A Salute to My Readers

A year has passed since I began my Chipin blog. Chipin--because I play golf--and I chip in a lot from off the green. That is, no putter is required on the green to hole out! This past year I chipped in 29 times. In both 2008 & 2007 (when I first kept track), I chipped in 21 times each season. Yes, I have a very good short game.

This article is a tribute to readers who visited my blog this past year--from 18 countries on four continents. I'd like to share their national flag with you--and in a few instances I will offer their national anthem.

Because of the extent of my readership, I will divide this into two blog articles. This one recognizes readers from Europe & Asia.

Please forgive me if I miss a country. I've done my best to identify visitors, as provided by a web tracking service. However, at times, it does not always tell me which country a visitor my hail from.

Let me start with Sweden. That's because my favorite golfer, now retired Annika Sorenstam, hails from this great nation. Please enjoy their national anthem, Du Gamla Du Fria, as sung by Carola Häggkvist.




Vielen Dank für die Deutschland besuch.


I appreciate your viewings from The Netherlands.


From the land of President Sarkozy, here is the French flag.


Of course, I had visitors from the great United Kingdom.


I honor of my visitors from Switzerland, here is their flag.


Now enjoy the Turkish national anthem, Istiklal Marsi, the Independence March.



Here is the flag of Hungary.


I appreciate my visitors from India.


I had a visitor from as far away as Thailand. If I understand correctly, their national anthem is broadcast on TV twice each day, at 8 am and 6 pm. Here is one version.

"Saved Alone"

Horatio Spafford lived a tragic life. He was a wealthy man of Chicago means. He owned a profitable business but the Great Chicago Fire ruined him financially.

He could live with that. It was better than the loss of his only son a bit earlier, in 1871.


Sometimes it's just good to get away from it all for a while--and relax. Horatio, his wife and four girls planned a trip to Europe. They reserved space on the S.S. Ville du Havre.

But as Spafford's usually bad luck would have it, he was delayed on business concerning zoning problems following the Great Chicago Fire. So he sent his wife & kids on while he took care of business matters at home.

Spafford was soon to hear from his wife. While crossing the Atlantic, the ship sank rapidly after a collision with a sailing ship, the Lockhearn. All four of Spafford's daughters died.

Sometimes the words are so powerful that they can overwhelm the moment. Horatio received a cable from his wife, Anna. She wrote just two words...

Saved alone.

Shortly afterwards, as Spafford traveled to meet his grieving wife, he was inspired to write a song as his ship passed near where his daughters had died.

I was asked recently to sing that song at a funeral for our dear friend & fellow choir member, Wally Hoewisch, a few weeks ago.

Spafford maintained a keen interest in Christian activities, deeply spiritual and devoted to the scriptures. Horatio's faith in God never faltered. He later wrote Anna's half-sister, On Thursday last we passed over the spot where she went down, in mid-ocean, the waters three miles deep. But I do not think of our dear ones there. They are safe, folded, the dear lambs.

But what became of Anna?

After Anna was rescued, Pastor Nathaniel Weiss, one of the ministers traveling with Anna remembered hearing Anna say, God gave me four daughters. Now they have been taken from me. Someday I will understand why. Anna was utterly devastated.

Many of the survivors watched Anna closely, fearing she may try to take her life. In her grief and despair, Anna heard a soft voice speaking to her, You were saved for a purpose! It was then Anna remembered something a friend had once said, It's easy to be grateful and good when you have so much, but take care that you are not a fair-weather friend to God.

The complete song has six verses. Perhaps you'd like to listen to some of it.

At this time of the year, I hope the tune will be well for your soul.

Extinction Due to Creative Destruction

Creative destruction is an economic concept first introduced by Joseph Schumpeter. In a nutshell, as new ideas are created, old ones are shelved. Here is an example of what we mean:


The IPOD replaced the CD...


Which made the cassette tape disappear...


Which pushed the 8-track tapes into oblivion...


Which encouraged sides A & B of the 45 record to take a hike...


Which shoved aside the 33 1/3 rpm LP (long play) vinyl record (except for audiophiles today)...


Which replaced the 78 rpm record...



