Tuesday, December 29, 2015

Predictions for 2016

I offered no predictions last year and therefore I can honestly say that none of my predictions failed. But I knew that your holiday would be spoiled if I did not add a few tantalizing forecasts to those you will be hearing from real experts during the next week. So I am giving you 11 predictions for the price of 10.

1.     President Obama will announce a new directive in which Michelle his wife will become Queen for life of America. Congress and the Supreme Court are unnecessary obstacles under her regime so those pesky institutions will be disbanded.
2.     Marco Rubio will grow a whole foot next year and will tower over the other candidates at the debates at 6’6”.
3.     Iran, Cuba, and North Korea will form a new country named Korcuran. After their first practice shot with a nuclear tipped ballistic missile they will explain to western friends that they have no nuclear tipped missiles and would never aim them at Israel.
4.     Vice President Kerry will be scammed by third graders posing as fifth graders at a Kool-Aid stand.
5.     Carly Fiorina will be named most congenial from among the Republican presidential candidates.  Despite constant rumors she will not marry Matt Lauer or Hoda.
6.     Bernie Sanders will lose the Democratic nomination for President but will be among the top five candidates for emperor of Korcuran.
7.     Late starters, Dennis Rodman and Charlie Sheen, will win the Presidential election next November. Both are considered to be outsiders who will stand up for the little guy while being totally unintelligible. And possibly drunk. Queen Michele Obama will protest the election. 
8.     Delta and United Airlines will soon be marketing new standing areas on their international flights. While paying for all the usual amenities (baggage, JD, etc) flyers will now have to Pee for Pay in the lavatory. If a passenger cannot remain standing during the full 18 hour flight to Australia, he or she can pay flight attendants a little extra to tie them to their poles. Let’s not stand for that!
9.     The Indiana University football team will not play anyone in the defensive backfield next year. They have brokered a deal to have 15 players on the offense and only 7 on the defense.
10.  Net Neutrality will become the law of the land next year but most people do not have a net and are not remotely neutral. In a poll taken earlier this year 14 out of 10 people did not know what net neutrality means.
11. Obamacare will not be repealed. It will be renamed Rodmancare. Among the many new benefits will be a free week with unlimited healthcare in Korcuran and a discounted round trip airfare in Delta’s new Standing Zone.

I think I am running out of steam.

I hope you had a nice Christmas and 2016 brings you everything you ever dreamed of and more. And yes, send money if you can.

Tuesday, December 22, 2015

Santa, Trump, and Climate Change

That time of the year has rolled around again. Despite a mountain of evidence that Rudolph is really an ISIS spy using Santa’s sleigh to collect reams of personal information, we cut down perfectly good trees, decorate them, and go deep into debt so our children will carry on these traditions.

So naturally I was thinking about Santa when I read Bloomington's Sunday (a week ago) newspaper and came upon the column by notable left-wing columnist Eugene Robinson. The last time Robinson wrote a nice thing about a Republican candidate was when….hmm….I guess I can’t remember. Robinson, like about 2 million other nationally syndicated columnists, likes to write about Donald Trump. Articles about Trump now exceed the number of emails I receive purporting to help me enlarge my male part.

Here is what Robinson says about two-thirds through his article – “It’s not that Trump will do the impossible, it’s that he might do something.” It was this statement that got me thinking and that isn’t easy on a Sunday morning after the annual Christmas tree decorating party that included a brand new half-gallon bottle of JD. This statement by Robinson made me see the glowing connections between Santa, Trump, and Climate Change.

Let’s begin with Santa. We adults, except for Jason, all know that Santa brings no gifts with Rudolph and his sleigh.  As Robinson says, Trump won’t do the crazy stuff he yells about. But we love it when Trump reams the big guys. It’s like we all love it when IU almost beat Ohio State in football. We cheered like crazy knowing that our IU guys would not really win. We’d like to think that we might have won. That’s enough for Hoosiers. We love to tell our kids about Santa and Mrs. Santa and his workshop and shimmying down chimneys drinking milk and eating cookies. We love it because it makes us feel good. We love Trump because he say's things that most people would not say. 

