marvelled.

Then he performed one final analysis: The Gross National Product of EverQuest, measured by how much wealth all the players together created in a single year inside the game. It turned out to be $2,266 U.S. per capita. By World Bank rankings, that made EverQuest richer than India, Bulgaria, or China, and nearly as wealthy as Russia.

It was the seventy-seventh richest country in the world. And it didn't even exist."

Fascinating stuff.

Incidentally, the writer of the Game Theory article is Clive Thompson, who excellent blog collision detection is well worth checking out . . .

CPI versus Personal Spending

Sunday, May 30, 2004 | 08:33 AM

in Finance

Personal income grew in April at twice the rate of spending, boosting the savings rate to the highest level since last summer. According to the Commerce Department, Spending advanced 0.3%, while Personal income increased by 0.6% last month. Both numbers were 0.1%, ahead of expectations.

Let's break it down:

The Good News: This increase in income was the largest monthly gain since November's 0.6% advance. Disposable personal income, or income after taxes, climbed 0.5%, following a 0.4% advance in March.

The Bad News: Spending on durable goods, big-ticket items such as cars and appliances, rose 0.8%; Outlays on nondurable items such as food and clothing slipped 0.1%. Look for rising interest rates to negatively impact durables number going forward, while higher inflation eats into spending (goods purchased will have the ~same $ amount, but lower units sold).

Spending!
personal_consumption_4.04

The Ugly News: Inflation. A price index for personal consumption expenditures is rising, most especially due to food and energy costs. Beware the news releases that focus on ex- food + energy, as they are foolish knaves sent to waste your time.

We all wish our "personal-consumption expenditures were actually "less food and energy" -- but such is life on planet Earth. A boys gotta eat and get to work. That takes (duh) FOOD AND ENERGY.

The Really Ugly News: University of Michigan consumer-sentiment index dropped to 90.2 in May; Economists were looking for 94.4. Ouch.

Consumer Sentiment went south in May -- Iraq, Inflation, Gas topping $2 -- all soured consumers mood.

In sum, wage earners eked out a little more green, but then promptly handed it over to gas station attendants and supermarkets. Consumers weren't topo pleased with the situation.

Sources:
Personal Income Grows 0.6%, Double the Rate of Spending
WSJ, May28,20048:53a.m.
http://online.wsj.com/article/0,,SB108574734050223927,00.html

Barrons Economic Calendar
http://online.wsj.com/public/page/0,,barrons_econoday,00.html

Data Source: Haver Analytics

Light posting ahead . . .

Saturday, May 29, 2004 | 08:49 AM

in Weblogs

Enjoy the 3 day weekend . . .

Economist Wanted

Saturday, May 29, 2004 | 08:39 AM

in Finance | Politics

wsj_format_logo

Steve Liesman has fun at the Chairman's expense (heh):

"Wanted: Economist with impeccable credentials. Knowledge of monetary policy a must. Should be a calming, paternalistic figure. Intuitive sense of economic trends desirable. Ideal candidate desires full employment and low inflation in equal measures. Ability to navigate Washington political minefields a real plus. Required skill includes talent for speaking -- at length -- and not saying anything.

Essential that candidate be independent but remember who offered the job in the first place.

Send resume and cover letter to 1600 Pennsylvania Ave., Washington, D.C.
To the attention of: Person TBD by voters in November."

The full article looks at all the potential replacement candidates from a possible Bush second term . . . Next week, John Kerry's choices..

With Greenspan's Time Short, Who Might Bush Pick for Fed?
The Macro Investor
Steve Liesman
WSJ, May 28, 2004
http://online.wsj.com/article/0,,SB108566410070022899,00.html

Read it here 1st: W's Eroding Cuban Support in Florida

Friday, May 28, 2004 | 01:55 PM

in Media

nw_abt_periscope_0104

Over two months ago (March 24, 2004), we cited polls indicating that Cuban Voters in Florida Wavering in Support for President.

Not just one, but two different polls.

Glad to we see Newsweek has caught up with the Big Picture. Can't blame them for being behind -- how could they ever match our manpower or budget?

Let me also welcome those of you joining us from the Washington Post, coming to read our "legal excerpt" (tm) from the American banker: Fed Chief's Calendar Includes More White House Face Time

Source:
Florida: Eroding: Bush's Cuban Support
Arian Campo-Flores
Newsweek, May 31 2004 (found May 28 2004)
http://www.msnbc.msn.com/id/5040192/

Terror Warning Timing Questioned
Dan Froomkin
Washington Post, May 27, 2004; 10:30 AM
http://www.washingtonpost.com/wp-dyn/politics/administration/whbriefing/

Follow Up: The Way the Music Died

Friday, May 28, 2004 | 12:32 AM

in Finance | Music

frontline

Tonite, I watched the Frontline show, "The Way the Music Died."

It was kinda of interesting, but all told, rather disappointing. For a discussion on the economics of the music business, it was shockingly scarce on, well economics.

