Cool A/C

Toronto has found a unique way to take advantage of its location on Lake Ontario:

GEOTHERMAL heating—using the warmth of the Earth’s interior to heat water—is an old idea. Using the planet’s natural coolness, though, is something of a novelty. Nevertheless, as cooling and heating are merely two ends of the same process, it could save money and reduce carbon-dioxide emissions. As long, that is, as you can find a suitable source of cold.

Fortunately for Toronto, it sits next to a very large supply of the stuff, in the form of Lake Ontario. Canada’s largest city has been pioneering the idea that instead of using electricity to power air conditioning, a useful supply of cold can be directly extracted from the environment.

The amount of electriciy saved is significant:

Some 36 buildings in the central business district have now been connected and a further sixteen have signed on to join the system. The project is expected to save the city 61 megawatts, enough to power 8,500 homes.

Toronto is not the only place this works, but one has to wonder why this hasn't been done in more places. The article states that several places have been looked at and rejected - Chicago and New York among them. In those cases, the water wasn't deep enough near shore and the cost of running pipes out to deep water was prohibitive. But certainly there are places this could be applied.

California Goes Solar

CALIFORNIA’S $3.3 billion solar initiative, championed by Arnold Schwarzenegger, the governor, is impressive. State rebates, combined with federal tax credits, can cover up to half the cost of a residential solar system. California builders must now offer solar as an option on all new construction. Another perk: installing solar on existing buildings will not trigger a rise in California’s already heinous property taxes. Mr Schwarzenegger’s goal of a million solar roofs by 2017—in a state with 36m people, and growing—looks ambitious. It also looks relatively feasible.

The title of this post links to the story above in The Economist.

I am usually not a fan of government intervention and I'm not much worried about global warming, but I am a fan of solar power. I've been watching this industry for a long time and the efficiency of solar collectors is rising fast. See this story from last December about a solar panel that achieved a 40% efficiency in converting sunlight to electricity. Average panels today are in the range of 12-18%. That panel was developed using funds provided by the DOE.

Living in South Florida, I have wanted to install solar panels, but I've been waiting for the efficiency to rise enough to make the cost worthwhile. I don't like government intervention in the market, but I have hope that they'll get this one right. In this case, I think I can overlook the malinvestment caused by the government subsidy. The idea of getting energy from a source that isn't found under the Middle Eastern version of the Hatfields and McCoys is enough to convince me that any market distortion is worth the cost.

What? Me? Worry?

Don Boudreux has an excellent post on the fear many Americans have about the large Chinese holdings of US Treasuries.

Is there real reason for Americans to worry about the Chinese government buying and accumulating lots of dollar-denominated assets?

Probably not.

Like Professor Boudreaux, I do not worry much about the Chinese doing something that will hurt them as much, or more, than it will hurt America. Read the entire post by clicking on the title of this post.

Random Walker

Burton Malkiel, the author of A Random Walk Down Wall Street has a very interesting editorial in the WSJ today. The article is primarily about the reduction of risk premiums in financial assets:

The facts are that stock prices are high not only in the U.S. but also in the world's developed and emerging markets. We can estimate long-run annual equity returns by adding today's dividend yield (just under 2%) to the likely future growth rate of earnings and dividends (perhaps 5.5%). This calculation suggests that stocks are priced to produce about 7.5% future returns, well below the 10.5% annual returns achieved from 1926 through 2006. Treasury bond yields (at just under 4.75%) are historically low, as is core inflation, running close to 2%. The prospective equity risk premium (the amount by which stock returns are likely to exceed bond returns) of about two and three-quarter percentage points appears to be well below the five percentage point equity risk premium earned since 1926. We are not being paid as much to take on the risk of holding stocks.

Not only are equity premiums low; so are bond risk premiums. The spread between high-yield bonds (more pejoratively called junk bonds) and safe U.S. Treasuries is just about at an all-time low. Sovereign emerging-market debt yields are not much more than two percentage points over U.S. government debt. The VIX index, measuring expected U.S. stock market volatility, is extraordinarily low. These measures imply that financial markets are very relaxed about risk and that the world is a very stable place.