That leaves us with another article that was published Sunday December 13 about climate change. President Obama was quoted in this article as saying, “The climate pact offers the best chance to save the planet we have.” I am not sure about you but the minute I saw that statement the first thing that came to mind was Supergirl. Don’t tell me I am not liberated!

There is a photo in that newspaper article with several key players of the United Nations with thumbs up and hands clapping. The title of the article is, “Historic pact to slow global warming is celebrated in Paris.” Ban Ki-Moon, not related to the infamous Reverend Moon said, “The Paris Agreement on climate change is a monumental success for the planet and its people.”

You would have thought that the representatives of 190+ countries had found a way to stop comets from intersecting with the Earth – or they had eradicated Aids or Pancreatic Cancer. Or maybe they agreed that Iran should name Christmas as an official holiday.

No, these representatives apparently did something monumental to save the plant from climate change. Already you are labeling me a climate change denier. That way you can dispense with me as just another fruitcake from the right. Never mind that. I am saying that you folks who are not climate change deniers have been duped in the usual ways by the usual people. If you care about climate change you were sold down the river by the 190+ smiling government officials.

These people punted every possible real issue. Folks there ain’t no Santa Claus and this agreement has done absolutely nothing to save the planet earth.

Your mom says "go do your homework". But she does not tell you when you have to do your homework. Nor does she tell you how much homework you have to do. Your mom says you have to self-report how much time you spent on your homework. But there are no penalties if you don’t do your homework. Maybe she will frown at you. You agree to do your homework when your friends do their homework but there is no mechanism for your friends to do their homework until they are 45 years old. Even then there are no penalties if they don’t.

No, I am not going to do the boring work of repeating all of the silly things in the agreement that are making so many people pop their corks. But here are a few examples of the silliness as expressed with the words of the contract:
By “some point” somewhere around 2050 emissions need to be reduced to low levels. I checked my calendar and Grandson Nolan will be almost 38 years old then. He is 2.5 now.
Countries are “expected” but not required to meet any targets
Since the agreed targets are insufficient, countries are asked to review them in four years to “see if they can update them.”
There are no penalties for missing targets
Richer countries “should” continue to support the poorer countries. China is “encouraged to pitch in on a voluntary basis.”

I think representatives of those 190+ countries should be asked to sign a statement that says that Santa is real and that Trump has nice hair.  We will then all feel a lot better.

Tuesday, December 15, 2015

Adam Smith and Prudent Man

Last week on December 8 the Wall Street Journal had two articles on page A15. In their Notable & Quotable column is a quote from Adam Smith from his “The Theory of Moral Sentiments” (1759). The second article is titled “Dissensus, the Spirit of our Age” by Joseph Epstein.

So today I am taking a departure from my usual Macro-paranoia to discuss the ways we speak to each other. My spell-checker does not like the word Dissensus but we all know what that means. It means we don’t agree. And when we disagree we are often emotional if not violent. I suspect that dissensus has always been around but to me it seems a lot worse today.

Perhaps our problems are more severe now – but I doubt that is the case. I recall too well being at Coral Gables High School and wondering before his horrible assassination if President Kennedy was going to start a war over missiles in Cuba. I remember the draft and Vietnam. I remember that blacks drank from separate drinking fountains and were required to sit in the back section of city buses. None of that was fun or good. We had plenty to argue about.

Yet despite the extreme and seeming intransigent problems we faced, many of us were able to find less strident ways to disagree. The Epstein and Smith articles ask us to think about this issue. Epstein emphasizes that people – even people with strongly held views – thought it more prudent to look at both sides of a question before leaping to vote for a candidate. Today many of us seem to have reflexively made-up our minds. Epstein thinks that we used to cogitate more and only decided after much weighing of facts.

Smith is copied below. His wording seems a little archaic and his descriptions of prudent man might be considered by some old-fashioned. But the father of the free market and the “invisible hand” says things we probably should not forget. Among the gems below are that the prudent man:
            studies seriously and earnestly
  may not be brilliant but they are always perfectly genuine
            is not ostentatious
            is simple and modest
            does not always think of cultivating the favor of those little clubs and cabals
 neither endeavors to impose upon you by the cunning devices of an artful imposter, nor by the arrogant airs of an assuming pedant nor by the confident assertions of a superficial and imprudent pretender.