The show:

• never even mentioned high retail prices;
• made no mention of price fixing;
• hardly talked about technology;
• did not discuss consumer time pressures;
• made no mention of the RIAA;
• did not discuss the inherent genius of suing their clients;
• failed to discuss the industry's anti-consumer protectionism;
• only vaguely mentioned file sharing;
• ignored competitive pressures from other entertainment (DVD, Vid Games, Internet);

To their credit, there were several spirited discussions on the negative effects of radio ownership consolidation to their business model, especially ClearChannel. As an example, KCRW 89.9, an independent station in Los Angelos, first "broke" Fiona Apple, Coldplay, and Norah Jones. The implication is that a broader, less consolidated radio industry would be more experimental, "break" more acts. The tiny Clearchannel determined play list as the root of all evil was hardly discussed.

There was alot said about the decreasing quality of music, as the industry focused (thanks to MTV) on what bands look like -- Pretty! -- rather than what they sound like. David Crosby singled out Britney Spears (not much of a reach there) as the prime example.

As a counter example, one of the producers mentioned that good creative music still sells: Outkast (8 million records sold), Eminem (8 million), 50 Cent (6 million sold) and Norah Jones (6 million). Despite downloading and everything else, these artists connected with fans and sold lots and lots of albums.

There was also a lot of hand wringing about the -- horror! -- corporatization of music, as public firms were forced to meet quarterly numbers -- something this business is particularly ill suited for.

Lastly, I was quite surprised to hear that Best Buy, Wal-Mart, and Target account for 50% of all sales. That seems way higher than the numbers I've been looking at (more like 30% and growing). If anyone can validate this data, I;d appreicate it . . .

The Way the Music Died

Thursday, May 27, 2004 | 03:55 PM

in Music

frontline

Be sure to catch the Frontline show tonite:

The modern music scene was created in 1969, at Woodstock. Half a million fans, dozens of artists, and the politics of the times came together as a big bang moment that eventually would generate billions of dollars. But over the last twenty years, MTV, compact discs, corporate consolidation, Internet piracy, and greed have contributed to a perfect storm for the recording industry. FRONTLINE examines how the business that has provided the soundtrack of the lives of a generation is on the verge of collapse.

Confirming a Market Turn

Thursday, May 27, 2004 | 01:38 PM

in Finance

Last week, we discussed how the Dow Transports have not “confirmed the new low in the Industrials." The Transports did not create a Dow Theory Sell signal. As we previously wrote: “Unless and until that happens, the excessive bearishness leads us to anticipate a strong bounce back rally.” So while waiting for a Dow Sell signal, we also were awaiting a follow-through confirmation day.

The “follow-through” methodology simply looks for a strong rally on any of the major indices of 1% or greater on better than the previous day’s volume. I like to see better than the 30-day average volume. This confirmation day ideally shows up in the 4th through 7th day following the first day of higher trading (post-reversal).

Tuesday’s action saw Nasdaq surging 2.2% in trading on 24% higher volume than the day before. That certainly qualifies as a confirming follow-through day. In our view, these are a reliable means of determining whether a reversal is a mere “dead-cat bounce,” or the start of a more lasting move.

Why does this method work? After the long sell off, anyone who wants or needs to sell has already done so. With supply drying up, the market finds an uneasy equilibrium. It takes very little additional buying to ignite a move up. Short covering often starts the process, than institutional buyers start accumulating shares, which draws the attention of the Technicians. Finally, the momentum players hop on board - and we are off to the races.

Additionally, despite the expected seasonal “Sell in May” weakness, the four-year presidential cycle continues to work in the Bull’s favor. As the nearby chart shows, the market has a tendency to rally, starting around June, in presidential election years.

That suggests to us that the next four weeks leading up to the Fed meeting and the Iraqi sovereignty handover could be especially volatile. Traders are expected to be positioning themselves in front of this event -- and as this occurs, it would conform to our recent reversal rally thesis.

Tuesday’s action confirms our bullish stance from March 14th. We’re now looking for another follow-through day, on even stronger volume sometime over the next 5 trading days. It is probably too early to say that today is that day. But if we do get further confirmation, it would conform to our expectations for a new leg up, which we believe could last anywhere from two to six months.

Note: A much longer version of this was published at The Street.com (by subscription) here: Confirming Market Turns.

That column was a follow up to "Timing Market Turns."

The Chart of the Day: Average Election Year (Dow / 1897 - Present)

Thursday, May 27, 2004 | 01:25 PM

in Finance

The Chart of the Day observes “the stock market has a tendency to be somewhat choppy during the first five months of an election year, but prospects tended to improve (on average) as the November election approached.

Average Election Year (Dow / 1897 - Present) election_year_rally

Source: Chart of the Day, Pinnacle Data

We agree. This potential June - November rally is very consistent with our “Market Reversal” thesis of late.