This is something I've touched on before and I agree with Mr. Malkiel. He goes on to say that there may be reasons why the markets are not pricing in as much risk as in the past. The reduced volatility of economies in general and the subsequent reduction in the volatility of earnings may mean that stocks and other financial assets are priced correctly. And as an efficient market believer (one place we part company) he is reluctant to believe that markets are mispriced. However, he also states:

I believe that markets are high and risk spreads compressed because of massive increases in world liquidity. A world awash in dollar-based purchasing power has helped to keep our interest rates low and the spreads on risk assets tight.

This, to me, seems inconsistent with his stated belief in efficient markets. If the world is "awash" in liquidity, doesn't that imply that there is something wrong in the system? Doesn't it imply that the central bankers of the world are doing something wrong? And doesn't that imply that assets are mispriced because of the distortions caused by the central bankers?

Mr. Malkiel ultimately gives some good advice though:

So what should investors do as the Dow rises to new highs? Should they "sell in May and go away," as one stock-market bromide suggests? As a student of markets for over 50 years, I am convinced that attempting to time the market is a fool's game. But new highs in the market should induce investors to review their asset allocations. If the rising stock market has pushed your allocation of equities well above the level consistent with your risk tolerances, it makes sense to consider rebalancing. Rebalancing is an excellent strategy to constrain your investment risk in a very uncertain world.

We are always evaluating exposure to the various markets we cover so rebalancing in our tactical portfolios is something that happens regularly, but our investment models are all based on static portfolios with regular rebalancing, generally 2 years. Rebalancing generally forces investors to sell some of what has gone up and buy some of what has not. Sell high, buy low. Good advice.

Falling Dollar = Inflation

Another WSJ article highlights the link between a weak dollar and inflation:

Overall import inflation has moderated because oil prices aren't rising as fast as they did a couple of years ago. But other signs of import inflation are out there. In March, prices for imported consumer goods, excluding automobiles, were 1.8% higher than they were a year earlier -- the biggest gain in 11 years, points out Morgan Stanley economist Richard Berner. The risk is that this could make it harder for the Fed to cut rates in the presence of economic weakness. Calling it stagflation -- the coupling of economic weakness and skyrocketing prices -- is overdoing it, but there's a whiff of it in the air.

However, there are some positive effects as well:

Last Friday, the Commerce Department reported that gross domestic product grew at its slowest pace in four years in the first quarter. The Dow Jones Industrial Average advanced, nonetheless, as it has most days in a month that's so far seen it add 767 points.

The big factor in the rally has been that, thanks to the combination of strong growth overseas and a weak dollar, overseas sales have pushed profits higher at many companies. Among the companies whose first-quarter strength has come as a surprise to investors: Whirlpool, 3M, Caterpillar and Coca-Cola.

It is this effect that has been the source of my bullishness on large cap stocks over the last six months. That is starting to pay off now. Smaller companies are more dependent on the domestic economy while the big multinationals benefit at least as much from strong overseas economies.

This is a Problem?

The WSJ has an article about a conundrum facing the Bank of Japan. The Japanese economy is expanding but deflation remains persistent (prices are falling again). Apparently this is viewed as a problem:

Still, such weakness in prices would make it difficult for the Bank of Japan to raise interest rates. Raising interest rates too quickly could discourage consumers and businesses from spending, depressing demand and putting more downward pressure on prices.

Oh my goodness, the economy is expanding, prices are falling and the central bank may have to keep interest rates low, whatever will we do? Can the government please rescue the Japanese citizen from these terrible conditions?

Wii Hacking or Why the Video Game Industry is Important

The WSJ has an article about the Wii-mote, the remote control for Nintendo's Wii video game console. Apparently hackers are reprogramming the remote for other functions:

A deejay in the Netherlands uses his to mix techno music at dance parties. A medical student in Italy has reprogrammed his to help analyze the results of CT scans. And a Los Angeles software engineer has found a way to get his to help vacuum the floor. The high-tech device in each case: the remote control from a $250 videogame console.

With a Wii console, the Wii-mote is used to act out the video games. For instance, with a tennis game, you swing the remote to swing the racket on the video screen. The Wii-mote has an accelerometer that detects the speed and direction of motion. This is translated into action on the screen. I could make a comment sure to show my age about how lazy teenagers are today (Um, why don't they just go play tennis?), but I think the more important point is that because of a video game controller, innovation is happening. And not just innovative new ways dj:

Some companies see possible business applications with the Wii-mote. Rick Bullotta, vice-president of SAP Research, an arm of the German software giant SAP AG, is looking at ways to integrate the Wii-mote into their clients' manufacturing operations. He envisions factory and warehouse employees walking through facilities pointing and waving Wii-motes to monitor and control machines. "It's the first time we've used a videogame controller for R&D," he says.