More of Smith is at the bottom below.

Should we not passionately disagree? Of course we should. That is not my point today. My point is that we seem to rush judgment. We share with some others a complete and well-outlined ideology that has its own dos and don’ts. Am I saying you should not have an ideology? No. But what I am saying is that perhaps there are some important things that fall between the cracks.

One example is abortion. That topic has some of you already taking deep breaths. But in a democratic nation with divided views it is hard to  imagine moving to an extreme state in which we had either no abortion or totally free choice for abortion.  Today we have laws that allow it but regulate it. Realistically the laws will bounce around over time. Sometimes we will make it harder to get abortions for good reasons. Other times we will do the opposite – for good reasons. This is where the thinking comes in. If we are never going to move to either ideological extreme then it seems that knowledge and analysis ought to be used by both sides to decide on the best current solution. That hardly ever seems to be the case today. 

The same goes for income distribution or poverty programs. Extreme ideology supports widely divergent policies – virtually no social programs or greatly expanded state public assistance. Reality finds us between those ends. We can shout ugly epithets at each other – or we can be more like Smith’s prudent man. Would not a left-winger be willing to discuss waste in current programs? Might not the conservative believe that society could gain by assisting some families? The idea that knowledge and common sense can be brought together for our mutual gain seems valuable. The more important the policy topic the more important that we arrive at good decisions.

If we continue to go down the path of dissensus we will live by reality TV. Instead of prudent man we will live by the dictates of finger-pointing. It is hard for me to believe that we would continue to choose the latter.

Adam Smith, “The Theory of Moral Sentiments” (1759):

The prudent man always studies seriously and earnestly to understand whatever he professes to understand, and not merely to persuade other people that he understands it; and though his talents may not always be very brilliant, they are always perfectly genuine. He neither endeavours to impose upon you by the cunning devices of an artful impostor, nor by the arrogant airs of an assuming pedant, nor by the confident assertions of a superficial and impudent pretender. He is not ostentatious even of the abilities which he really possesses. His conversation is simple and modest, and he is averse to all the quackish arts by which other people so frequently thrust themselves into public notice and reputation. For reputation in his profession he is naturally disposed to rely a good deal upon the solidity of his knowledge and abilities; and he does not always think of cultivating the favour of those little clubs and cabals, who, in the superior arts and sciences, so often erect themselves into the supreme judges of merit; and who make it their business to celebrate the talents and virtues of one another, and to decry whatever can come into competition with them. If he ever connects himself with any society of this kind, it is merely in self-defence, not with a view to impose upon the public, but to hinder the public from being imposed upon, to his disadvantage, by the clamours, the whispers, or the intrigues, either of that particular society, or of some others of the same kind.

Tuesday, December 8, 2015

The Oil Glut Grows by Guest Blogger Buck Klemkosky

The International Energy Agency (IEA) has estimated that crude oil inventories have swollen to 3 billion barrels, the highest level on record, representing more than a one-month global supply. Many oil tankers, typically used to deliver oil, have been converted to floating storage with more than 100 million barrels of crude oil sitting in tankers offshore as the oil glut fills on-land storage to near capacity. The economics of storing oil for future delivery is no longer profitable as storage rates have increased dramatically, meaning some of the 3 billion barrels will be taken out of storage in 2016 and 2017. In addition, the U.S. strategic petroleum reserve is at its 720 million barrel capacity as well as China’s and other countries.

The oil glut has grown because supply exceeds demand by approximately 2 million barrels per day (b/d), 96.5 million b/d of supply versus 94.5 million b/d of demand. This is due more to supply increases than demand. Most major oil-producing countries have ramped up production including Russia, Saudi Arabia, Iraq, Iran and several others. Meanwhile, oil production in the U.S. has proven more resilient than expected although its 9.2 million b/d production is expected to decrease in 2016 but not significantly enough to offset increased supply from other countries, especially Iran as economic sanctions have recently been lifted. The growth of oil demand has increased by 1% annually over the last decade and growth is not expected to increase going forward. Much of the increased demand has come from China and other developing countries but their economic growth has slowed dramatically. Peak demand is now of more concern than peak supply.

