Investing Curiouscatblog

Category: Economics

  • China GDP up 8.7% in 2009

    China’s GDP Growth Accelerates to Fastest Since 2007

    Gross domestic product rose 10.7 percent from the same period a year ago, more than the median forecast of 10.5 percent in a Bloomberg News survey, a statistics bureau report showed in Beijing today. For the full year, GDP gained 8.7 percent, beating Premier Wen Jiabao’s 8 percent target.

    The report may stoke speculation the central bank will start raising its benchmark interest rate and tighten restrictions on the nation’s lenders. Minutes after the release, traders said the People’s Bank of China guided three-month bill yields higher at an auction for the second time in two weeks.
    …
    Fourth-quarter economic growth was driven by an unprecedented $586 billion stimulus package, subsidies for consumer purchases and a credit-fueled investment boom. The property market has rebounded and a 13-month slump in exports ended last month.

    Industrial production grew 18.5 percent in December from a year earlier and retail sales climbed 17.5 percent, the statistics bureau said today.

    In 2008 China’s GDP was up 9.6%. The economy there obviously continues to do amazing things. Also there are plenty of signs of crazy spending building huge amounts of housing and office space that lies vacant and questionable infrastructure projects. There is certainly a risk of bubbles bursting in China but the long term strength of the economy seems real. The danger is first political with financial bubbles being the second risk – I think.

    Related: Japanese Economy Shrinks 12.7% in the 4th Quarter of 2008 – Data on the Largest Manufacturing Countries in 2008 – Oil Consumption by Country in 2007

  • Market Inefficiencies and Efficient Market Theory

    Find below some interesting thoughts on financial markets and the efficient market theory. That theory essentially says the market prices are right given the available information. I think markets are somewhat efficient but there are plenty of opportunities to profit from inefficiencies in the market. Still it is not easy to consistently exploit these inefficiencies profitably.

    Capital Market Theory after the Efficient Market Hypothesis

    People see high returns in a particular sector, and they cannot tell whether the lower returns they are receiving are due to their fund manager’s proper avoidance of risk, or incompetent management. As they increasingly conclude that incompetence is to blame, funds shift to the new sector and this creates a self-reinforcing process where prices are driven above their fundamental values, i.e. a bubble occurs. It seems like such reallocation of investment funds could, if driven by a strong enough incentive, be enough on its own to drive a bubble even without an external source of liquidity.

    Capital market theory after the efficient market hypothesis by Dimitri Vayanos and Paul Woolley

    Capital market booms and crashes, culminating in the latest sorry and socially costly crisis, have discredited the idea that markets are efficient and that prices reflect fair value.
    …
    Theory has ignored the real world complication that investors delegate virtually all their involvement in financial matters to professional intermediaries – banks, fund managers, brokers – who dominate the pricing process.

    Delegation creates an agency problem. Agents have more and better information than the investors who appoint them, and the interests of the two are rarely aligned.
    …
    he new approach offers a more convincing interpretation of the way stock prices react to earnings announcements or other news. It also shows how short-term incentives, such as annual performance fees, cause fund managers to concentrate on high-turnover, trend-following strategies that add to the distortions in markets, which are then profitably exploited by long-horizon investors. At the level of national markets and entire asset classes, it will no longer be acceptable to say that competition delivers the right price or that the market exerts self-discipline.

    Related: Nicolas Darvas (investor and speculator) – Beating the Market, Suckers Game? – Lazy Portfolios Seven-year Winning Streak – Stop Picking Stocks? – Don’t miss future gains just because you missed past gains

  • USA Spends Record $2.3 trillion ($7,681 Per Person) on Health Care in 2008

    Nominal health spending in the United States grew 4.4% in 2008, to $2.3 trillion or $7,681 per person. This was the slowest rate of growth since the Centers for Medicare & Medicaid Services started officially tracking expenditures in 1960, yet once again outpaced nominal GDP growth (2.6% in 2008). This brings health care spending to 16.2% of GDP. In 2003 the total health care spending was 15.3% of GDP.