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Quote of the Day:
"People who can take a risk, who believe in themselves, enough to walk away [from a company], are generally people who bring about change.”
- Cynthia Danahar, Hewlett Packard’s medical Products GM

Shrek Wreck

Thursday, May 27, 2004 | 06:54 AM

in Media

wsj_format_logo

Tuesday's comments (Blame it on the Locusts) which mocked the absurd rationalization out of retailers, was picked up by Jesse Eisinger's Ahead of the Tape column "Shrek Wreck" in the WSJ today. Jesse is a relatively rare breed -- a financial reporter who allows (or is allowed) his sense of humor to find its way into his writing:

"They put movies out in the summer but apparently nobody told the nation's retailers.

The International Council of Shopping Centers this week blamed "Shrek 2" for weaker-than-expected chain-store sales. Well, if they blamed what is likely the real culprit -- high gasoline prices -- "it would horrify the shareholders" of retailing-company stocks, Barry Ritholtz, strategist for Maxim Group, says. "I fully expect them to blame locusts one of these days."

Better hurry. If retailers don't do it now, they will have to wait another 17 years."

One of the side effects of all the corporate and Wall Street scandals has been the increased value of "truth telling." Would these sort of snarky sarcastic observations have made it into print 5 or 10 years ago? I doubt it.

Since I am not seeking investment banking business, I call 'em as I see 'em, and let the chips fall where they may. There is a premium of sorts for the straight dope these days (Go figure). Lets hope it lasts . . .

Source:
Shrek Wreck
Jesse Eisinger, Ahead of the Tape
WSJ, May 27, 2004; Page C1
http://online.wsj.com/article/0,,SB108560463743722161,00.html

WSJ: Battleground States

Wednesday, May 26, 2004 | 12:01 AM

in Politics

wsj_format_logo

The WSJ continues to impress with their aggressive election coverage. Here is their most recent State by State analysis. The Journal observes:

"Mr. Bush won eight of these 16 battlegrounds in his 2000 victory, but if the election were to be held tomorrow, it looks unlikely that the president would fare as well. But differences in one-quarter of the states where Mr. Kerry leads -- Florida, Missouri and Nevada -- fall within the polls' margins of error, while those of half of Mr. Bush's states -- Tennessee and West Virginia -- do. If one discounts battleground victories that fall within the margin of error, Mr. Kerry carries nine states and 105 electoral votes, and Mr. Bush two states and 13 electoral votes."

As you can see from the map below (click for larger pop up), the incumbent has picked up but one "Blue State" -- Iowa -- from 2000. The challenger has picked 5 formerly Red States. (Note that 11 states are within the margin of error).

Battleground States Map
Click for Larger Map

Source: WSJ

Surprisingly, neither the Journal nor Zogby International found 3rd party candidate Ralph Nader to be much of a factor. "Mr. Nader, who has yet to get on the ballot in any state, made his best showing in Minnesota, where he received 3.4% of the vote, compared with Mr. Kerry's 51.3% and Mr. Bush's 42%." Indeed, but for Minnesota, Nader polls under 3% -- and in many states, well under. Unless the race is as close as last time, he is now looking like less and less of a factor.

State by State analysis of how the candidates are faring relative to how each state voted in 2000:

Poll Results

STATE	2000 Election	MAY 24 POLL	% Pts. Lead	Margin of Error	BUSH	KERRY	NADER
ARKANSAS	BUSH	BUSH	4.8	+/- 4.5%	49.3%	44.5%	1.2
FLORIDA	BUSH	KERRY	1.4	+/- 3.4%	47.6%	49%	1
IOWA	GORE	BUSH	5.2	+/- 4.0%	50.1%	44.9%	0.8
MICHIGAN	GORE	KERRY	8.3	+/- 4.0%	41.2%	49.5%	2.4
MINNESOTA	GORE	KERRY	9.3	+/- 3.2%	42%	51.3%	3.4
MISSOURI	BUSH	KERRY	3.3	+/- 4.3%	43.9%	47.2%	2.1
NEVADA	BUSH	KERRY	3.8	+/- 4.3%	43.5%	47.3%	2.8
NEW-HAMPSHIRE	BUSH	KERRY	9.6	+/- 4.3%	39.9%	49.5%	2.2
NEW-MEXICO	GORE	KERRY	5.1	+/- 4.6%	43.3%	48.4%	2.9
OHIO	BUSH	KERRY	4.6	+/- 4.1%	44.8%	49.4%	0.9
OREGON	GORE	KERRY	5.4	+/- 3.2%	44.3%	49.7%	2.9
PENNSYLVANIA	GORE	KERRY	8.2	+/- 3.8%	42.6%	50.8%	1.8
TENNESSEE	BUSH	BUSH	2.5	+/- 3.0%	49.3%	46.8%	0.6
WASHINGTON	GORE	KERRY	8.1	+/- 4.3%	44.4%	52.5%	1.3
WEST-VIRGINIA	BUSH	BUSH	2.4	+/- 4.4%	48.3%	45.9%	2
WISCONSIN	GORE	KERRY	8.2	+/- 3.4%	43.7%	51.9%	1.4

The electoral situation has been, and remains, quite fluid. We've previously discussed the projected electoral college vote for 2004, where we discover some unexpected twists. We noted the Cuban voters in Florida, a previously reliable GOP bloc, were wavering in their support for the president. We also observed that Arab voters were abandoning Bush in key swing states. And the table above provides empirical evidence that the projected impact of Nader on close states in 2004 is likely to be much less than previously expected.