The fall of oil prices (West Texas Intermediate) to less than $40 in 2015 will have repercussions for the U.S., some positive and some negative. The energy industry was the big driver of employment growth and corporate investment since the Great Recession of 2007-2009. Already $200b of global projects have been cancelled or delayed and more than 250,000 workers have been laid off. Two-thirds of the oil rigs in the U.S. have been taken out of service. The Keystone XL pipeline has been vetoed but that will not have much impact as the U.S. already imports 3.4 million b/d of oil from Canada out of 9.5 million b/d total. Overall lower oil prices will be a plus for importing countries such as the U.S. as lower gasoline and fuel prices put more money in consumer pockets. The real hurt will be felt by the major oil-producing countries and companies as all of the OPEC countries, including Saudi Arabia, are facing huge fiscal deficits. Forty North American exploration and production companies have already declared bankruptcy with more to come.

It is difficult to predict oil prices but the IEA estimates that the best-case scenario for oil prices is $80 per barrel by 2020 and the worst case is $50 per barrel. Geopolitical instability in the Middle East is always a possibility and Saudi Arabia has recently stated it would like to see oil stabilized at a higher price. But Saudi Arabia has not committed to cutting production to balance supply and demand which has been its role for several decades. If low oil prices are the new normal, the U.S. will be a net positive beneficiary as consumers will enjoy lower energy prices for several more years.

Tuesday, December 1, 2015

Export Doldrums: The Little Engines that Couldn't

Americans earn income when they produce things and get paid for the production. Our nation produces lots of things. Pfizer has been in the news lately because they are merging with another company. Pfizer makes Viagra. That makes a lot of people happy but I won’t go into that because some of our readers might take offense. We also make guns and houses and the list goes on and on. We also produce services. In fact the majority of what the nation produces is classified as a service. If you work at Macy’s you get paid the minimum wage or less to perform the sales function. If you are an Uber driver you get paid each time you deposit someone at a desired location like LaTorre’s Mexican Restaurant. If you sell tickets for cruise ship voyages you receive income so that people can gain about 50 pounds and see the shorelines of very interesting places.

In 2014 USA National Output or GDP was $17.4 trillion dollars. Wow. That is a pile of stuff! Of that amount $7.9 trillion was for consumer services and pretty much the rest was for goods sold to consumers and goods and services purchased by businesses and governments. In 2014 we imported goods and services of about $2.8 trillion and we exported $2.3 trillion.

It is those exports that I want to focus on today. Look at it this way – we produce stuff at home and sell it to people both here and outside the country. Let’s call the local buyers Pete and those offshore buyers Charlie. If we are US policymakers we want Pete and Charlie to buy a lot of US stuff. When they do that all kinds of good things rise – output, profits, jobs, wages, and so on. Please, no Viagra jokes. We have problems in the USA presently because neither Pete nor Charlie are on a spending spree. So the economy limps along.

I will pick on Pete another day but the question today is what happened to Charlie? And that’s what the next 117 pages are about. If you are in Colorado or Washington light up your favorite smoke and hold on. Otherwise JD works well. 

The first thing to keep in mind is that the US, unlike some other countries, is not dominated by export sales. That $2.3 trillion of foreign sales is only about 13.2 percent of GDP. If that figure was half of GDP then what I am about to say below would be alarming. But since export sales are 13.2% of GDP that means what foreign buyers do is important but it also means the 86.8% of local buyers are much more important.

But we talk about local buyers all the time so let’s spend a little time investigating foreign sales or exports.