Innovation begets innovation. It will be interesting to see how Nintendo reacts to this. It seems that so far, they've only issued some boilerplate statement saying the Wii-mote was created solely for use with the Wii console. Well, yeah, but somebody forgot to tell the hackers. Will Nintendo be so sanguine when someone reprograms the Wii-mote for a higher, more profitable use? I hope so. I don't know if there would be any patent issues at stake, but if there are, Nintindo should waive any rights to them. The new innovative uses of the Wii-mote is already benefiting Nintendo (you can buy the remote seperately from the console) and any new uses will likely benefit them more.

I'm sure many people don't think of the video game industry as anything important, but if part of a video game system can help analyze a CT scan, maybe you should reconsider that position.

Bubble World

Jeremy Grantham is a legendary value investor with a gold plated client list. According to this article in The Street.com, he believes the world is in a bubble:

Everything is in bubble territory, he says.

Everything. "From Indian antiquities to modern Chinese art," he wrote in a letter to clients this week following a six-week world tour, "from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it's bubble time!"

"Everyone, everywhere is reinforcing one another," he wrote. "Wherever you travel you will hear it confirmed that 'they don't make any more land,' and that 'with these growth rates and low interest rates, equity markets must keep rising,' and 'private equity will continue to drive the markets.' "

I don't know anything about Indian antiquities or modern Chinese art, but in many ways, I agree with Mr. Grantham. The world is awash in liquidity and many risk assets are trading at unreasonable valuations. I don't think that applies to US stocks, but emerging market bonds and emerging market stocks certainly fall in that category. I just don't think the bubble is ready to burst just yet.

Abolish the Federal Reserve

As long time readers know, I have no love for the Federal Reserve. When you give a bank the monopoly on printing money, well, that's what they will do. That the Federal Reserve's official policy is to maintain an inflation rate says a lot about the purpose of the bank. Our government issues debt and the Federal Reserve creates excess currency to inflate away the value of the debt. A little like the fox guarding the hen house if you ask me.

I believe that the only way we will ever have really good economic policy in the US is to abolish the Fed or move to a gold standard (which really amounts to the same thing). Most people don't believe this is possible, probably because there has always been a Federal Reserve during their lifetime. But there is one country that has no central bank and it's operating just fine thanks:

In this modern, post-–Bretton Woods world of "monetary order" and coordinated central-bank inflation, many who are otherwise sympathetic to the arguments against central banks believe that the elimination of central banking is an unattainable, utopian dream.

For a real-world example of how a system of market-chosen monetary policy would work in the absence of a central bank, one need not look to the past; the example exists in present-day Central America, in the Republic of Panama, a country that has lived without a central bank since its independence, with a very successful and stable macroeconomic environment.

Just think: a world where Ben Bernanke is just an economics professor. What a wonderful thought....

Technorati

Technorati Profile

6% inflation

If you click on the title of this post you will be taken to John Williams' website, Shadow Government Statistics. Check out the chart that graces the top of the page. The chart shows what reported CPI would be if it were still calculated as it was prior to the Clinton administration. If you're having trouble reading it or you don't want to really see it, I'll tell you the number is 6.2%. That's right 6.2% annual CPI inflation. Anyone have a guess as to how the market would react if everyone knew that number was the truth rather than the 2.8% figure recently reported by the government?

Technology to the Rescue

Consider energy. We are awash in energy (10,000 times more than required to meet all our needs falls on Earth) but we are not very good at capturing it. That will change with the full nanotechnology-based assembly of macro objects at the nano scale, controlled by massively parallel information processes, which will be feasible within twenty years. Even though our energy needs are projected to triple within that time, we'll capture that .0003 of the sunlight needed to meet our energy needs with no use of fossil fuels, using extremely inexpensive, highly efficient, lightweight, nano-engineered solar panels, and we'll store the energy in highly distributed (and therefore safe) nanotechnology-based fuel cells. Solar power is now providing 1 part in 1,000 of our needs, but that percentage is doubling every two years, which means multiplying by 1,000 in twenty years.