Of course, the usual caveats apply: The election is still many months away, and anything can and will happen. We have yet to see what sort of "Hail Marys" Karl Rove has dreampt up; I imagine there are still afew tricks left up his sleeve. I'll post my 5 favorite potential October surprises after the weekend.

Lastly, I continue to be impressed by the depth and quality of the WSJ reporting. Between their coverage of the Iraq war and their focus on the election, they are simply the best newspaper in America today.

UPDATE: May 27, 2004 04:27 PM
Ellen Dana Nagler informs us (thanks Ellen!) that CNN just flashed a poll that shows Kerry leading in Iowa.

Of course, the statisticians out there will caution us about the dangers of mixing data sources, and they are correct in that. So until WSJ/Zogby see the same Iowa numbers, it should not impact the present poll.

We don't get to cherry pick the data points/Intel you like from a variety of different sources, and then wrap it up as a consistent report; Only the Vice-President can do that.

Sources:
WSJ Interactive Map
http://online.wsj.com/public/resources/documents/info-battleground04.html

WSJ Print version
http://online.wsj.com/public/resources/documents/info-battleground04-print.html

Zogby Interactive (http://zogby.com), Federal Election Commission, Political Money Line, U.S. Dept. of Labor, state governments, state elections boards, WSJ.com research.

Indifference . . .

Tuesday, May 25, 2004 | 02:23 PM

in Finance

It seems to be common knowledge that the Bulls and Bears have battled to a draw. Rallies get sold, sell offs get bought, equilibrium holds. Some strategists such as Bernie Shaeffer are calling for Dow 8,000, others, while others, like Doug Kass are looking for a strong oversold rally. Then there are the outliers of the world, including Don Hays, who are looking for very significant moves towards new highs.

The opposite of love is not, as so many people misunderstand it, hate. Those emotions are both passionate responses to a thing deeply cared about. Indifference, on the other hand, is a reflection of a lack of passion. Investors continue to demonstrate neither love nor hate for equities, but rather, Apathy. Thus, the exasperating markets of late.

The recent low volume action continues to remind us of the interminable period of Q1 2003, just prior to the Iraq war.. After the capitulation low in October 2002 - dumping tech stocks for less than their cash on hand was an example of investor hate, in our view - the market came in for a lighter volume retest in March 2003.

Looking back on the March 2003 retest: Duct-tape alerts frayed nerves to the point where investors were distracted by other, more important geopolitical matters. A buyer’s strike made rally attempts unsuccessful - but the lack of heavy distribution frustrated the Bears. We are now in the midst of an eerily similar process, albeit minus the pre-war tension’s denouement once the war actually began. Presently, we wait for a resolution of the Abu Ghraib prison scandal, we ponder how the U.S. will fare in moving the nation building process forward, we fret over the continued U.S. casualties.

While it appears to us that there has been a big upswing in criticism of the Iraq war’s prosecution, what has been so surprising to us has been where these condemnations are coming from: The Wall Street Journal, 4 star generals and the Army Times.

In our view, these are not your run of the mill critics, and are hardly to be confused with liberal think tanks.

Of the 900 points the Dow has lost from its April highs, the majority has happened since the Iraqi prison photos were released two weeks ago. Combine these geopolitical factors with the latest wait for the Fed to hike rates and a low-volume retest then makes some sense to us

The opposite of love is apathy and indifference. In our opinion, that is what the markets are experiencing now - and probably will continue to be stuck with, until after the Fed raises rates, and the situation in Iraq becomes less murky.

Blame it on the Locusts

Tuesday, May 25, 2004 | 12:31 PM

in Finance

A quick note on retail sales:

Just for once, JUST ONCE, I'd like to see a mediocre retail report released without some absurd excuse explaining disappointing sales.

Today's softer than expected same store sales numbers were rationalized by (brace yourself) the outsized opening of Shrek 2. This despite the fact that retail sales have been softening for the past 2 weeks, and Shrek 2 only opened Thurday evening. What about the prior 10 days?

In the winter, weak sales are blamed on the totally unexpected January phenomena of snow. In the Summer, its movies. Can't these guys ever just say "Sales were lower than we'd hoped? Oops, our bad. We'll try harder next month."

Why is it always some external factor, and never anything the company did? Could it be their product mix is less robust than hoped for? (Never!) Have consumers gotten bored with their wares (Impossible!). Perhaps the new incentive program for our sales people isn't working. Maybe the staff just got lazy. (well, maybe -- just don't blame management!).

As long as we're coming up with lame excuses, why not locusts? What about the Cicadas? As one web site jokingly alleges, "Cicadas are vicious killers that prey on innocent children and pets, seething with deadly venom and flesh-eating bacteria. This year Cicadas will kill more people than snakes, spiders, scorpions, and sharks combined"

Yeah, that's the ticket: Cicadas. People are afraid to leave their houses to go shopping due to the killer Cicadas . . .