Who buys our crap? Mostly people who are close by – Canada and Mexico are the two top foreign destinations for US goods and services. Together they bought $646 billion in 2014. That amounts to 28% of all US exports. Next in line were China and the UK. Below are the top 12 destinations for US goods and services. Together these 12 countries purchased in 2014 $1.4 trillion or a little over 60% of US total exports to the world.
            United Kingdom
            South Korea
            Saudi Arabia

If the US economy has been slowing down because Charlie is not buying as usual, then we should be able to see this in the data. So I compared two 8 year time periods for evidence of change: 2000 to 2007 and 2007 to 2014. It turns out that exports grew much slower in the latter period compared to the former. The next table shows the increase during 01 to 07, the increase during 08 to 14, and the differences. Data are from www.bea.gov 
US Export Sales to the World from 2000 to 2014.
                               0 to 7  7 to 14  Diff
Canada                   2297  1802     -495
Mexico                   1515  1068     -447
China                        897     345    -552
United Kingdom       773     645    -128
Japan                         760     735     - 25 
Germany                   531     421    -110
Brazil                        415     178    -237
South Korea              404     291    -113
France                        333    268      -65
India                           225      93    -132
Saudi Arabia              154      75      -79
Italy                            171    143      -28
   Total                      8474   6064  -2410

0-7 is the sum of US exports during the years 2000 through 2007
7-14 is the sum of US exports during the years 2007 through 2014
Diff is the difference between the first two columns
A negative number for Diff means lower export sales in 2007 to 2014
Numbers are in billions of dollars

The key point is that US exports have slowed dramatically. From 2000 to 2007 the US exported a total of $8.5 trillion in goods and services to the top 12 country destinations. From 2007 to 2014 we exported less, $6.1 trillion. The difference is not small -- $2.4 trillion! That is a 28 percent reduction.

While China explained about one-fifth of that seven year decline – notice that US exports slowed to every one of the top 12 country destinations. All 12!  Between our NAFTA partners Canada and Mexico we explain almost a trillion of the decline.

These declines do not come from one country or one part of the world. Economic problems in Europe, Asia, South America and even the Middle East all contributed to weakness in US sales abroad. As these countries suffer economic recessions and slow growth, their people are able to buy less. They buy less at home and they buy less from other countries, including the USA.

Next we turn to economic projections for these 12 countries. Expectations of stronger growth abroad would translate into a stronger demands for US goods and services. Below is a table I generated using economic growth data from the IMF World Economic Outlook (October 2015) Tables A2 and A4.

                    97-06  07-15  16-20
Canada          3.4     1.6       1.9
Mexico          3.3     2.1       3.1
China             9.4     9.1       6.3
UK                 3.1     1.0       2.2
Japan              0.9     0.4       0.9
Germany        1.5     1.1       1.5
Brazil             2.7     2.7       0.8
S. Korea         4.9     3.4       3.4
France            2.4     0.7       1.7
India               6.6     7.3       7.6
Saudi Arabia  3.9     5.0       2.7
Italy                1.5   -0.8       1.2
Average          3.7    2.8       2.8
Column 1 is the average annual growth rate of  Real GDP for each country from 1997 to 2006. The second column has average growth rates from 2007 to 2015 (the 2015 number is a projection for the year made in October of this year) and the third column averages the predictions for the IMF for the years 2016 and 2020. 

We see two things from this above table. First, the economic growth rate of the main US trading partners declined significantly after 2006. Every country except for India and Saudi Arabia (Brazil's growth rate did not change) slowed considerably in the 2007 to 2015 time period. This helps to explain the major reductions in US exports during those years. Incomes of our trading partners slowed or declined --- and they purchased less from the USA. 

Second, the IMF is not expecting things to improve in the next five years. The 12 country group's average GDP growth will not improve at all. Looking at our top three destinations only we see a big improvement expected in Mexico, a small gain for Canada, and a continued decline in China. India is expected to grow faster while Brazil and Saudi Arabia will suffer continued growth problems. 

Exports are not everything to the USA -- but they are important. If we believe the IMF's economic growth forecasts it is difficult to see any real hope for an export led resurgence of growth in the USA. As I wrote last week -- free trade agreements are the right thing to do but in this slow global growth environment it is difficult to believe that countries will approve a strong agreement and even with such an agreement, income problems will swamp any gains that might come from trade-opening agreements. The world needs a locomotive but it is unclear who will play that role.