Tuesday, February 22, 2011


Lots of geopolitical activity has been driving the markets lately, including whether the man with many names (Muammar al-Gaddafi) has finally lived past his sell by date as an authoritarian dictator. His thoughts seem to be more along the lines of: Do not go gentle into that good night. Recent events did affect our returns today as shown below. (Click on tables for clearer images.)

Our last post recommended a sell of 200 (out of the original 400) shares of FL and the market opened on February 1st at $18.00. This resulted in a loss of almost $250 (including transaction costs). Since that time it has hit highs above $19.50. CODI has taken it on the chin after a downgrade which was incorrectly reported by Dow Jones Newswires as an upgrade and the CEO, Joe Massoud, was taking a leave of absence. Massoud was highly praised by investors but if management is broad and deep then this should be a minor setback to a solid performing company. Just last month, Steven Kiel was praising Massoud's abilities at My Top (Relatively Safe) Holdings. In addition to the recorded loss, RSY noted the following dividend payments of: EGAS providing $18 dividend, GAIN providing $8 dividend, and ARLP providing $86 dividend. Below is a summary of transactions since inception.

RSY has been sitting on a full 400 shares of MRH since September 17, 2010. Sabrient has downgraded it to hold, and as such, RSY recommends a sell of MRH of 200 shares at $20.31. It never is good to be selling into a weak market but this seems to be the time to partially harvest some of our spectacular returns. It closed today at $20.35, so this should leave some leeway from the oversold position today, but investors should monitor this closely tomorrow morning.

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Monday, February 21, 2011

A Macro View: A Fair Proposal For Social Security, Inspired by Paul Krugman

This post is a continuation of discussions on Social Security with the last one at Paul Krugman Wrong Again. There, I discussed the Old-Age and Survivors Insurance Trust Fund {Social Security} and what the report from 1945 said about projections going out to the year 2000. Along the way we saw that Paul Krugman skimmed over the material to confirm that they had a very good prediction on percentage of population 65 and over to population aged 20 to 64, but failed to notice that they assumed less percentage receiving benefits for retired individuals. This goes to the heart of the Social Security's Demographic Challenge. The following graphically shows the ratio of "covered workers" (i.e. payroll tax payers) to beneficiaries.

From the last post, we saw that up to a third of people over 65 were not expected to receive benefits, and adding in the fact that over a quarter of new "reward" recipients is based on disability, then it seems clear that the ratio above would not be nearly as hard on younger taxpayers without these two factors added to their burden.

In this post, I want to further explore his main points from Paul Krugman's blog post at Live Long And Prosper.
This is a really terrible idea, for at least three reasons.
1. The retirement age has already been increased to 66, and is scheduled to rise to 67. So any further increase would mean pushing retirement back to unprecedented ages. Yes, a lot of people live to 70; how many of them are really able, easily, to work that late into life?
2. While life expectancy is rising, life expectancy at age 65 — which is what is relevant here — isn’t rising nearly as fast.
3. Finally, disparities in life expectancy have been rising sharply, with much smaller gains for disadvantaged socioeconomic groups and/or those with less education than the average. Yet these are precisely the people who depend most on Social Security.

According to Krugman, the really terrible idea was to raise the age for the full Social Security benefits to kick in. He does raise some important issues with regards to what is just and fair, but to claim that something is "unprecedented" does not indicate that it is not the most logical thing to do. There are many unprecedented facts that make these unprecedented actions necessary. Longevity is now unprecedented as more people born today can expect to live longer including to retirement age and then beyond. Thus the pool of beneficiaries is unprecedented now and will only get more dramatic as the baby boomers retire. In fact, the demographic chart of the US is quite unique in that a group of cohorts are larger than the groups of older as well as younger cohorts. The chart below shows that bulge from the web site AGE DISTRIBUTION. It is easy to see the two largest bands are in the range 35 to 44.

Here Are "Just The Facts", Obama (Paul Krugman)
Let us now look at some the graphs that are provided by Social Security Administration at Fast Facts: Figures About Social Security, 2010.

New Benefit Awards, 2009
Benefits were awarded to about 5.7 million persons; of those, 48% were retired workers and 17% were disabled workers. The remaining 35% were survivors or the spouses and children of retired or disabled workers. These awards represent not only new entrants to the benefit rolls but also persons already on the rolls who become entitled to a different benefit, particularly conversions of disabled-worker benefits to retired-worker benefits at full retirement age.