    The huge amount being spent continues to grow to an even larger percentage of GDP every year. The damage to the economy of the dysfunctional health care system in the USA is huge. For comparison the total GDP per person in China is $5,970 (the closest total country per capita GDP, to the health care spending per capita in the USA, is Thailand at $7,703 – World Bank data). The average spending by OECD countries (Europe/USA/Japan…) was $2,966 per person in 2007 (the USA was at $7,290). In 2007 Canada spent $3,895; France $3,601; UK $2,992; Japan $2,581.

    • Hospital spending in 2008 grew 4.5% to $718 billion, compared to 5.9% in 2007, the slowest rate of increase since 1998.
    • Physician and clinical services’ spending increased 5.0% in 2008 to $496 billion, a deceleration from 5.8% in 2007.
    • Retail prescription drug spending growth also decelerated to 3.2% in 2008 as per capita use of prescription medications declined slightly, mainly due to impacts of the recession, a low number of new product introductions, and safety and efficacy concerns. Drug prices increased 2.5% in 2008.
    • Spending growth for both nursing home and home health services decelerated in 2008. For nursing homes, spending grew 4.6% in 2008 compared to 5.8% in 2007.
    • Total health care spending by public programs, such as Medicare and Medicaid, grew 6.5% in 2008, the same rate as in 2007.
    • Health care spending by private sources of funds grew only 2.6% in 2008 compared to 5.6 percent in 2007.
    • Private health insurance premiums grew 3.1% in 2008, a deceleration from 4.4% in 2007. Remember many people lost their jobs and did without insurance. Doing so results in reduced spending on health insurance but is far from a good sign.
    • Home health care spending growth decelerated from 11.8% in 2007 to 9.0% in 2008. Expenditures reached $64.7 billion in 2008. You can understand why investors (and companies) are looking to invest in home health care.

    At the aggregate level, the shares of financing for health services and supplies by businesses (23%), households (31%), other private sponsors (3%), and governments (42%) have remained relatively steady over time. Between 2007 and 2008; however, the federal government share increased significantly (from 23 to 25%), while the state and local government share declined (from 18 to 17%).

    Decades ago Dr. Deming included excessive health care costs as one of the seven deadly diseases of western management. We have only seen the problem get worse. Finally it seems that a significant number of people are in agreement that the system is broken.
    (more…)

  • The USA Pays Double for Worse Health Results

    This graphic from the National Geographic shows the amazingly high cost of health care in the USA and the poor performance. Granted just life expectancy is not a good overall measure of success. But this just mirrors the general mediocre at best performance of the USA health care system.

    Chart of health care cost versus life expectancy by country

    The USA spends $7,290 per person (based on 2007 OECD data) the next highest spending country is Switzerland at $4,417. Canada spends the 4th most: $3,895. Only 5 countries have a lower life expectancy. The most any of those countries spend is $1,626. How people continue to accept arguments by the apologists for the special interests trying to defend the current system is beyond me.

    The Cost of Care by Michelle Andrews

    The United States spends more on medical care per person than any country, yet life expectancy is shorter than in most other developed nations and many developing ones. Lack of health insurance is a factor in life span and contributes to an estimated 45,000 deaths a year. Why the high cost? The U.S. has a fee-for-service system – paying medical providers piecemeal for appointments, surgery, and the like. That can lead to unneeded treatment that doesn’t reliably improve a patient’s health. Says Gerard Anderson, a professor at Johns Hopkins Bloomberg School of Public Health who studies health insurance worldwide, “More care does not necessarily mean better care.”

    Related: USA Spent $2.2 Trillion, 16.2% of GDP, on Health Care in 2007 – Employees Face Soaring Health Insurance Costs – International Health Care System Performance – USA Heath Care System Needs Reform

  • China Forecasts 9.6% GDP Growth, Close to Becoming 2nd Largest Economy

    China has been growing incredibly quickly for years. The credit crisis slowed things down. But unlike so many other governments that spent all their resources and more in good times, China has plenty of cash and spent a great deal on large projects. That spending has boosted their economy. And with that encouragement their economy has continued to grow, including consumer spending. As I posted earlier, China May Take Car Sales Lead from USA in 2009.