And if we skip all the way back, we come to Edison's cylinder phonograph of 1899:


Schumpeter taught us that this would happen.


And he taught that there would be cycles of invention, growth and then maturity of concepts, just as we have witnessed with the delivery of music for our personal enjoyment.

IMF Speaks to Inflation

Dominique Strauss-Kahn is the International Monetary Fund's managing director. He recently weighted in on inflation.


We stand at a critical juncture, Strauss-Kahn says. The sustainability of this recovery will depend on the decisions taken by policymakers in the months to come.

I see fewer problems with monetary policy...Especially in many advanced economies, monetary policy can afford to stay accommodative for some time, given little sign of inflation on the horizon.

How are we doing in the US? The following chart provides a very long-term historical perspective on inflation, as measured by the Consumer Price Index for Urban Consumers (CPI-U).


The annualized inflation rate computed from this number is -0.18%, which marks the eighth consecutive month of deflation. However, the rate of deflation has steadily eased over the past four months from -2.10% in July, -1.48% in August, -1.29% in September, to the current -0.18%.

Now we should start to see an increase in the inflation statistic, if nothing else because we are starting to measure off of low points from a year ago. In addition, as consumers start to create some demand, following a resumption in the velocity of money circulating throughout the US, we should experience some inflationary tendencies.

The bond markets are still confirming that inflation expectations are relatively low. The 30-year AAA corporate bond yields are but one of many bond market measures that track like this graph.


The yields on 10-year Treasury Inflation Protected Securities (TIPS) provide another glimpse into investor's views about inflation. The bond market doesn't seem to be too concerned at the moment, either. The spreads between TIPS and the 10-year Treasury yields is back to "normal," as viewed over this past decade--with a spread of about 1.75%.

Finally, here is the Personal Consumption Index graphed over time--both with (black) and without (gold) the food & energy component. Note that food & energy prices are quite volatile, so often inflation measures are viewed without them in order to gain a better perspective on the underlying pattern.

Inflation Hawk Weighs In

Philadelphia Federal Reserve Bank president Charles Plosser is one of the most hawkish Fed officials on inflation.


He recently said, We're in much better shape than six months ago, but that does not mean everything is hunky-dory. (I am) not worried about inflation in the near-term; my worries about inflation are in the intermediate to long-term.

How can that be with all the money the Feds have pumped into the US over the past year?

It is because all of that money is not in circulation. As Plosser says, All the excess reserves in the banking system that are sitting there right now are not inflationary, but they could become inflationary if we're not careful.

He was also asked about the fall of the dollar relative to other national currencies. He downplays the significance of the U.S. dollar's recent declines. People talk about the fall of the dollar, but we have to remember that the dollar is not even where it was before the crisis started.

Plosser is in favor of establishing a formal inflation target. He says that countries which have set formal targets have greater protection from the adverse effects of large relative price shocks to food, energy and other commodities. The Federal Reserve does not have a formal inflation target.

He also says it is not quite time yet to raise interest rates in the US. A lot depends on the nature of the economy, how it evolves over the coming couple of quarters. We will have a lot better sense going into the middle of next year, how well the recovery has taken hold.

That's important before we can make any final decisions. At the end of the day, policy is going to be data dependent; it's going to depend on how the economy's evolving. We will just have to wait and see.

As time has gone on, over the last several months, I've become more optimistic that what we are seeing is the beginning of a recovery. As a consequence, I have become less concerned about the possibilities of a double dip.

But at the same time, there are always shocks that could happen, things that we don't know that could come might trigger a relapse of some kind. Commercial real estate might be one. But if the economy continues to grow, then commercial real estate will gradually take care of itself.

Plosser's outlook is bolstered by the Fed Model, which shows no sign of a double-dip recession in the coming year. You can read more about this in my March 7 blog, Feds & Recession.

It's Texas, Hands Down, Pardner

Question: What is the worst state (and best) to do business in?

Readers of Chief Executive magazine were asked this question.

• The worst: California
• The best: Texas

Why is this? It seems it all comes down to values. Two of the largest states in the nation--and they have very different philosophies. In addition, it is clearly borne out in their respective unemployment rates.