The peak oilers and other Malthusians will be wrong again. This is a quote from Ray Kurzweil who was the first to see the promise of the internet way back in the early 80s. He's been right so many times about future events, one wonders if he truly does have a crystal ball. I believe that technological advances will make the whole issue of peak oil and global warming a moot point withing the next 25 years. Check out Kurzweil's web site; it'll help you keep up to date with the advances that are happening at an increasing rate. http://www.kurzweilai.net/

Short Interest

Short interest on the NYSE hit another record last month. From a contrarian viewpoint, this is bullish. Sentiment is a major factor in our decision making process and short interest indicates widespread skepticism about the market.

Chutzpah

This story comes courtesy of Opinion Journal, the WSJ daily blog by James Taranto. Mark Mellman, writing in The Hill, opines that the Democrats have wrested control of the tax isssue from Republicans. As most of you know, I am a libertarian so I don't have much use for either of the major parties, but the one thing I've always sided with Republicans on is lower taxes. Here's what Mellman has to say:

While the taxman keeps coming, we now care a little bit less.

Everyone dreads April 15, but for decades, Republicans turned distaste for taxes into votes against Democrats. We were decried as the party of higher taxes, while Republicans championed Richard Nixon’s immortal slogan, “It is time to get big government off your back and out of your pocket.”

Races at all levels, at least sometimes, hinged on taxes, usually to the detriment of the Democrat. Almost every cycle, millions of dollars in ads attacked Democrats for supporting some tax or other. In 1946, Republicans developed an 18-point lead as the party better able to deal with taxes; Democrats lost 54 House seats, in part as a result. Though the question was asked only intermittently, Democrats maintained an edge as the party better able to deal with taxes through most of the rest of the ’50s and again in 1978, then through the early ’90s. However, in 1994, when the GOP opened a 10-point lead on taxes, disaster struck with Democrats again losing 54 house seats, partly as a result.

In the last couple of election cycles, though, the air has slowly, though not completely, seeped out of the tax balloon, as evolving public opinion has reduced the power of this standard GOP attack.

Gee, I wonder public opinion has shifted?

While no one wants to pay more taxes, the perceived burden has diminished. Earlier this month, 53 percent of respondents told Gallup the amount they paid in federal income tax was too high. Though still a majority, it represents a significant decline from the two-thirds who thought their taxes were too high in the late ’90s. In 1993, 67 percent of Americans told Harris they “had reached the breaking point on the amount of taxes they paid.” A decade later that figure dropped by 15 points. CBS found 49 percent saying they paid more than their fair share in 1997, but just 37 percent taking that position this month.

Why has the perceived burden of taxes diminished? Maybe it has something to do with the fact that the actual burden has diminished? What happened in that decade? Oh yeah, we had a tax cut that was opposed by almost every Democrat. Maybe that has something to do with Americans being less concerned about taxes?

Democrats will likely look at this and decide it's okay to raise taxes. They should look at it and worry that if they raise taxes, they'll start losing elections again.

ETFs Stray

The WSJ has an article this morning about ETFs which have diverged from the performance of the benchmarks they were designed to match. The funds cited most frequently are the funds that are designed to match the price of oil. A number of these funds have diverged widely from the actual price of oil. The technical reasons why this is happening is not important to us since we don't use these ETFs, but the problem could affect investors who are making narrow bets using ETFs. We use mostly broadbased ETFs which have not experienced these problems. Frankly, I think the ETF market is getting a little out of hand. The number of funds has exploded as sponsors try to slice and dice the market into ever smaller segments. The problem is that there is not suffcient trading volume to maintain the narrow spread between market price and NAV. Stick to the broad based ETFs and you shouldn't have any problems.

Lots of oil

Iraq could hold almost twice as much oil in its reserves as had been thought, according to the most comprehensive independent study of its resources since the US-led invasion in 2003.

The potential presence of a further 100bn barrels in the western desert highlights the opportunity for Iraq to be one of the world’s biggest oil suppliers, and its attractions for international oil companies – if the conflict in the country can be resolved.

This would not seem to be a good development for the price of oil. Of course, as this article from FT.com points out, the "conflict" in the country will have to be resolved before most of this oil sees the light of day.

