Metro Area Incomes Show Impact of Higher Oil Prices

The Bureau of Economic Analysis has released data on 2007 personal income by metro area.

The big story is told in the middle section of the country. Around the Gulf of Mexico, incomes are up - partly because of aid to Katrina-hit areas, but more broadly because of the higher incomes that have accompanied higher oil prices.

These higher oil prices have devastated the Mid-West metro areas around the Great Lakes that live by manufacturing and are linked to the automobile industry or to other products that use energy.

We see a vivid picture of the massive economic shift away from manufacturing and toward energy. The next U.S. President will be the person who can offer hope to the depressed economies of the Mid-West.

Take More Risk to Cover Losses?

Yesterday's NY Times story reports that the NY State Comptroller is worried about two stresses on the state pension fund - more state workers are retiring as the baby boomer cohort gets to their 60s, and the fund took a 6.4 percent loss on its domestic equity investments. The fund fell by $600 million in nominal dollars for an overall 2.6 percent return (after adjustment for payouts), which is well below the 8 percent return that is built into the pension fund's projections. The NY State fiscal year ends March 31, so the equity loss was before the steep drop in June.

The bright spots in the Comptroller's report are high reported returns of 24.8 percent in private equity and a 14.8 percent return in real estate. The Comptroller is asking the State Legislature to let him raise his bets in this area, the riskier "alternative investments" that also include commodities and hedge funds. Comptroller Thomas P. DiNapoli is now allowed to invest 25 percent of the state pension fund assets in these riskier areas - an increase of 10 percentage points was agreed to by the Legislature in 2006.

DiNapoli is essentially saying that the 8 percent target will be hard to meet in traditional debt and equity investments and is saying that he will need to take more risk.

But there are two problems with raising the allocation again:

1. Alternative investments are notoriously less liquid and are harder to value than listed equities.
2. As yesterday's NY Sun notes, alternative investments "increase opportunities for investment managers to make politically motivated decisions," because lobbying can be fierce over these types of investments, both by managers of alternative investments and beneficiaries of the investments.

In considering the request to raise the allocation, the Legislature might pay heed to investment adviser Daniel R. Solin, who describes as a dumb money move "Taking Extra Risk With Your Investments to Make Up for Recent Losses." He says: "Many investors are tempted to take more risk with their portfolios to make up for their losses. This is a bad idea. The fact that you may have lost money in the current markets does not mean that you are able to take more risk. In fact, it may mean the opposite: Your ability to withstand market losses has diminished." More on Dumb Money Move No. 11.

NYC BUDGET | Cuts to Meet Emergency

In connection with the fiscal emergency announcement by NY State Governor David Paterson, who has called for a $600 million cut in State spending, the following article from ten months ago is worth resurrecting. It is reprinted in full from the NY Sun.

NY State's budget problems are especially acute because the State does not receive property-tax revenues, which act as a fiscal stabilizer for the City. However, NYC will be affected by NY State budget cuts and by the shortfall in investment returns for the NYC pension funds below the required return of 8 percent – which means another hit to the City's budget because the City makes up the shortfall.

City Council To Oppose Any Midyear Budget Cuts
By GRACE RAUH, Staff Reporter of the Sun October 29, 2007

If Mayor Bloomberg proposes midyear budget cuts to soften the blow of lower than expected tax revenues, he may face stiff opposition in the City Council. The chair of the council's Finance Committee, David Weprin, said yesterday that he would object to layoffs or midyear cuts now, but he added that individual agencies should always be looking for ways to be more efficient. "I think we should be looking at ways to save money, but I don't think we should be looking at any kind of panic scenarios," he said. "At this point, I would just sit back and just look for savings, but not look for any midyear budget cuts of layoffs." In September, Mr. Bloomberg sent a memo to top city officials saying the city's budget director, Mark Page, would be in charge of closely scrutinizing all future hires to ensure that the only positions filled were those deemed "critically necessary." The mayor noted that the city's economy depends on the profitability and success of Wall Street and said "recent events in the financial markets are, therefore, a subject of deep concern."

A report in the New York Post yesterday, citing an unnamed source, said Mr. Bloomberg is instructing city agencies to list potential budget cuts and that a public announcement is expected this week.