The table that accompanies the above passage and pie chart gives the total percent of new recipients as 57% for retired workers and dependents. Thus 43% fall under the other two categories of disabled workers and survivors of deceased workers. Also new awards for disabled recipients are growing at a faster rate than simply retiring recipients at a rate of 2.6% vs. 1.9% respectively as the growth trends are shown below.

Looking at the facts in the Supplemental Security Income (SSI) program is even more lopsided with respect to retired vs. the other categories. On top of this, benefits for non-retiring recipients is actually higher that retiring recipients.

Are Social Security taxes regressive?

The Economist magazine brings up some important points about the progressivity of payroll taxes. The first being the obvious fact that payroll taxes are taxed on the first $106,800 per year and afterwards are not taxed, thus the percentage of payroll taxes to income decreases. The second point being based on marginal utility from the last dollar earned. This takes some value judgments of what the value of various cohort groups are. But once this theory is used then how would any tax policy be anything other than regressive? How high of tax rate would it have to be on the top 400 American earners to the bottom one percent so that both marginal utilities would equalize? But more importantly, for our discussion here, is whether the tax and benefit structures are fair and equitable. In this regards the Economist provides some important points.
But the folks who claim the payroll tax is regressive do not take into account that it is not so much a tax, but a contribution to a forced saving/social-insurance scheme. Over 12% of payroll taxes fund Social Security (this includes old age and disability). The amount of payroll taxes paid during your working years determines your benefit. The benefit formula for Social Security is highly progressive. The lower your average earnings the higher a benefit you get relative to your contribution.

The Economist goes on to summarize two studies from the National Bureau of Economic Research. The first showing that the actual return on investments from payroll taxes for "low earners earn a 5.19% internal rate of return on their contributions to Social Security, while high earners get just 0.54%." The second points out that the rates look more progressive when factoring in disability benefits and survivorship benefits, and they also question the assumptions that the poor get less benefits because they die earlier and start work earlier. Reasons for shorter life expectancy should also be evaluated for factors attributed to less disposable income along with occupations that they participate in and those that are "lifestyle choices". For example, the trend that higher income social groups have reduced consumption of cigarettes while lower income groups have been slower at reducing consumption where even higher taxes and costs have not diminished this trend as significantly.

Policies that Redistribute Income
It is quite difficult to give a summary of all the aspects of redistribution but some aspects are shown through the calculations of expected benefits by Social Security Online at Your Retirement Benefit: How It Is Figured. The first and second steps are to record the yearly taxed income over the taxable income history of a group of cohorts by age and adjust the earnings based on the Indexing Factors which are derived from the Average Wage Indexing Series. The link to indexing factors produces a vector of indexes for each year of workers born including future dates based on expected growth of average wages. Simply add 62 to the year born to determine which is the year of "eligibility". This indexing factor gives more weight to earnings early in the working career than later. Although maybe small in the grand picture, it does provide more return on dollars invested for entering the work force earlier.

The third step is to pick the top 35 adjusted income years and add them up. This results in individuals that work more than 35 years pay into the system with no additional benefits in SS. It is difficult to know ahead of time which years will be more beneficial for the calculations. So starting early, may not be such a great advantage since more years working with no more benefits. This does seem to open up the possibility of the program being changed to make eligibility not strictly on age but by number of years paid into the system above a minimum threshold in income. Most pension systems work this way, so why not the biggest pension plan out there? So somewhere between 40 to 45 years working seems reasonable. Take for example the minimum for this program is 45, then the person that starts working at 17 retires in 62, while the person that finishes schooling at age 28 retires at 73.

The fourth step is to divide the total adjusted income by 420 which is number of months in 35 years, which results in the average monthly wage adjusted income. Step five is the key to how the whole system provides more returns on investments (i.e. taxes) for low income workers than high income earners. The first $761 is multiplied by 90% and then has further kinks in the benefits per dollar taxed at 32% for between $761 and $4,586, and another kink above $4,586 with a multiplier of 15%. Thus for example to get the most return on the payroll tax a worker would need to earn $9,132 but since indexing the worker needed to earn just over $618 in 1951. Step 6 is just to add up the individual calculations on benefits and step 7 to reduce this amount by 25% which is the expected SS benefits.