So far the only new contracts for developments by foreign companies are the five signed by the Kurdistan regional government in the relatively peaceful north of Iraq.

The new supply seems significant:

The study from IHS, a consultancy, also estimates that Iraq’s production could be increased from its current rate of less than 2m barrels a day to 4m b/d within five years, if international investment begins to flow.

Adding 2m b/d to world supply would certainly have an effect. Considering as well that the only way this comes to market is if the violence in Iraq is greatly reduced, the potential drop in price could be significant. Maybe, just maybe, is it possible that Iran might want to prevent such a drop in price? And if that is true, what could they possibly do to make sure it doesn't happen? Hmmm, let me think. I know! They could try to stir up a civil war in Iraq!

Or maybe its just about bragging rights down at the Arab League?

If confirmed, it would raise Iraq from the world’s third largest source of oil reserves with 116bn barrels to second place, behind Saudi Arabia and overtaking Iran.

The Iranians will not help us stabilize Iraq. It's not in their best interests to stabilize Iraq. Their economy is already in a shambles; they can't afford a big drop in the price of oil. The mullahs very survival depends, at least in part, on maintaining a high price for oil.

Inconvenient Science

I haven't seen An Inconvenient Truth, Al Gore's global warming propaganda film. I don't usually get my science news and facts from politicians. The science of global warming, contrary to what Mr. Gore says, is not settled. There are many scientists who don't subscribe to the simplistic global warming model espoused by Gore and other alarmists. The fact is that there is still a lot we don't know about weather on this planet. And new things are being learned every day by scientists who are actually bothering to do research. For example, there is a new study from Lawrence Livermore National Lab about trees and their effect on climate. The conclusions are not what we have been taught by the environmental movement:

This chattering-class environmental picture is not necessarily wrong, but it does include many assumptions. One of them, that planting trees will make the world cooler than it would otherwise be, is the subject of a newly published study by Govindasamy Bala, of the Lawrence Livermore National Laboratory, in California, and his colleagues. Dr Bala has found, rather counter-intuitively, that removing all of the world's trees might actually cool the planet down. Conversely, adding trees everywhere might warm it up.

Now the scientists behind this study are not recommending that we cut down all the trees. Their point was merely that the environment and what affects it is a very complicated subject with few pat answers:

The reason for this is that trees affect the world's temperature by means other than the carbon they sequester. For instance forests, being generally green and bristly things, remain quite a dark shade even after a blizzard. They are certainly darker than grasslands smothered in snow, and thus they can absorb more of the sun's heat than vegetation which might otherwise cover the same stretch of land. That warms things up.

Transpiration—the process by which plants suck up groundwater and evaporate it into the atmosphere—is another and opposite matter. Woodlands are usually better than other ecosystems at getting water vapour into the air. In warm places this tends to make things cloudier, and those clouds, in turn, reflect the sun's heat back into space. That cools things down.

There is still a lot to learn about the climate on this planet. Until we have a better grasp on things, it makes no sense to allow politicians like Al Gore to decide how to address a problem that may not even exist.

Rational Healthcare Debate

There is a very good post over at the Economist blog, Free Exchange, about healthcare:

WHAT is it about healthcare that utterly short-circuits rudimentary economic knowlege? It is not that there are no good arguments for socialised medicine, mind you. But why is it that so many arguments in favour of nationalisation, even from certified economists, seem to rely on the notion that fundamental laws of economics have somehow been repealed in the case of health care?

I run into this all the time when trying to debate the healthcare issue. People are so fed up with the current system that they have decided that the only answer is to let the government handle things via a single payer system and they won't listen to any other alternative. There are free market economic answers to making our healthcare system function better. The problem with the debate at this point is that the general public believes we have a free market system and its failing. Nothing could be farther from the truth. The employer provided insurance system we have is itself a result of corporations attempting to avoid a government mandate (wage controls after WWII).

Just about 50% of healthcare in this country is currently paid for by the government. If the system is getting worse and this percentage is rising, it is illogical to believe that raising the percentage to 100% will make things better. It seems logical to me that the reverse would be true. Furthermore, I've dealt with government healthcare in the Navy and believe me, that is not a path we should take as a country.