UPDATE: May 25, 2004: 3:30pm
I've been thinking about why the "International Council of Shopping Centers" decided to blame soft sales on Shrek 2 -- instead of the real culprit, like $2.59/gallon gasoline.

Then it dawned on me -- If the ICSC did that, the actual economic conclusions might scare the beejesus out of them. With 2/3rds of the economy based on consumer spending, every additional dollar spent on gas is another buck not spent at the mall. Having just tanked up my wife's fuel efficient, 4 cyclinder, 5 speed manual -- it cost over $28 -- I did a little math. $8 more than usual, 4-6 tank fulls a month (More if we go away on the weekends) and that's about $50 less to spend on discretionary items.

Now mulitiply that times two if you have a big ugly SUV. (If you have a Hummer, than its times 4). If, like most suburban families, you have a second car, than multiply times two again.

Assuming yours is not a 2 Hummer family, than you are spending anywhere from $150 - $250 more per month on gasoline. THAT'S why retail numbers are a bit soft . . .

Had the ICSC released that statement, they would scare the hell out of holders of retail stocks -- and clearly, this organization is much more worried about spin than truth . . .

Sources:
Summer movies sap U.S. chain store sales - report
Reuters, 05.25.04, 7:44 AM ET
http://www.forbes.com/business/services/newswire/2004/05/25/rtr1383446.html

Retail Snow Job
http://bigpicture.typepad.com/comments/2003/12/barrons_picks_u.html

Stores: Shrek ate our sales
May 25, 2004: 12:41 PM EDT
http://money.cnn.com/2004/05/25/news/economy/weeklysales/index.htm

Read it here first: Oil Price Increases Are Not Taxes

Tuesday, May 25, 2004 | 09:42 AM

in Finance

bloomberg_logo

Hurrah for Caroline Baum!

We have repeatedly discussed -- both recently and in the past -- that oil price increases are not like taxes.

Finally, someone else has come to the same realization. It's a pleasure to see this argument from someone more eloquent and erudite than I:

It's axiomatic that higher gas prices act like a tax on consumers.

It's also dead wrong. There is nothing about a demand-driven rise in oil prices that will discourage oil production and reduce the quantity supplied to the market, which is precisely the effect of a tax.

Tax something more, and you get less of it: Now there's an axiom you can hang your hat on. If the government imposes a tax on a good or service, the effect will be to shift the demand curve back (inward) or the supply curve upward, depending on whether the tax is levied on the consumer or producer. In both cases, the quantity supplied at the new equilibrium is lower than it was before.

Let's walk through an example before looking at why the analogy of oil prices as a tax is off-base. If the government levies a tax on widgets that the buyer is responsible to pay, the same widget a consumer paid $5.00 for previously now costs him $5.50.

The imposition of a tax, which raises the effective cost to buyers, makes widgets less attractive, reducing the demand for them at any given price. The effect is expressed as a shift inward, to the left, in the demand curve, reducing the quantity of the widgets sold.

Thank you Caroline!

Sources:
Higher Oil Prices Are Not Like a Tax. Really
Caroline Baum
Bloomberg, May 24
http://quote.bloomberg.com/apps/news?pid=10000039&sid=agrHqq5dSJcg&refer=columnist_baum

Oil price rises are not tax increases
http://bigpicture.typepad.com/writing/2003/10/repeat_after_me.html

Oil Prices Are Not Taxes II
http://bigpicture.typepad.com/comments/2004/05/oil_prices_are_.html

Chart of the Week: Nonfarm Payrolls (% change from recession end)

Monday, May 24, 2004 | 02:53 PM

in Finance

Highlighting the fact that markets anticipate economic events, we see payroll picture is finally improving. Although this post-recession cycle clearly lags previous recoveries, job creation is finally moving in the right direction.

Nonfarm Payrolls (% change from recession end) employment_post_recession
Source: BLS, Chart of the Day

This graphic will be significant for both the broader economy as well as the closely contested U.S. Presidential election.

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Was the Bubonic plague a virus?

Quote of the Day:
"The average investor desires to be told specifically which particular to buy or sell. He wants something for nothing. He does not wish to work
- William Lefevre Reminiscences of a Stock Operator, 1928

Fed Chief's Calendar Includes More White House Face Time

Sunday, May 23, 2004 | 11:08 AM

in Finance | Politics

ab_logo_top

Kenneth H. Thomas, Lecturer in Finance at Wharton, was kind enough to allow us to reproduce portions of his research. "Fed Chief's Calendar Includes More White House Face Time." This was originally published in American Banker, and referred to in the previous Barron's discussion, below.

Here are Thomas' findings:

"One reason we have so much trust in the Federal Reserve - and Chairman Alan Greenspan - is its political independence in maintaining price stability.

This independence, which was a cornerstone of the Fed when it was founded in 1913, is critical. Otherwise, short-term economic gains such as rapid growth to help an incumbent President get reelected might be sacrificed for long-term pains such as inflation and deficits.