What does this all mean?
Those that have the greatest needs from Social Security look to be getting more benefits over time from the disability and survivorship benefits allotments. This then calls into question whether raising the age of full retirement benefits for Social Security will help that much, or whether it just limits the growth in the secondary aspects. Those factors could be such things as dependents not getting stipends as early in both Social Security and SSI, increased number of years of work over the 35 years for maximum benefits under SS, and delayment in receiving health benefits.

If the system was suppose to be designed as to be a non-discriminatory benefits package then providing two ways to become eligible seems reasonable. One based on age that may need to be adjusted based on life expectancy like it currently is designed, and the second way is through longevity in the work force like pensions.

Social Security Is Important to Women

How "precommitment devices" will force you to lose weight, stop drinking, and not sleep with that jerk on a first date.

The Means-Testing Mirage - NYTimes.com

Misc. Links:
Social Security and Retirement around the World: Historical Trends in Mortality and Health, Employment, and Disability Insurance Participation and Reforms

Live Long And Prosper
Social Security and the Federal Deficit

Social Security's Demographic Challenge

Social Insurance History

Income And Life Expectancy

Social Security History

Social Security & Medicare Tax Rates

Program Cost and Size

Your Social Security Statement


Social Security benefit calculator

Social Security (United States) - Wikipedia, the free encyclopedia

Population pyramid


How has the Average Age at Marriage Changed Over Time?


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Wednesday, February 16, 2011

PK: The Great Abdication

Paul Krugman is at it again...and it is hard to keep up with all his distortions, like the lies of Keith Olbermann. Let me start with his his own words.
The Great Abdication
The important thing, I think, is that he has effectively given up on the idea that the government can do anything to create jobs in a depressed economy. In effect, although without saying so explicitly, the Obama administration has accepted the Republican claim that stimulus failed, and should never be tried again.

What’s extraordinary about all this is that stimulus can’t have failed, because it never happened. Once you take state and local cutbacks into account, there was no surge of government spending. Here’s total (all levels) government spending over the past 10 years:

Obviously a little over the top that Obama considers that Fiscal Stimulus will never be tried again. Wasn't there already the back door stimulus plans and now he frames it as "investments" into our future. Not to say there is not room for more investments in our infrastructures and public goods, but high speed rails and broadband access is hardly something that will create synergies and produce a positive cost benefit analysis.

On the one hand he is right that the "surge" never really showed up in this chart in early 2009. But first, the stimulus was slow in getting started and there were very few "shovel ready projects" out there. Secondly, the growth rate {that is the slop of the line} was steeper than average after the slump in mid to late 2008. I suppose some of that was TARP and other fiscal measures including automatic stabilizers before the states started cutting back.

It is true that Keynesian economists often talk in terms of the G in the equation Y=C+B+G+X-M as total government spending, but when Keynes talked about fiscal measures he was talking in terms of a central government and its autonomous budget process. Individual states are under different constraints and thus are not set up to do fiscal stabilizers for the economy, although it is prudent that they each have a rainy day fund for down turns in the economy. Under Krugman's theory, the G would increase consumption for any shortfall in income, no matter the cause.

More importantly, there was a surge in government spending and fiscal policy stimulus on a massive scale. It was so massive that Krugman clearly can not see it. Other than the dip during mid 2008, government has been continuously surging forward. If he wants to see massive surges in fiscal spending during high unemployment and stagnating economic times, then there needs to be times of "contraction". If government is to control and mitigate the violent swings in the macro-economy, then it must balance its finances over the business cycle.

Although it is hard to see if the UK will meet the following guidelines when dealing with the current worldwide recession, it certainly provides constraints on spending over the long term.
Fiscal policy in the UK
The Government has also specified two key fiscal rules that accord with the principles. These are:
• the golden rule: over the economic cycle, the Government will borrow only to invest and not to fund current spending; and
• the sustainable investment rule: public sector net debt as a proportion of GDP will be held over the economic cycle at a stable and prudent level.

Governments Abdication of Fiscal Contraction
This also leads us to conclude that if "surges" are not really surges because states and localities are reducing consumption at the same time, then where is the fiscal contractions that never have occurred when states and local governments have expanded? Will Krugman alter his Keynesian fiscal policies to reflect his inclusion of all levels of government when considering "surges" and of course contractions?

