• Everyday economics of Greek financial markets

    What Greek Markets are Saying to Us

    Jan 29 • Businesses, Demand, Supply, and Markets, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Financial Markets, Government, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy • 488 Views

    In 1906, at the West of England Fat Stock and Poultry Exhibition, a rather large ox was on display. Like guessing how many jelly beans are in a jar, people could win prizes for accurately estimating its weight. At the time, one individual who was curious about crowd accuracy noted the guesses on the 787 legible entries and computed their average. Remarkably, the crowd average was 1197 (others say 1208) and the ox weighed 1198 pounds.

    Writers like to use the ox story as an example of collective intelligence. In The Wisdom of Crowds, financial writer James Surowiecki says we can use collective intelligence to solve cognition problems. The crowd can tell us who it thinks will win the Super Bowl, the location of a lost submarine or whether a country will pay back its debt..

    And that takes us to Greece.

    Collective Intelligence: Greek Markets

    After last Sunday’s election, people are wondering whether Greece is heading toward a bond default and eurozone exit. Using the “wisdom of the crowd,” one Bloomberg writer suggested that Greek bond prices, credit default swaps and Greek bank deposits could be our crystal ball.

    So let’s take a look…

    Five Year Bonds

    When yield soars, it means the collective intelligence is saying Greek bonds are risky:

    Greek Default and 5 rising 5 year bond yield

    From: WSJ

     

    Credit Default Swaps

    Confirming the message from bond markets, the price of insuring five year bonds is going up. Bloomberg says credit default swaps prices indicate there is a 70 percent chance that Greece will default within five years.

    You can see below where the CDS price for those five year bonds was going in December. The current cost is $4.2 million plus $100,000 annually to insure $10 million of Greek debt that is due in five years.

    Greek Default CDS 5 year

     

    Bank Deposits

    And finally, deposits have been fleeing Greek banks at record levels.

    Below, the arrows indicate how much deposit totals decreased from a peak just before 2010 to the end of December 2014. As of yesterday, outflows have accelerated to record levels.

    Perhaps the Greeks always knew the crisis was not over.

    Greek Default bank deposit flght

    From: Bloomberg

    Our Bottom Line: Markets

    Former Secretary of the Treasury Lawrence Summers said that the most important idea to learn about economics is “the power of the market.” As a process that creates prices and quantities for countless items ranging from securities to services, markets are a source of information and incentives.

    Thinking of Greece’s financial future, financial markets are clearly demonstrating the collective intelligence.

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  • everyday economics and snow storm property rights

    How To Keep Your Parking Spot After a Snow Storm

    Jan 28 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Economic Humor, Economic Thinkers, Government, Labor, Regulation, Thinking Economically • 665 Views

    In Boston, the South End just prohibited winter dibs. As one resident proclaimed “…South Enders believe that the streets are a public resource and nobody has a right to claim them.”

    Elsewhere in Boston, in Chicago, Philadelphia, parts of NYC, you just have to shovel your car out of a snowy parking space and…”Winter Dibs.” You leave a marker to signal temporary ownership and the spot should remain unoccupied until you return.

    Winter Dibs Markers:

    Winter Dibs Property Rights

    Property rights from winter dibs

    From: Huffington Post

     

    The Winter Dibs Dilemma

    Normally, a parking space belongs to the occupant. When “you leave it, you lose it.”

    After a snow storm, in Chicago for example, the rules change. If you shovel out your car, that space is yours. By leaving a marker, you signal temporary ownership of your newly claimed property. If someone violates your temporary property rights, retribution is the norm. A nasty note, a missing mirror, a deflated tire is a possibility.

    For government, winter dibs can be a dilemma. In Chicago, it appears that local officials have said it is a neighborhood issue. In Boston, the Boston Globe says the Mayor’s office approves the South End ban. Also though, conveying its tacit approval, the city has expressed a 48 hour rule as the winter dibs max.

    Our Bottom Line: Property Rights

    It is all about property rights. Since we began to live in communities, we have allocated scarce resources through property rights. In the U.S., Alexander Hamilton knew that a market economy required a contractual system that preserved property rights.

    But we do have tradeoff. Property rights are exclusionary. What could have (and should have?) belonged to everyone now belongs to an individual or a firm. On the other hand, property rights create productive incentives. Because of winter dibs, more spots are shoveled more thoroughly.

    I guess even winter dibs returns us to the timeless economic debate between equality and efficiency.

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  • Everyday economics of income mobility

    The Reason It Can Be Tough to Cross the Street

    Jan 27 • Demand, Supply, and Markets, Economic Debates, Economic Growth, Economic Thinkers, Education, Households, Labor, Lifestyle, Macroeconomic Measurement, Thinking Economically • 633 Views

    To access Guilford in the East Baltimore area of Maryland, just walk north on the west side of Greenmount and make a left. Driving, though, you would find it tough to turn into the community because most of the streets are one-way, in the wrong direction. And once you did discover an entry point, you would soon be on narrow, winding roads that snaked unpredictably. To park, a permit is required.

    On the other hand, Waverly borders Greenmount to the east. As a neighborhood, Waverly is based on a grid. Driving north on Greenmount, to access Waverly on the right, you can identify 37th Street, 38th Street and so on. It is easy to enter the community.

    Asked whether a home on Waverly’s 37th Street is more pricey than one on Guilford’s Cold Spring Lane, with no research, executives from Zillow would point out that numbers imply less affluence than names. In a recent NY Times column, Zillow executives added that if the residence is on a “lane” rather than a “street” or a “road,” the odds are higher that you are in a wealthier community.

