Carpe Diem

Moving In And Out of Those Income Brackets

Significant Income Mobility: Quintiles Not Closed Clubs


Great column today by Thomas Sowell on That “Top One Percent,” here are a couple excerpts:

Americans in the top 1%, like Americans in most income brackets, are not there permanently, despite being talked about and written about as if they are an enduring “class” — especially by those who have overdosed on the magic formula of “race, class and gender,” which has replaced thought in many intellectual circles.

At the highest income levels, people are especially likely to be transient at that level. Recent data from the Internal Revenue Service show that more than half the people who were in the top one percent in 1996 were no longer there in 2005.

Among the top one-hundredth of one percent, three-quarters of them were no longer there at the end of the decade.

These are not permanent classes but mostly people at current income levels reached by spikes in income that don’t last.

Among corporate CEOs, those who cash in stock options that they have accumulated over the years get a big spike in income the year that they cash them in. This lets critics quote inflated incomes of the top-paid CEOs for that year. Some of these incomes are almost as large as those of big-time entertainers — who are never accused of “greed,” by the way.

Most Americans in the top fifth, the bottom fifth, or any of the fifths in between, do not stay there for a whole decade, much less for life. And most certainly do not remain permanently in the top one percent or the top one-hundredth of one percent.

Most income statistics do not follow given individuals from year to year, the way Internal Revenue statistics do. But those other statistics can create the misleading illusion that they do by comparing income brackets from year to year, even though people are moving in and out of those brackets all the time.

Carpe Diem

Apostrophe Misuse Ending at The NY Times?

NYTimes today: In the first half of the 1990’s, she was Mr. Mitterrand’s lead aide on international trade issues.

NYTimes today: For two years in the mid-1990s, Mr. Morrissey was suspended from practicing law in New York State for mishandling a client’s escrow account.

NYTimes today: As prime minister in the 1990s, Nawaz Sharif was a religiously conservative, nationalist leader who allowed the Taliban to flourish in Afghanistan and detonated a nuclear weapon despite an American plea not to.

NYTimes today: In the past four years, he has designed collections inspired by the war in Chechnya, the boycotted 1980 Moscow Olympics, the Soviet Navy and, this season, Moscow criminal gangs of the 1990s.

Although it’s not always consisent, I think the NY Times is phasing out its long-standing policy of adding an unnecessary (IMHO) apostrophe to words like “1990′s” (first example above) and is moving toward the standard style guideline in use at every other major newspaper, and is now using “1990s” (most of the time), since a decade is plural, not possessive.

For example, a search of the NY Times in 2007 through November 27 shows almost 3,000 examples of the term “1990s,” and only 56 examples of the term “1990′s.”

A search of the same period in 2006 shows almost 3,000 examples of the term “1990′s” and only 237 examples of the term “1990s.”

There is a definite trend at the NY Times towards eliminating the misuse of that “puny piece of punctuation.” Thank God. See previous CD posts about apostrophe abuse here and here.

Carpe Diem

New York Manhole Covers, Forged Barefoot in India

It’s not just call centers that are outsourced to India.

NEW DELHI — Eight thousand miles from Manhattan, barefoot, shirtless, whip-thin men rippled with muscle were forging prosaic pieces of the urban jigsaw puzzle: manhole covers.

Manhole covers manufactured in India can be anywhere from 20 to 60 percent cheaper than those made in the United States.

MP: Just wondering, to be PC, shouldn’t it now be “personhole cover”? After all, “Frosty the Snowman” has been replaced by “Frosty the Snowfriend,” and a “grandfather clause” has been replaced by a “grandperson clause,” and I’m not making that up!

Watch a slide show here about manholes made in India.

(HT: Sanil Kori)

Carpe Diem

Mad Money = Money-Losing Investment Advice

In the December 2007 issue of the Quarterly Review of Economics and Finance, there is an article “Does Mad Money make the market go mad?”

From the abstract: Our analysis of returns and trading volume around stock recommendations aired on charismatic host Jim Cramer’s Mad Money program reveals statistical evidence of response to both his buy and sell opinions, with most of the full-day return following an on-air buy recommendation captured by that day’s opening price. Trading strategy analysis suggests that individuals with limited funds should be wary of short-term trading to exploit the show’s suggestions.

From the conclusion: Heightened investor activity around stocks discussed on the show is indicated by statistically significant abnormal and raw returns, as well as trading volume increases, on both the day 0 air dates of buy recommendations and the day +1 trading day, with the day +1 effects being stronger as expected. However, since almost all of the average raw return on day +1 is captured in the difference between the day 0 close price and the day +1 opening price, a change likely induced by the weight of pending buy orders placed by viewer investors before the market opens, the average investor is unable to benefit from this effect and, further, the aggregate impact is to increase the cost of acting on these recommendations for all investors.

