David Wessel of the Wall Street Journal reports that President Obama will re-appoint Ben Bernanke as Chairman of the Federal Reserve.
Excellent decision.
P.S. Don’t let this good news distract you from the much-less-good economic news on Tuesday: CBO and OMB are releasing new budget projections that will show trillions upon trillions of coming deficits.
If you have bad news to report in our nation’s capital, Friday afternoon in August is a good time.
So what did we learn this afternoon? Well, according to various news services (e.g., Bloomberg and Reuters) the Obama administration is projecting that budget deficits will total about $9 trillion from 2010 – 2019. That figure was released by an unnamed official (the usual practice) in advance of the release of new administration forecasts next Tuesday
That projected ten-year deficit is up about $2 trillion from the administration’s previous forecast, reportedly because of weaker economic assumptions. The new figure is in line with earlier estimates by the Congressional Budget Office, which will release new estimates on Tuesday as well.
As I discussed a few days ago, the administration estimates that the budget deficit this year will total about $1.58 trillion; that figure is not included in the $9 trillion figure, which covers the next ten years.
Yesterday marked a new record in the divergence between oil and natural gas prices.
As noted in a small item in the Wall Street Journal, the ratio of oil prices ($ per barrel) to natural gas prices ($ per million BTU) hit a record 24.5 at yesterday’s close. As you can see from the following chart, that’s far out of line with historical norms:
A barrel of oil has roughly 6 times the energy content of a MMBtu of natural gas. If the fuels were perfect substitutes, oil prices would tend to to be about 6 times natural gas prices. In practice, however, the ease of using oil for making gasoline makes oil more valuable. As a result, oil has usually traded between 6 and 12 times the price of natural gas.
That’s changed in recent months. Natural gas prices have fallen to $3.00 per MMBtu, weighed down by new supply and weak demand. Oil prices, however, have stubbornly increased to more than $70 per barrel. That’s down sharply from the $100+ prices of last year, but up sharply from the $40 – $50 range earlier this year.
Where do prices go from here?
Continue reading “The Disconnect Between Oil and Natural Gas Prices”
Shawn Tully at Fortune has a fun article recounting the rapid rise of Blackrock, which will soon be the largest asset manager in the world.
He contrasts the firm’s fixed-income investment strategy with other firms (e.g., Pimco) as follows:
BlackRock does not invest by forecasting which way interest rates are headed. Instead BlackRock wonkishly focuses on the other factors that drive bond values: prepayments and default risk. As a result, BlackRock was better equipped to analyze the complex mortgage securities that came to dominate the fixed-income markets and that caused so much havoc last year.
BlackRock’s approach works like this: Say mortgage bonds are selling at a big discount because rates recently rose. BlackRock’s models are expert at judging if those bonds are “rich” or “cheap” based on its technology for predicting prepayment trends and defaults. If the model predicts, for example, that prepayments will be higher than most investors expect, BlackRock can garner extra returns because homeowners will pay off their loans at full value, and the fund can reinvest the proceeds at higher rates.
The firm’s analytical modeling gets so granular that BlackRock found that people living near IBM offices prepay frequently because IBM executives are often dispatched to new cities.
I find that IBM tidbit very telling. It’s a great example of the information-processing that can, in principle, allow investors to earn super-normal returns (alpha, in the lingo). And if enough investors do it, market prices could approach the efficiency that finance theory often predicts. On the other hand, the need to get that “granular” suggests just how difficult it is for normal investors to value these kinds of securities. (Of course, experience has shown that many investors in mortgage-backed securities made much more basic errors — like trusting the ratings granted by the credit rating agencies — but that’s a topic for another day.)
P.S. For those too young to remember, the old joke is that IBM stands for “I’ve Been Moved.”
Next Tuesday is a big day for budget watchers. The Congressional Budget Office will release its updated budget and economic projections in the morning, and the Office of Management and Budget will release its projections later in the day.
CBO isn’t a fan of leaks, so we probably won’t know much about its updated projections until Tuesday. The Obama administration, on the other hand, will likely allow select tidbits out early, as have previous administrations.
Indeed, Bloomberg is already reporting that an administration official told them that this year’s deficit will come in at “$1.58 trillion, about $262 billion less than forecast in May.”
There are several things you should know about this estimate:
In short, the cost of fighting the financial crisis has been much lower than forecast in May, while the rest of the budget has done slightly worse than forecast.
This being Washington, there will be some debate about whether the $1.84 trillion figure from May is the right benchmark for evaluating whether the deficit is lower than forecast. That figure (the “policy deficit”) reflected not only the administration’s expectations about how the economy was affecting the budget, but also the budget impacts of its policy proposals, including the potential TARP II. At the time, the administration also made a second forecast that did not include any policy changes. That “baseline deficit” was $1.62 trillion, almost identical to the new estimate. Folks who use the baseline as a benchmark will thus conclude that the deficit is essentially in line with earlier expectations.
Note: The estimates of this year’s budget deficit will get lots of press (and blog) attention, but they are by no means the most important information in the new projections. The real question is what 2010, 2011, and subsequent years look like. We know the deficits will be scary-looking, but we will have to wait until Tuesday to find out just how scary.
Yesterday’s report on residential construction provided more evidence that step one of a housing bottom is underway — and that step two may be beginning.
Total housing starts fell slightly in July because of weakness in multi-family. But starts of single-family homes increased to 490 thousand (at an annual rate), the fifth straight monthly increase and the highest level since last October.
As the chart shows, this rebound is off of extremely low levels, so we shouldn’t get too excited. But it does appear that single-family starts bottomed last January and February (at 357 thousand).