    And yes, with a median income of $75,000 Guilford is more affluent than Waverly’s $40,000.

    Where are we going? How easy is it to cross the street from Waverly to Guilford?

    Crossing the Street

    One paper from Harvard and UC Berkeley suggests that in the U.S., your income mobility depends on where you live. After dividing the entire U.S. into “commuting zones,” (CZs) each composed of approximately four counties and 380,000 people, researchers compared intergenerational mobility. They asked, for example, where it was most likely for a child in the lowest income quintile to become an adult in the highest income quintile.

    This map summarizes their conclusions. The lighter areas indicate more mobility.

    Income Mobility depends on geography.

    From: “Where is the Land of Opportunity? The Geography of intergenerational Mobility in the U.S.”

    More specifically, researchers identified the most intergenerational income mobility in these ten Commuting Zones (CZs):

    Income mobility top ten CZs

    By contrast, the least mobility in the top 50 CZs was here:

    Income Mobility bottom 10 US CZs

    From: “Where is the Land of Opportunity? The Geography of Intergenerational Mobility in the U.S.”

    Trying to identify why CZ mobility differed, researchers focused primarily on five variables:

    1) residential segregation (race and income), (2) income inequality, (3) school quality, (4) social capital, and (5) family structure (single or two parent).

    Our Bottom Line: Income Mobility

    Because mobility depends on where you live, it can be a local policy concern. And, as for making the leap from Waverly to Guilford, in the top 50 list, the Baltimore region is #37. So crossing Greenmount could be tough.

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  • Everyday economic of lower gas prices

    Two Words That Tell Us All We Need To Know About Oil

    Jan 26 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Growth, Economic History, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 667 Views

    Oil can be sweet or sour, and light, medium or heavy. But the best kind is sweet and light. Sweet oil is low in sulfur; light oil can float on water. Put the two together and you get oil that needs little processing.

    And that takes us to WTI (West Texas Intermediate), Brent and the price of oil.

    WTI and Brent

    Global benchmarks, WTI and Brent are both sweet and light. WTI, though, is U.S. oil while Brent (North Sea) comes from Europe. You can see below that typically, though not always, if you asked about the price of oil, WTI or Brent would have conveyed similar information.

     

    Supply and demand equilibrium prices for WTI and Brent

     

    However, after the two prices diverged during the past several years, each got a separate identify. WTI is now associated with the U.S. market and Brent for a world price.

    As benchmarks, they matter. Let’s say you have some sour medium oil. A trader could ask, what is the price of Brent and then move down from there to determine the value of the lower quality oil he is evaluating. In one article, an analyst just said, “I’ll give you Brent minus $2.50.

    But why are the benchmarks plunging? We need to look at supply and demand.

    The Price of Oil

    Supply Side:

    U.S. oil production far exceeded projections:

    U.S. Oil Supply

    Supply and demand US oil supply

    From: World Bank

     

    Reflecting U.S. increases in supply and OPEC’s decision not to constrain output, global oil production is up.

    OPEC and Non-OPEC Oil Production

    Supply and demand global supply up

    From: World Bank

     

    Demand Side:

    Meanwhile as world GDPs slip…

    GDP Growth

    Supply and demand  demand slips

    From: World Bank

     

    World oil demand also drops:

    Global Oil Demand

    Supply and demand demand slips globally

    From: World Bank

    Also, biofuel production is rising.

    Global Production of Biofuels

    Supply and demand demand down for oil

    From: World Bank

    And, global energy use is less oil centered.

    Oil Intensity of Energy Consumption and GDP

    Supply and demand and oil use down

    From: World Bank

    Combine more supply and less demand and you get lower prices.

    Our Bottom Line: Supply and Demand

    So, to tell the whole story of oil prices, our two words are WTI and Brent. Instead though, we could say, “Supply and demand.”

    supply and demand graph

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  • Everyday economics and baseball inflation

    Why a $210 Million Baseball Contract Is Less Than It Appears

    Jan 25 • Businesses, Demand, Supply, and Markets, Economic History, Entertainment, Labor, Macroeconomic Measurement, Money and Monetary Policy, Sports • 480 Views

    With inflation in the news, let’s look at baseball salaries.

    Where are we going? To the value of a $210 million deal.

    The Scherzer Deal

    Signing with the Washington Nationals, pitcher Max Scherzer negotiated a whopping $15 million a year for the next 14 years. Some call it a $210 million deal. It is actually much more complicated because he gets some of the money as income, some as a bonus, some after he retires and some before.

    Let’s just look at inflation though and assume that he is paid $15 million each year. If the inflation rate is close to two percent for each of the next 14 years, then $15 million in 2029 would have the same spending power as $11.5 million (or so) today.

    Next, Mickey Mantle.

    Mickey Mantle’s Salary

    During each of the six years before he retired in 1968, the Yankee star center fielder was paid $100,000.

    But it depends how you look at it.

    According to the BLS inflation calculator, you needed $113,725.49 in 1968 to have the same purchasing power as $100,000 in 1963. So, that means he was really earning 13 percent less

    A Baseball Quiz

    And finally, a number I discovered that most of us will assume is a phone number except for our baseball friends.

    714-511-4256

    The answer is after “Sources and more…” below.

    Our Bottom Line: Inflation History

    We cannot predict where the inflation rate will go. And we should remember this quote from economist Rudiger Dornbusch (1942-2002):

    “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”

    But still, in assessing the Scherzer deal, here is some inflation history:

    A global inflation erspective

    From: WSJ

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