Tax the Tall

I know most people who read this blog are not economic geeks like me, but I had to post something about Greg Mankiw's new econ paper at Harvard. Here's the abstract:

Should the income tax system include a tax credit for short taxpayers and a tax surcharge for tall ones? This paper shows that the standard utilitarian framework for tax policy analysis answers this question in the affirmative. This result has two possible interpretations. One interpretation is that individual attributes correlated with wages, such as height, should be considered more widely for determining tax liabilities. Alternatively , if policies such as a tax on height are rejected, then the standard utilitarian framework must in some way fail to capture our intuitive notions of distributive justice.

What's the conclusion? Well, I haven't finished reading it yet so I'll have to let you know, but so far this is the funniest serious economic paper I've ever read.

Tax Day Call for a Flat Tax

Deroy Murdoch chooses today, for obvious reasons, to call for a flat tax to replace our current system.

As kitchen tables nearly buckle beneath receipts, pay stubs, and calculators, Americans must be grateful that tax returns are due only annually. Today’s deadline reacquaints us with our humungous tax-filing burden. It also suggests a voluntary flat tax as the exit from this morass.

The flat tax has been adopted by a multitude of Eastern European countries with great effects. Even Russia has adopted the flat tax. When Russia has a simpler tax system than the US, I say it's time for reform. Me? I filed for an automatic extension yesterday.

More Pig and Gumbo Fest Pictures

More Pig and Gumbo Fest Pictures

More Pig and Gumbo Fest Pictures

More Pig and Gumbo Fest Pictures

Pig and Gumbo Fest Pictures

Pig and Gumbo Fest

This past Saturday, AIM had its first annual Pig and Gumbo Fest. We had 82 pounds of suckling pig, two huge pots of Gumbo, homemade bread pudding, home brewed AIM Ale and lots of nice people.

We believe that the key to our success as a company is to serve our clients. We don't work for a brokerage firm or mutual fund company; we work for our clients just as we did on Saturday. We didn't cater this affair; Orlando and I started pig preparations on Friday with a trip to Palacio de los Jugos, an institution in Miami, to purchase fresh sour oranges for the marinade. Salt, fresh garlic and oregano were added and the pig was marinated overnight. We arrived at the park at 7:30 Saturday morning to get the 82 pound monster in the Caja China.

Ralph, a Tulane grad who learned some useful skills while in New Orleans, prepared the roux for the gumbo Friday night and completed two batches of gumbo on site. He also made a batch of his famous bread pudding.

Julian and Ashton were in charge of logistics and thought of everything. Good job to everyone involved.

A special thanks to my wife, Fay, who braved the aisles of WalMart to buy most of the supplies.

I'll be posting pictures all day so check back often. All of you who couldn't attend missed a great time. See you next year.

What Correction?

The market made a new high for the year. All of the correction that started on February 27th has been recovered. That the market has recovered this quickly just demonstrates the strength of the market -- we are still bullish.

Chinese Takeout

Here's a more traditional defense of free trade as it relates to China:

Washington’s insistence on retaliating against China for undervaluing its currency, dumping cheap goods onto U.S. markets, and for subsidizing exports implies that China is an enemy to be retaliated against. But does anyone seriously believe that U.S. consumers are worse off if goods can be imported more cheaply than they can be produced at home? Imposing tariffs on China harms U.S. consumers and industrial users of imported products; it is an act of economic suicide.

Politicians are the greatest threat to our prosperity. Cutting off trade with China will have some serious consequences - for us.

Compare and Contrast Tiger Woods and China

Donald Luskin has an intersting take on all the China bashing:

A powerful and dangerous force has been unleashed on the global economy. It’s a new source of skilled labor that has put American workers at a competitive disadvantage — and no one knows just how many jobs have already been lost because of it. The U.S. is running a huge trade deficit with this force; every year we’re spending millions more on what it produces than it spends on American goods and services. And to top it all off, this entity has built a massive currency reserve, investing large sums of it on U.S. government securities and thus enabling America’s fiscal profligacy.

Why, oh why, won’t the U.S. government do something to protect us from . . . Tiger Woods?

The analogy isn't perfect but Luskin makes a good argument. Much of the anguish about China is akin to the Japan bashing we heard back in the 80s. I say if China is willing to send us actual goods in exchange for pieces of paper with pictures of Presidents, we should let them.