As stated in Trends magazine, In the 1950s and '60s, California was the embodiment of the American Dream, offering great schools, roads, jobs, and communities with all the latest amenities, not to mention good weather, beaches, and quick access to the mountains and wilderness for recreation. As home to Disneyland and the movie industry, the state represented all that was glamorous and new.

Today, California is $26 billion in the hole and has recently been paying its bills with IOUs. Its once-proud schools are suffering and the prison system is releasing criminals early because the state can't afford to keep them. Social services are being cut right and left. Infrastructure is aging and falling apart.

Its state income tax is the second highest in the US, and government regulations seem perversely aligned to discourage people from doing business there.

People are fleeing California at the rate of 100,000 per year!

Texas, on the other hand, was considered something of a backwater in the 1950s and '60s, and certainly not a glamorous destination for the upwardly mobile masses. How things change.

Texas created 70 percent of all the new jobs in the United States in 2008, and it has a budget surplus. No wonder it's the fastest-growing state in America, with 150,000 new residents arriving each year.

Both the Brookings Institution and Forbes Magazine studied America’s cities and rated them for how well they create new jobs. All of America’s top five job-creating cities were in Texas. And here are the results as seen in the unemployment statistics.

One out of every eight people in the US live in California. Much of the US housing crisis is concentrated in just a few states, including California, Nevada and Florida. California serves as a drag on the entire nation, with an overall effect of slowing recovery from recession for the whole nation.

How did this happen? What’s wrong with California, and what’s right with Texas? It has a lot to do with values. Here are observations from Trends magazine.

• Texas: Believes in laissez-faire markets with an emphasis on individual responsibility.
• California: Favors central planning solutions and a reliance on a big government social safety net.

• Texas: Views environmentalism as one component among many in maximizing people's quality of life.
• California: Treats environmentalism as a “religious sacrament.”

• Texas: Proactively encourages all the state’s residents to join the mainstream.
• California: Places ethnic diversity above assimilation which has impeded many of California’s diverse ethnic groups and subcultures from integrating fully into the mainstream.

• Texas: Focuses on streamlining the regulatory and litigation burden on its residents.
• California: Attempts to use regulation and litigation to transfer wealth from its creators to various special-interest constituencies.

In the broadest sense of values--Texas seeks to create an entrepreneurial society and California endeavors to create a welfare society.

OK, this is where things stand now. But just what are the guideposts you can look for in the wake of California’s meltdown and Texas’ ascendancy? Trends magazine offers six forecasts:

Expect to see California’s loss of jobs to Nevada accelerate. It’s difficult for most employers to make a solid business case for starting up or expanding a business in California, when nearby Nevada offers so many advantages. Over the longer term, this high-profile debacle will serve as a wake-up call not just to California, but to states across the country.

Expect to see a backlash in California and across the country against regulations, especially green initiatives that can’t clearly demonstrate a positive ROI. Everyone agrees that doing more with less and cleaning up the environment are desirable objectives. But they're not so desirable when they take away jobs or take down whole industries.

Watch for the smart money, including venture capital, to begin migrating to Texas for start-ups in many areas, including energy, info-tech, manufacturing, and biotech. Unless California revamps dramatically, expect to see its economy languish, even as the recovery takes off.

Texas will invest heavily in secondary education and work hard to attract the best talent to its research universities. Keep an eye especially on the University of Texas, which already has a first-rate campus and faculty. Within 10 years, UT may well rival Stanford or Berkeley.

Other states will adopt tort reform measures pioneered in Texas. Unlike California and most other states, Texas has been aggressive in minimizing the enormous burden of frivolous lawsuits.

Look to Texas to become a cutting-edge cultural mecca.

Go Mid-West

Go mid-west, young man.

Long ago, opportunity was to be found on the west coast--as Horace Greeley would sometimes advise his readers.


These days with the national unemployment rate at 10%, and certainly above that is some states, particularly along the west coast, there are few places of full employment--which might be defined as 4%.

The bright spots of full employment can be found in the agricultural counties of the Great Plains. Montana, Wyoming, North and South Dakota, Nebraska and Kansas seem immune to the wave of persistent joblessness, at least for now.