On Friday, Mr. Page reported to the state's Financial Control Board that tax revenues for the current fiscal year and future ones are less than had been anticipated in June. Tax revenues are down $238 million for the current fiscal year and predicted to be down $577 million in fiscal year 2009 and down $638 million in fiscal year 2010.

A former chief economist in the city comptroller's office until 2006, John Tepper Marlin, said that if he were at City Hall, he would act quickly to address the lower tax revenue projections by holding a press conference today to announce an official hiring freeze.

"There is absolutely no point in waiting. You want to act immediately," he said. Mr. Marlin said he agreed with Mr. Page's projections and added that if anything, "it could be worse." Unlike past mayors, Mr. Bloomberg is not afraid to deliver bad news, he said.

A spokesman for the mayor, Stuart Loeser, wrote in an e-mail message that when Mr. Bloomberg has a budget announcement to make, he will make it.

"We don't announce that we're announcing them and then announce them at a later date," he said.

POLITICAL ADS | Obama v. McCain

July 31, 2008–Blake Fleetwood has posted a sharp take on the last two elections, arguing that Karl Rove succeeded in painting a picture of:

• Al Gore as an egghead with delusions of grandeur (Image: Jerry Lewis as the mad professor) and
• John Kerry as lying about his bravery under fire (Image: Pinocchio).

Both images were travesties but they played their part in bringing Dubya to the White House.

Using Blake's flashlight we can read the first McCain and Obama ads as similar snapshots:

• McCain announces in the "Celeb" ad that Obama is the biggest celebrity in the world, up there with Britney Spears and Paris Hilton. Message? Obama's popularity is not based on anything but appearance and that being opposed to new offshore drilling means he is responsible for higher oil prices. Image: Obama as empty-headed star.

• The Obama "We Believe" campaign ad starts with an image of McCain with Bush and Cheney, then goes to Obama's uplifting "we believe" followed by enthusiastic applause. Image: A vibrant challenger, facing up to the nation's economic problems, subverted priorities.

McCain's proposed "drill and nuke" solution to the energy crisis is not likely to have any effect on balancing energy supply with needs during the next eight years. A real solution to the energy crisis requires changing the incentives and behavior of the American people, which is Obama’s focus. That's why the Sierra Club has endorsed Obama.

Misery Index Climbs

Wall Street indexes rise and fall but the economic misery index goes on forever as a single-number summary of what is happening on Main Street. I therefore think it is well worth watching as a measure of how the economy is doing. The index (simply the sum of unemployment and inflation rates) rose in June to 10.5, the highest level in 15 years, i.e., since January 1993, the month President Bill Clinton was inaugurated and President G.H.W. Bush left office. Under Clinton the index improved but it has recently climbed back to what it was when he took over.

Misery Index in the Last Month in Office of Recent Presidents:
Carter: 19.3
Reagan: 10.1
Bush 41: 10.6
Clinton: 7.9
Bush 43 (as of June 2008): 10.5

More (Huffington Post)

DOWN DOWS | Cognitive Dissonance 2

July 11, 2008–On Nov. 8 last year, in DOWN DOWS | Cognitive Dissonance  and then on  Nov. 8 in  Huffington Post, I noted that Bob Janjuah of the Royal Bank of Scotland had raised the upper end of his estimate of cumulative subprime write downs. His estimate was $500 billion at a time when losses of just $50 billion were acknowledged by institutions. Now Janjuah looks like an optimist:

1. Bridgewater Associates, the world's second-largest hedge fund, has estimated likely asset writedowns at $1.6 trillion, i.e., a 6 percent overvaluation of $26.6 trillion of risky credit-based U.S. assets (mortgages, credit receivables and credit-card receivables). Some bankruptcies are predicted.

2. David Rosenberg, Merrill's Chief North American Economist, argues in a July slide show that more bad news is in store:
- A recession? We're in it. Just a question of how bad it gets and for how long.
- Asset values? Not yet priced low enough to reflect the recession.
- Housing prices? Could fall another 20 percent.
He therefore believes that while stagflation is the problem today, tomorrow it will be deflation and Fed policy must therefore remain accommodative.

Recent declines in the Dow are closing the disconnect I noted on Nov. 8 between the debt and equity markets. But the months ahead will be challenging for private investors and government officials at all levels.