We try to insulate the Fed from politics by having it self-funded and also by having senior Fed officials appointed for long terms, overlapping presidencies.

These and other efforts can fail if the Fed chairman gets too close to the administration and there is the reality or even perception that the Fed is responding more to political rather than economic winds.

In 1999 I began research to attempt to answer the question: How political has Mr. Greenspan become? Each year I made a Freedom of Information Act request to the Fed for his personal calendar, showing all political meetings since 1996. (See table.) These private meetings are usually not disclosed at the time they take place, nor is any record made public of the discussion that occurred.

A certain amount of political meetings is necessary for the chairman to do his job. For example, he averaged 96 such meetings, or about 1.8 per week, over the 1996-98 period, which might be considered a "normal" amount.

However, this number jumped to 128 and 116 in 1999 and 2000, or 2.5 and 2.2 times per week, respectively. This was nothing compared with the huge rise in such meetings, especially at the White House, when George W. took office.

Mr. Greenspan had 149 political meetings in 2001 - 2.9 per week. This grew to 161 (3.1 per week) in 2002 and 170 (3.3 per week) in 2003.

Thus, the most recent three-year period of 2001-2003 averaged 160 meetings, or 3.1 weekly, compared with just 96, or 1.8 weekly, during 1996-98. This can be interpreted to mean that Mr. Greenspan has become 67% "more political" over this period.

This is a significant finding.

In the 1996-2000 period it was apparently necessary for the chairman to visit the White House about 12 times per year, or once per month. For no apparent reason, Mr. Greenspan's visits to the White House tripled from just 12 in 2000 to 37 in 2001, when Bush took office. Starting in January 2001, the same month Mr. Greenspan began cutting rates and flip-flopped on the Bush tax cuts, he visited the White House at least three times per month, with the only slowdown in June and July of that year.

What were previously monthly meetings continued to skyrocket to over one per week in both 2002 (55 meetings) and 2003 (68 meetings).

These White House meetings since 2001 were with officials at the highest level, something Mr. Greenspan did not do in 2000 or apparently since 1996 based on his monthly meetings there. For example, in 2003 he met with the President once, Vice President Cheney seven times, Condoleezza Rice six times, and Chief of Staff Andy Card three times. In March 2003 he had 14 White House meetings, and in July 2003 he met with six members of the Cabinet, including Colin Powell.

Such increasingly frequent meetings at the most senior level, including the Oval Office, are appropriate for a politician but not a central banker, whose political independence is paramount. The noteworthy increase in these meetings since 2001 is puzzling and problematic.

In all fairness to Mr. Greenspan, who has been one of our best Fed chairmen ever, he is a product of his political environment in Washington.

I have long argued that we should follow the lead of the Germans, who have one of the most independent central banks in the world, by relocating the Fed from our political to our financial center (New York). This way, it would not be so easy for the Fed chairman to take his limo to lunch at the White House.

At 78 years old, Mr. Greenspan is our oldest chairman and second-oldest Fed board member ever. With his term as chairman ending this June and his board term ending in 2006, when he would be 80, the Fed, like all organizations, needs a firm succession plan.

Though both Bush and Kerry have indicated they would reappoint Mr. Greenspan, neither should be allowed the luxury of remaining silent on whom they would chose to succeed him if he unexpectedly retired. Again, we should take a cue from the Europeans, who eliminated uncertainty and speculation in this regard by having a well-publicized succession plan in place for their central bank, which recently got a new president.

The Fed is too important to ignore proposals that would reduce its politicizing and the uncertainty over a succession plan for its chairman.

Mr. Thomas is a lecturer in finance at the Wharton School of the University of Pennsylvania.

Thanks Ken, terrific stuff.

Source:
Fed Chief's Calendar Includes More White House Face Time
By Kenneth H. Thomas
Lecturer in Finance at Wharton,
American Banker, Friday, April 23, 2004
http://www.bankinfo.com/article.html?id=20040422SZWAGCTD& (subscription req'd)

Is Alan Greenspan too tight with President Bush?

Saturday, May 22, 2004 | 07:01 PM

in Finance | Politics

Barron's resident curmudgeon asks the question: Is the Fed Chief too tight with the President? Based upon research done by Wharton Finance Professor Kenneth Thomas, it is:

"Kenneth Thomas, a lecturer in finance at Wharton, the U. of Penn's famed business school. Mr. Thomas has discovered that Alan Greenspan has become, in his view, too tight with President Bush.

For this startling disclosure, we're indebted to Charleston's Post and Courier, which scooped the world (or certainly the provincial slice that goes under the name of the Greater New York Area), with the story. Mr. Thomas, manifestly a brave soul, has pored over Fed data that he extracted by grace of the Freedom of Information act and come to the conclusion that Mr. Greenspan has lent himself to undue influence by the White House.