    China Raises GDP Growth Estimates, Narrowing Gap With Japan

    China’s expansion will be more than 8 percent in 2009, according to government officials, and the nation is poised to overtake Japan [in GDP] next year, International Monetary Fund projections show.
    …
    China’s expansion in 2008 compares with U.S. growth of less than 1 percent. Japan’s gross domestic product shrank 1.2 percent. The Indian economy expanded 6.7 percent in the fiscal year ended March 2009.

    Economic data always has some errors within, and from China the data is even less reliable. But the overall strength seem very real and significant.

    Related: Government Debt Compared to GDP 1990-2007 – Japanese Economy Grew at 3.7% Annual Rate (Aug 2009)

  • Commercial Real Estate Market Prospects Remain Dim

    Why This Real Estate Bust Is Different by Mara Der Hovanesian and Dean Foust

    But the Goldman deal, with its unrealistic assumptions, multiple layers of investors, and stratospheric prices, helps illustrate why this downturn is more complicated than previous ones—and will turn out to be far costlier. Already, prices have plunged 41% from the peak in 2007, according to Moody’s/REAL Commercial Property Price Index—worse than the 30.5% fall in the housing market from its 2006 apex. “We’ve never seen this extreme a correction as far back as the data go, which is the late 1960s,” says Neal Elkin, president of Real Estate Analytics, the research firm that created the index. Adds billionaire investor Wilbur Ross: “Commercial real estate has gone from being highly liquid at sky-high prices to being extremely illiquid at distressed prices.”
    …
    While the housing crisis seems to be easing, the commercial storm is still gathering strength. Between now and 2012, more than $1.4 trillion worth of commercial real estate loans will come due…

    The USA commercial real estate market, by many account, is going to continue to have trouble. I would like to add to my commercial real estate holdings in my retirement account, because I have so little (and other options are not that great), but with the current prospects I am not ready to move. I would not be surprised if the market comes back sooner than people expect: it seems like it is far too fashionable to have bearish feelings about the market. However, it doesn’t seem like the risk reward trade-off is worth it yet.

    Related: Commercial Real Estate Market Still Slumping – Victim of Real Estate Bust: Your Pension – Nearly 10% of Mortgages Delinquent or in Foreclosure (Dec 2008) – Urban Planning

  • Volcker on the Great Recession and Need for Reform

    America Must ‘Reassert Stability and Leadership’

    SPIEGEL: Can the current situation be compared with the Great Depression?

    Volcker: I remember there were people, beggars and tramps as we called them, who wanted to be fed. So it’s true, today we also have people who are relying on food stamps and other payments but we are a long way from the Great Depression. We are in a serious, great recession. Today we have 10 percent unemployment, but at that time it was more like 20 or 25 percent. That’s a big difference. You had mass unemployment.
    …
    SPIEGEL: Are you sure? The Wall Street businesses are doing well. The big bonuses are back.

    Volcker: It’s amazing how quickly some people want to forget about the trouble and go back to business as usual. We face a real challenge in dealing with that feeling that the crisis is over. The need for reform is obviously not over. It’s hard to deny that we need some forward looking financial reform.
    …
    SPIEGEL: But the American government seems to have lost some eagerness in setting a tougher regime of rules and regulations to control Wall Street. Everything is being watered down. Why?

    Volcker: I will do the best I can to fight any tendency to water it down. What we need is broad international consensus to make things happen.

    I am surprised how many people are trying to compare the economic situation today (often using unemployment rates) and say we are in nearly as bad a situation as the great depression. The economy is certainly struggling, great recession, is a good term for it, I think. But taking the high measures of unemployment and underemployment today and comparing it to unemployment in the 1930’s is not comparing like numbers. The employment situation is bad now. It was much worse in the great depression. As intended, support systems like unemployment pay, FDIC, food stamps… have worked to reduce the depth of the recession.

    He is right that we need serious reform to the deregulation that allowed the credit crisis to explode the economy.

    Related: Volcker: Economic Decline Faster Now Than Any Time He Remembers – The Economy is in Serious Trouble (Nov 2008) – Unemployment Rate Reached 10.2% – Canada’s Sound Regulation Resulted in a Sound Banking System Even During the Credit Crisis

  • USA Housing Foreclosures Slowly Declining

    Mortgage defaults hit an all-time high in July according to RealtyTrac (the data in this post is from their survey). Last month default notices nationwide were down 8% from the previous month but still up 22% from November 2008, scheduled foreclosure auctions were down 12% from the previous month but still up 32% from November 2008, and bank repossessions were flat from the previous month and down 2% from November 2008. The housing market is currently not getting worse but it is hardly improving rapidly.