I wouldn't count on it...

Paul Krugman laments Living Without Discretionary Fiscal Policy.
Alex Tabarrok makes an interesting point: recent experience seems to suggest that Keynesian policies, even if appropriate, turn out not to be politically feasible when you need them. I don’t think we need to take that as an immutable fact of life; but still, what are the alternatives?

They would be more politically feasible if when the economy was below the full employment level and the economy was overheated {by historical standards} there was some sign of fiscal contraction. I was always taught that Keynesianism worked best when balanced over the business cycle and not meant as a tool for ever expanding central government control.

Note: he does have a good point about setting a higher inflation target. The IMF has studied this quite extensively and higher rates of inflation for many countries can net higher growth rates. Below 10% rates is considered acceptable without harming growth rates and so the target being changed to 4 to 5% sounds reasonable.

The Means-Testing Mirage - NYTimes.com


Monday, February 07, 2011

ISM January: Much of the Same but More of It.

Worldwide Growth in Manufacturing
The US and much of the world's manufacturing base has maintained its growth this last month with many growing at a faster rate like the US. World-Wide Factory Activity, by Country is provided by the WSJ. Out of the list, only Greece and Australia are contracting. Last month Japan changed from contracting to expanding with the index jumping 3.1 to 51.4%. The top two with fastest growing manufacturing sectors was the UK and the US with 62 and 60.8% respectively. David Smith noted that the UK is also turning around the services sectors and should signify economic growth continuing although low at
Strong services completes January rebound.
More of the Good News
Most of the consensus data thought that the indexes would maintain approximately its last months pace, but in fact far exceeded it. Both indexes jumped a solid 2.3% with non-manufacturing rising to 59.4% and manufacturing to 60.8% which was the highest level since May 2004 or nearly 7 years. The non-manufacturing consensus from Econoday was 57% with an extremely wide consensus range of 53.4 to 63.5% and from MarketWatch it was 57.3%. Econoday reported a consensus of 57.5% with a consensus range of 56.5 to 59.5%. The ISM had revised its last month's data (seasonal adjustment according to non-manufacturing report) from 57 to 58.5% which is one reason that MarketWatch took the revised numbers to come up with a consensus of 58.5%. Either way, it still far exceeded expectations and reasons why many have given the reports glowing praise.

And beyond the headline numbers also deserved praise. Business activity/Production increased .5 to 63.5% for manufacturing and 1.7 to 64.6% for non-manufacturing. Not only is the heart of the economy is in production, going forward the indexes showed strength in new orders with non-manufacturing growing a solid 3.5 to 64.9% and manufacturing having an outstanding 5.8 increase to 67.8%. Also looking forward for the manufacturing sectors showed strength in new export orders with a huge jump of 7.5 to 62%. Most trade is on the manufacturing sectors, so the drop in the services sectors new exports of 2.5 to 53.5% is not as significant. The import index for manufacturing rose 4.5 to 55%. As I have stated before, it is important that the export sectors grow as this provides an autonomous increase in absorption for the economy that increases aggregate income. But the import index and export index are not necessarily correlated to total import and export aggregates and most importantly imports are the inputs to the production process and exports are the end process in production. Robert Oak provides a good analysis of the ISM manufacturing report at Manufacturing ISM for January 2011 - 60.8% where he states the following.
Exports & imports increased, exports up 7.5 percentage points, and imports 4.5. That's always good news when exports exceed imports, especially since the deceleration of imports was the reason we had reasonable Q4 GDP growth.

This portion I disagree with because the increased in percentage points is rate of change not absolute levels and the indexes ended up at 62% for new export orders and 55 for imports. Thus even if the difference in rates of growth were different, new export orders would have probably maintained its percentage lead. And secondly, imports and exports for the GDP is merely accounting for the GDP and are not the true strength of the economy.

Because of structural rigidity shown up in higher and rising prices for commodities, then this is no time to be worrying about imports to the productive sectors of the economy. It is nice to think that some of the shortages are solved by import substitution but in reality that is not likely to happen over the short term due to legal and economic structural rigidity. We should instead be embracing these imports as much as we embrace worker productivity.