According to his research, the number of confabs between Greenspan and Bush or Bush subalterns took a quantum leap upward in the three years from 2001 through 2003, which, of course, were the first three years Mr. Bush was in office. That was, by Mr. Thomas' careful reckoning, 67% more times than Mr. Greenspan chose to visit the White House in the 1996-'98 stretch, when Bill Clinton was the prime tenant. Of course, it should be pointed out, Mr. Clinton was frequently otherwise engaged in the Oval Office during that period, so Mr. Greenspan might not have gotten very many invites.

Evidently a suspicious type, Mr. Thomas notes that Mr. Greenspan traipsed up to the White House 55 times in 2002 and 68 times in 2003, compared to 12 a year between 1996 and 2000. He expresses curiosity about a possible connection between the step-up in such powwows and what he dubs as Mr. G.'s "flip-flop in favor of the Bush tax cuts."

Thickening the plot, sniffs this academic gumshoe, is that Dick Cheney, Condi Rice and Andy Card were included in a number of such Greenspan-White House sessions. The knock against them, he says, is that none is an economist, a grave charge which, at least at this writing, has gone unanswered.

Mr. Thomas may lack the provenance of a Bob Woodward or Seymour Hersh, but he has picked up some of the standard clever dodges used by his journalistic counterparts to achieve wiggle room. Thus, he insists, even if the meetings were convened for nothing more than a game of whist, they give the wrong impression and appearances count.

Awed by Mr. Thomas's diligence and industry, we nonetheless believe Mr. Greenspan in his visits to the White House likely was engaged in some absolutely harmless activity like lobbying to keep his job. And, we're happy to note, that mission certainly has been accomplished."

Add 'Political Mischief' and 'over-reaching' to the rest of your reasons (serial bubble blower, shill, etc.): When future economic historians eventually write about this Fed Chief, Greenspan is likely to be judged quite harshly.

UPDATE: May 23, 2004, 11:00am
Kenneth H. Thomas was kind enough to allow us to reporduce his findings, including the graphic (which is the -pun-intended- money shot) here.

Sources:

Up and Down Wall Street: Voodoo Journalism
Alan Abelson
Barron's, Monday, May 24, 2004
http://online.wsj.com/barrons/article/0,,SB108517713517618315,00.html

Signs suggest improper influence of Bush on Fed, expert says
Frank Norris
Charleston Post and Courier, 9:13 a.m. Monday, May 3, 2004
http://www.charleston.net/stories/050304/bus_03finance.shtml

What is wealth?

Saturday, May 22, 2004 | 08:34 AM

in Finance

Arnold Kling discusses the concept of Wealth. Arnold is an interesting and thoughtful economist who usually provides intriguing food for thought.

Such is not the case today.

Arnold unfortunately cites David R. Henderson and Charley Hooper, who argue that we are all in the top 1% of the world's wealthiest people:

"Except for the few hundred thousand who are homeless, the Americans whom the U.S. government defines as poor live exceptionally rich lives. In most ways, their lives are better than those of kings and queens just 200 years ago. Consider the quality and quantity of our food, clothing, refrigerators, televisions, washing machines, stereo systems, and automobiles. . . "

This is such a silly argument, and on so many levels. Without even addressing the factual issues, let's take a look at the rhetorical problems, one at a time:

1) Any Temporal Argument is Two Sided:

If Henderson and Hooper claim we are "wealthier" today than long dead royalty of Shakespeare's time, than that is an admission how much poorer we are than people from the lowest rung of society 400 years from now.

Of course, that's just as foolish an argument. Nobody today thinks to themselves: "Huzzah! I am wealthier than King Henry!", nor do they lament "Alas! I have less wealth than the poorest schlump to be born in the year 2404. . . woe is me.".

Quite frankly, its transparently disingenuous. (That's a polite way of saying its idiotic.)

Compounding their own disingenuousness, H&H "time shift" their initial comparison of wealth from 200 years ago to Shakespeare's time. Last I checked, the bard was born in 1564 So the actual comparo is over between 440 and 400 years ago.

Here's why this is so foolish: It is the nature of mankind is to relentlessly raise his standard of living, generation after generation. This has been especially true over the past 500 years. And progress is accellerating at an ever quickening pace. Consider the gains we've made this past century, and even this past decade.

Yes, we are much better off than people 400 years ago. But, due to the accellerating pace of progress, the equivalent leap in standard of living is nonlinear -- meaning its likely to happen much faster than 400 years into the future. Our gains versus the people who lived in England in the 1600s will likely be had by inhabitant's of America in the year 2104, a mere 100 years from now. What the living standard will be like in 2404, 400 years hence, is simply inconceivable.

Comparing yourself to Kings who lived 4 centuries ago -- or paupers to be born 4 centuries from now -- is a fundamentally irrelevant and disingenous issue.

2) Wealth is Relative:

Regardless of the silliness of the historical/future argument, the authors exhibit a fundamental misunderstanding regarding people's conception of their own financial well being: Wealth is a relative concept.

Some people define wealth as having $100 more than what their brother-in-law has. We try to "keep up with the Jones" because they are their contemporaneous and geographical peers. People do not tend to compare or define themselves vis a vis noncontemporaries.