Weekends in Washington

Senate Majority Leader Harry Reid says lawmakers will work weekends to complete a sweeping health care bill because nothing can be more important than this. Reid said the Senate will work Saturdays and Sundays in December.


In my last blog, I introduced the concept of the prediction market. Recall: Investors from all around the world come to Intrade and place money down on specifically defined outcomes--either the outcome will happen or it won't.

The collective placement of money establishes a public priority on that issue.

Let's see how the probability has been trending for US national health care.

Intrade poses this question:

Health Care Reform - Will a federal government run health insurance plan (a public option) be approved in the US? This federal government run health insurance plan must be approved before midnight ET December 31, 2009.

Last summer the odds for a federal government-run health insurance plan to be approved before the end of the year were around 50%. Remember President Obama's push for a vote on the bill before the August recess? Some thought this would be signed into law a few months ago.

Here is how the Intrade probabilities have been tracking:


Well, by now that makes a lot of sense. There is a LOT of work, amendments to consider and debate to occur, before the Senate gets to a final vote. Then the House & Senate bills need to be reconciled. Then it would have to go to President Obama for signing.

So notwithstanding Senator Reid's valiant effort to work on weekends in December, it's hard to imagine completing work on such a massive undertaking--a bill that encompasses 1/6th of the US economy by year end.

So let's look at another Intrade proposition--with monies being placed on passage by midnight ET on June 30, 2010.


Right now investors around the world aren't too hopeful for passage of a US health care bill in this form, ie, with a government-run public option.

Intrade involves real money being placed on the line to establish a probability of occurrence, in the view of these investors, every day the Intrade auction is open.

Now let's turn our attention to US attitudes about health care reform. Researchers Nate Silver, Andrew Gelman and Daniel Lee have applied a statistical method called multilevel regression and post-stratification. They mapped opinion on health care, breaking down opinions by age, family income and state. (Click to enlarge)

• Younger, lower-income Americans strongly support (green) increased government spending on health care

• Elderly and well-off Americans are very much against (red) the idea.

Whether you are for or against the particular type of health care reform that is popular among some in Congress, and loathe to others, you are guaranteed to witness one of the most important debates on far-reaching legislation in US history.

Intrade

Have you ever heard of Intrade? I have been following it for a couple years. It's a useful tool for examining a global opinion about possible future events. As such, it is a prediction market.


I would imagine that term could be foreign to you, so let me try to explain.

Intrade is an online trading exchange website whose members speculate on the outcomes of non-sports-related future events. Intrade was founded in 2001. This web-based exchange originates from Ireland, and can be found at Intrade.

Here are some comparisons to help you understand:

• When it comes to the stock market, one buys & sells stocks which represent ownership in companies.

• In the commodities market, one buys & sells contracts for raw materials, like hogs, sugar or oil.

• For the futures market, one can deal in contracts to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. For example, corn for delivery on some winter date.

Now when it comes to a prediction market, one is buying & selling probabilities of a well-defined outcome! That is, whether you wish to put money down on whether a future event will or will not occur. Only one of those two things can happen.

For example, last year there was a predictions contract on whether Hillary Clinton would be the Democrat's Vice-Presidential candidate. Some people put money down saying "yes, she would be selected." Others had the opposite point of view, and placed their money in the "no" camp.

Trading positions are provided in the common investment nomenclature of long (will happen) and short (will not happen).

The trading unit is a contract with a settlement value, typically $10, and the contract may trade in range of 0-100. If the event specified in a given contract occurs, the contract settles at 100 points; otherwise, the contract settles at 0.

Thus, the current price of the contract can be imputed as the market's global opinion of the probability that the specified event will occur.

In the example given, Mrs. Clinton was not selected, so that contract settled at 0--and those who placed their money on the "short" side, collected, and those who went "long" lost all.

Because most events take place over a well-defined time span, traders can trade both before and during an event. This is different than sports-related events, ie, gambling, where no further bets are taken once the ponies start running.

Here is an explanation from John Stossel on ABC's 20/20.




In my next article we will use Intrade information to give you an insight into international opinion about a major US public debate these days.