That’s the first step of a housing bottom.
As I’ve noted in previous posts, however, that isn’t enough to declare a bottom in housing activity. Housing activity depends on the number of houses under construction, which depends on both housing starts and housing completions. Completions have exceeded starts for more than three years. As a result, the number of houses under construction has fallen for 41 straight months.
For me, the big news in the July data is that this decline may be ending.
Over at Time Magazine, Joel Stein has an amusing / troubling article (“Less Vegas: The Casino Town Bets on a Comeback“) about the perils of Las Vegas real estate (ht Anne Canfield).
The juiciest part of the article recounts how real estate agent Brooke Boemio advises clients to exploit the realities of the collapsed housing market:
Boemio specializes in short selling, in a particularly Vegas way. Basically, she finds clients who owe more on their house than the house is worth (and that’s about 60% of homeowners in Las Vegas) and sells them a new house similar to the one they’ve been living in at half the price they paid for their old house. Then she tells them to stop paying the mortgage on their old place until the bank becomes so fed up that it’s willing to let the owner sell the house at a huge loss rather than dragging everyone through foreclosure. Since that takes about nine months, many of the owners even rent out their old house in the interim, pocketing a profit.
In short, homo economicus is again stalking the Vegas housing market.
Stein notes that the renters often suffer from this ploy, since they can be evicted when a foreclosed property finally changes hands. In a nice illustration of how markets work, he then describes how renters are adjusting to this reality:
People are now paying a premium to live [i.e., rent] in apartment buildings, which in Vegas are almost always owned by a corporation.
Klein’s story has lots of other fun anecdotes from the front line of real estate crisis, including this immortal line from casino mogul Sheldon Adelson, whose wealth has reportedly declined by more than $35 billion:
A billion dollars doesn’t buy what it used to. So it’s not as tragic as one would assume.”
Be sure to read the follow-up post in July 2010
What are the 50 most important economic theories of the last century? That’s the question a publisher recently asked me to ponder for a book they are developing.
I’ve noodled on this over the past week and have some initial ideas. But I would be remiss if I didn’t solicit suggestions from my insightful readers.
So, what do you think have been the most important economic theories over the past century?
To spark your thinking, here are some very preliminary ideas, albeit without much respect for the publisher’s century limitation. (Apologies for the higher-than-usual amount of jargon and economic short-hand.)
In her recent speech about the impact of the stimulus effort, Christina Romer, Chair of the President’s Council of Economic Advisers, noted that “as of the end of June, more than $100 billion had been spent.”
If you visit the government web site tracking the stimulus (Recovery.gov), however, it will tell you that the government had paid out only about $60 billion by July 3. (You can find this figure in the chart at the lower right hand corner of the home page.)
Why does Christi report a figure so much larger than the one reported on the official website? Because Recovery.gov isn’t tracking all of the budget effects of the stimulus.
Christi’s figure includes the $60 billion of spending reported on Recovery.gov plus an internal estimate, prepared by Treasury, of the tax reductions resulting from the stimulus effort through June 24. Those tax reductions are obviously a big deal, totaling $40 billion or slightly more through the end of June.
Based on conversations with friends and journalists, I get the sense that some users of Recovery.gov do not realize that its figures cover only the spending side of the stimulus story, not the tax side.
As a result, I think Recovery.gov is (unintentionally) confusing people into thinking that the stimulus effort to date is smaller than it has actually been.
I have two suggestions for how to fix this:
Step 1: Reduce Confusion: Recovery.gov should slap a warning label on the home page chart (and everywhere else it reports aggregate figures) that says something like: “These figures reflect only the new Federal spending that has resulted from the recovery act. The act also included significant tax reductions that aren’t reflected here.”
Step 2: Provide the Information: Of course, it would be even better if Treasury would release official estimates of the week-by-week or month-by-month tax reductions flowing from the recovery act. These figures would obviously be estimates — and thus not able to be audited to the same degree as the spending programs — but would be invaluable to analysts trying to track the impact of the stimulus effort.
P.S. As I noted last week, the Congressional Budget Office recently estimated that the total budget impact of the stimulus effort reached about $125 billion through the end of July.
Everyone who follows the U.S. economy closely knows that the unemployment rate was 9.4% in July, down 0.1% from June.
Everyone, that is, except Google.
If you ask Google (by searching for “unemployment rate United States“), it will tell you the unemployment rate in July was 9.7%.
What’s going on? Well, it turns out that Google is directing users to the wrong data series. As I discussed last month, almost everyone who talks about unemployment is using (whether they know it or not) data that have been adjusted to remove known seasonal patterns in hiring and layoffs (e.g., many school teachers become unemployed in June and reemployed in August or September). Adjusting for such seasonal patterns is standard protocol because it makes it easier for data users to extract signals from the noisy movements in data over time.
For unknown reasons, Google has chosen not to direct users to these data. Instead, Google reports data that haven’t been seasonally adjusted and thus do not match what most of the world is using.
This is troubling, since I have high hopes for Google’s vision of bringing the power of search to data sets. The ability of users to find and access data lags far behind their ability to find and access text. I am hopeful that Google will solve part of this problem.
But data search is not about mindlessly pointing users to data series. You need to make sure that users get directed to the right data series. So far, Google is failing on that front, at least with unemployment data.
P.S. As I discussed in a follow-up post last month, Wofram Alpha has an even more ambitious vision for making data — and computation — available through search. I like many of the things Alpha is trying to do, but they are lagging behind Google in several ways. For example, as I write this, they haven’t updated the unemployment data yet to reflect the new July data. (Click here for Alpha results.)
You must be logged in to post a comment.