And consider Gore Vidal's observation: "It's not enough that I succeed. My friends must fail."

When NYC Mayor Ed Koch used to asked, "How'm I doing?" no one had to point out that he wasn't looking for a comparo with King Solomon, Julius Ceasar, or Emperor Ming.

Wealth is relative to the here and the now. (Its actually rather pathetic that this needs to be pointed out).

3) Deficits, anyone?

Notable due to its absence is any discussion on the impact of deficits on the long term fiscal health of the nation. H&H's entire debate was a not-so-subtle rail against rolling back tax cuts for the wealthiest 1%.

If we are discussing taxes, than we must also address spending cuts and deficits. The authors do neither.

As a fiscal conservative, I am offended by Henderson's failure to discuss this. Henderson was a senior economist with President Reagan's Council of Economic Advisers, so he damn well knows the economic revival which followed Reagan's tax cuts subsquently led to tax hikes and spending cuts to bring the spiraling deficit under control. The tax hikes and spending cuts were initially made by Reagan himself, and then by each of the next 2 presidents.

~~~~~~~~~~~~~~~

When I first read the excerpt, I initially suspected these authors had suffered some kind of a blunt force trauma to the head . . . In their dementia, their lack of mental accuity led to make rather pedantic and foolish arguments.

Then I went to read the full piece -- it is at TechCentral Station, where the full glory of the author's intents are revealed: Its a diatribe against presidential candidate John Kerry's plan to rollback the tax cuts for the top 1%.

So in addition to being a poor piece of tortured logistical reasoning, it is also a bunch of partisan hackery.

Arnold Kling: you can do much better than citing intellectual deitrus such as this . . .

BULL!

Saturday, May 22, 2004 | 06:25 AM

in Books | Finance

I'm a few chapters away from finishing the book "Bull! A History of the Boom 1982 - 1999" by Maggie Mahar, a former WSJ and Barron's reporter.

Just before Memorial Day each year, the WSJ runs a "What are you reading this summer?" column. I've participated in the past, and was asked again this year. Bull! is the book I am recommending.

Mahar does a terrific job dissecting what led to the longest market boom in history, and how it turned into the ugliest bear market since the 1929 crash. Anyone who believes we're at the beginning of another multi-decade expansion may want to read this.

My own research into boom and bust cycles suggests after multi-decade Bull moves, markets do not simply crash and then resume their prior uptrend immediately. Markets go through long phases -- bullish, bearish and sideways -- lasting anywhere from 5 to 18 years.

Last year's rally (2003) led many people to assume that we are "off to the races" again. The author presents some very sobering reasons as to why that's terribly unlikely. And, it's not for the usual reasons the perma bears always trot out. It simply takes time to work then off the massive excesses of a huge bull run.

Some of the specific items I learned fron Bull!:

-Few people know that the popularization of 401(k)s led to the "second act" of the Bull Market -- it caused fresh money to pour into the market in the early 1990s.

-In 1993, Connecticut Senator Joe Lieberman was the prime opponent to the SEC enforcing FASB rules for expensing options. Who knows how much less severe the bear market damage might have been if that rule was appropriately enforced. Consider how much less destruction the big stock option issuing firms would have suffered if they were required to accurately report their earnings (i.e., expensing and reporting them as per FASB rules). Had firms like Yahoo, Cisco, Intel, EMC not have run up as far as they had, might their SPLAT!!! have been a lot less severe?

-How devastating were the effects of the 1995 Safe Harbor Act, and the Private Securities Reform Act of 1995? It actually shielded corporations and their accountants from positive acts of misleading investors as to earnings; How many Enrons, Worldcoms, Global Crossings and Tycos might have been avoided?

Along the way, the author demolishes a number of closely held Wall Street myths: Buy and Hold is the best strategy (hardly); You cannot time the market (you can); Stocks outperform all other asset classes (they don't).

The narrative format works surprisingly well, considering the detailed subject matter. Despite the hundreds of documenting footnotes, it reads like a well paced novel. That makes it perfect for the hammock on weekends . . . "

Maggie Mahar: Bull! : A History of the Boom, 1982 1999

CDNOW Preferred Buyer's Club

Friday, May 21, 2004 | 02:19 PM

in Music

cdnOW

I've long held that the music industry's artificial price maintenance is the source of a huge amount of their problems.

I was quite surprised to learn that within Amazon.com is CDNOW's Preferred Buyer's Club. And an even bigger surprise was that their prices are actually quite reasonable. Last nite, I ordered these 3 discs (free shipping):

The Mose Chronicles: Live in London, Vol. 1 Mose Allison $9.99

Mose Allison
Afterglow Sarah Mclachlan $7.99

Afterglow

Lost in Space Aimee Mann $9.99

Aimee Mann

Under $10 is the price I believe CDs would sell for if true market place competition was allowed -- no oligopoly, no restrain of trade, no price fixing agereement.

If DVDs are $15, how can CDs be possibly be worth anything more than 2/3 of that . . .?

Friday, May 21, 2004 | 02:19 PM | Permal