    “November was the fourth straight month that U.S. foreclosure activity has declined after hitting an all-time high for our report in July, and November foreclosure activity was at the lowest level we’ve seen since February,” said James J. Saccacio, chief executive officer of RealtyTrac.

    Four states account for 52% of national foreclosures for the second month in a row: California, Florida, Illinois and Michigan.

    Related: Mortgage Delinquencies Continue to Climb – Over Half of 2008 Foreclosures From Just 35 Counties – Nearly 10% of Mortgages Delinquent or in Foreclosure

  • House Votes to Restore Partial Estate Tax Very Richest: Over $7 Million

    As I have said previously, capitalists support the estate and inheritance taxes. Not those that see themselves as nobility, and call wish to be called capitalists, that want to reward the children of the wealthy (because we all know they need more advantages than they already get). While the Democrats voted in favor of capitalism (letting those who earn wealth prosper) instead of supporting nobility, as has been the recent trend, they did so only for the richest few. So they decided Kings and Queens should not pass all their wealth to the kids (still they can pass more than 50% of it – oh don’t you feel sorry for those poor kids you might have to get just $3.85 million instead of the $7 million they “need”). So the Democrats decided all the children of Lords, Dukes, Earls… should not have to have their trust funds impinged in any way.

    The House voted 225-200 to indefinitely extend the current tax, which imposes a top rate of 45 percent.

    “We make the estate tax go away for 99.75 percent of the people in the country,” said North Dakota Democrat Earl Pomeroy, the main sponsor. Republicans who voted against the measure said they favored repealing the levy.

    Congress in 2001 decided to drop the estate tax in 2010 before reinstating it in 2011 at the previous higher top rate of 55 percent for estates valued at more than $1 million.

    Isn’t it amazing how little the children of wealthy are asked to share in the huge inheritances they get. But until the economic literacy of the country improves they are able to pretend noble blood lines passing down huge fortunes are not just those with the gold making the rules.

    You might notice the government is in pretty desperate need of money. But some still think asking the kids of the super rich to part with some of their inheritance is too much to ask. I wish they would learn about economics. It is not capitalist to reward being born in the right house with more cash than than many will every earn working 40 plus years (a 50% inheritance tax on the super rich is less than it should be – and it shouldn’t be just the super rich that pay inheritance tax). Maybe exempt $1-2 million and index that. The next million at 50%. Then increase the rate 5% every million. I don’t really see any need to give some kid $100 million because they happen to have been born to a rich parent. Capitalism is about rewarding economic productivity not the birth lottery.

    Related: Rich Americans Sue to Keep Evidence of Their Tax Evasion From the Justice Department – Killing Capitalism in Favor of Special Interests – Ignorance of Capitalism – Charge It to My Kids – Buffett on Taxes

  • Diabetics May Double in 25 Years, Increasing Health Costs $200 Billion

    Diabetics in U.S. May Double in 25 Years, Tripling Health Costs

    The number of Americans with diabetes may almost double in 25 years, and the annual cost of treating them may triple to $336 billion, according to a study published today in the journal Diabetes Care.

    Without new programs to assure that people get health care to manage their condition, 44.1 million people in the U.S. will have diabetes by 2034, from 23.7 million today, the report said. The number of diabetics on Medicare, the government plan for the elderly, will reach 14.1 million from 6.5 million today.
    …
    The analysis by O’Grady and his colleagues included the impact of aging and obesity rates

    The broken health care system needs to be fixed. We continue to spend huge amounts of money and yet fail to take sensible steps to improve outcomes (see our recent post for another example of failing to focus on outcome measures).

    Related: USA Heath Care System Needs Reform – Deficit Threat from Health Care Costs – articles on improving the medical care system – USA Spent $2.2 Trillion, 16.2% of GDP, on Health Care in 2007 – Study Finds Obesity as Teen as Deadly as Smoking