Most importantly in the so-called Great Recession, we are concerned about employment. The employment index for manufacturing continued its nice accent to above 60 to 61.7% with an increase of 2.8%. Econoday notes that this is the first plus 60 for employment in 7 years. Although the index did not increase as much for non-manufacturing employment, it did an acceptable level of increase with a rise of 1.9 to 54.5%. Maybe this will signify a break out of the stagnant labor market that trended around the break even point of 50. But with employers adding only 36,000 jobs last month the US will need a lot more strength in employment markets to get back to full employment.

More of the old Structural Rigidity.
The manufacturing price index jumped up a massive 9 percentage points to an rating of 81.5% which is the highest the reading has been since July 2008. Even more striking is that firms reporting higher prices is 64% to just 1% reporting lower prices. While not as dramatic, non-manufacturing price index rose significantly at 2.6 to 72.1%. The December index was reported as 70 but was later seasonally adjusted down to 69.5%.

These data points have again re-emphasized the fact that Manufacturing continues to face higher prices of commodities. Multiple months of rising prices had 16 commodities which was marginally higher than the 15 last month but total commodities rising in prices rose to 30 from 23. Non-manufacturing also showed increased total number of commodities to 28 from 23 and even more significantly was 14 commodities with multiple months up from 7 last month. A couple of respondents in the manufacturing report stated the following about rising costs.
* "Continued weakness in the dollar is having a negative effect on the components we purchase overseas and increasing our material costs." (Transportation Equipment)
* "Lead times are increasing significantly, and commodity pricing is starting to increase." (Chemical Products)

The Myth that Never Dies
Manufacturing continues to roll right along but surprisingly many politicians and even some economists think that the US has lost its edge in manufacturing to China. For example, Don Boudreaux made a post entitled On Fletcher and the False Assumption of U.S. Manufacturing Decline, where he takes to task Ian Fletcher's remarks regarding manufacturing output in the US. Although, I am not so certain that it is unusual that democratic socialists like Harold Meyerson and Bernie Sanders would be anything other than anti-trade and clinging to the height of industrialization that led to expansion of unions.

Mark J. Perry states that The Demise of America’s Manufacturing Sector Has Been Greatly Exaggerated and that it was the Increased Worker Productivity {that} Has Destroyed Millions of Jobs and ultimately We Should Take More Pride in Our Manufacturing Dominance. I include two of the most important graphs that he uses to explain the reason not to fear the "post-industrial" economy. The first graph is manufacturing output for the top 8 producers. (Click on graphs for clearer images.)

The next graph shows the percentage of workers engaged in farming out of total workers. This happened over many generations, and many groups and individuals resisted this trend, but for us to become the developed nation we have become, it was necessary for this structural changes to have transpired. Even in the 1980s, there was weeping and gnashing of teeth with the decline in family farms. Regional credit crisis created some of the impetus for the changing economy.

Manufacturing Forecast: 58.5%
Non-Manufacturing Forecast: 57.3%

CARPE DIEM: Manufacturing Continues as Recovery's Shining Star

Calculated Risk: Daily Color: D-List Data

Misc. Links:
Calculated Risk: Chicago PMI Strong, Dallas Fed Index Weak

There's Hope: Online Job Demand Rises Above Pre-Recession Levels: Highest Since June 2007

CARPE DIEM: More on The U.S. Poor Getting Richer, And Being Envy of the World's Poor

Calculated Risk: Inflation in China

American Samoa: The real story 60 Minutes missed

Mish's Global Economic Trend Analysis: Bernanke Reports "Good News" on Inflation Targets; Treasury Selloff Continues on Strong ISM; 2-30 Yield Spread at Record


Econbrowser: An improving economic outlook

CARPE DIEM: The Amazing Gains in Worker Productivity = Record Output in Q4 2010 With 7 Million Fewer Workers



Calculated Risk: ISM Non-Manufacturing Index showed expansion in January


Don’t Stop That Growing Feeling «  Modeled Behavior

Monetary policy: Is QE2 working? | The Economist
EconomistMom.com » Blog Archive » It’s That Damned “Holey” Tax System

Macro and Other Market Musings: Bernanke Acknowledges Risings Yields a Sign of Success

CARPE DIEM: Structural Shifts in the U.S. Labor Market

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