From the text: Table 6a (shown above, click to enlarge) shows that the 127 buy recommendations are distributed across twenty-eight different show air dates within our 7/26/2005 to 9/16/2005 sample. On each day, the $10,000 is allocated equally across all of the buy recommendations. Share purchases are rounded to the nearest whole share. As a result, the amount invested on each day is never exactly $10,000 but is more than $10,100 only twice. If an investor had executed this strategy twenty-eight times on the days covered in this sample, a loss of $861.32 would have been realized, not counting the per-trade commissions.


(MP: Add in $10 per trade for 127 buy orders, and your total loss would be $2,131.)

(HT: Mike Munger)

Carpe Diem

Commercial Bank Lending at All-Time High

From today’s front page WSJ article “Recession Fears Weigh Heavily On the Markets”:

This time around, much depends on how tight a rein financial institutions keep on their lending and consumers keep on their spending.

By itself, the housing slump seems unlikely to choke off U.S. economic growth. Home construction accounts for less than 5% of the nation’s gross domestic product. But if banks curb their lending in response to billions of dollars of mortgage-related write-offs, or if consumers cut their spending as home values fall and gasoline prices rise, it could knock the economy out of its delicate balance.

The chart above (click to enlarge) shows lending activity at all U.S. commercial banks from 1985 through the third quarter 2007, using data from the Federal Reserve Board. As the chart shows, both: a) all loans, and b) real estate loans, are at all-time highs, and there doesn’t appear to be any “curbing in lending” by commercial banks, at least not yet.

Carpe Diem

In Euros and UK Pounds, Oil Prices Aren’t That Bad

Rising oil prices, measured in dollars, get all of the media attention, largely because oil is priced and sold in dollars in world oil markets. What has gotten much less attention is the price of oil in other currencies like British pounds and Euros, which have both appreciated vs. the USD by 16-18% over the last few years, helping to offset the higher price of oil in dollars for Europeans.

The chart above (click to enlarge) shows that oil prices in dollars have almost tripled since 2004, whereas oil prices in pounds and euro have only doubled during this period. Since July 2006, oil prices in dollars have risen more than 15% (see vertical line above), compared to modest increases over the same period of only 2.74% in euros and 4% in pounds.

Further, consider that $100 oil today is only 67.4 euros per barrel at today’s exchange rate of $1.4828/euro, compared to 114 euros per barrel at the exchange rate 5 years ago of $0.8766/euro. The double-digit appreciation of major currencies (pound, euro, Canadian dollar, Swiss franc, etc.) vs. the USD might be another factor that explains why the world economy has been able to absorb the shock of $100 oil.

From the NY Times, “Throughout Europe, the rise of the euro has acted as a hedge against fluctuations in the dollar-denominated oil market.”

Carpe Diem

Some Historical Perspective on Commercial Banks


The charts above are based on Federal Reserve commercial banking data released on Monday and available here, with updated data on a) loan charge-off rates and b) loan delinquency rates through the third quarter 2007 for all U.S. commercial banks.

As the charts show, despite all of the recent bad news and “gloom and doom” about the U.S. banking sector, the commercial banking sector might actually be surviving the subprime crisis quite well, at least so far. The charge-off rates for all bad loans (0.60%) has increased recently (top chart), but is about half the 1.2% rate in 2002, and about 1/3 the 1.75% rate in 1991. The charge-off rate for real estate loans (.19%, or only about 2 properties per 1,000) in the third quarter 2007 is almost half of the .29% rate in 2001, and less than 1/6th of the 1.2% rate in 1991.

Likewise, loan delinquency rates have increased recently (bottom chart), but are still far below the rates of the late 1980s and most of the 1990s.

On a previous CD post, I reported that not a single U.S. bank failed in either 2005 or 2006, and only 3 banks have failed in 2007. The loan charge-off and delinquency rates for U.S. commercial banks through the third quarter of 2007 indicate that our banking system is surviving the subprime crisis, without any danger of pending collapse.

Bottom Line: The U.S. banking system is probably stronger and more stable than most people give it credit for. Empirical data on bank charge-off rates and delinquency rates, at least through the third quarter 2007, suggest that banks are probably doing better than most people think.

Carpe Diem

Ethanol: “Dangerous, Delusional Bullshit”

Ethanol: Fails a Cost-Benefit Test
Ethanol production in the United States has been steadily growing and is expected to continue growing. Many politicians see increased ethanol use as a way to promote environmental goals, such as reducing greenhouse gas emissions, and energy security goals. This paper provides the first thorough benefit-cost analysis of increasing ethanol use beyond four billion gallons a year, and finds that the costs of increased production are likely to exceed the benefits by about three billion dollars annually. It also suggests that earlier attempts aimed at promoting ethanol would have likely failed a benefit-cost test, and that Congress should consider repealing the ethanol tariff and the ethanol tax credit.

Abstract of a new research paper “The Benefits and Costs of Ethanol,” by Robert W. Hahn and Caroline Cecot, both of the AEI-Brookings Joint Center for Regulatory Studies.


From Robert W. Hahn’s editorial in yesterday’s WSJ:

To hear the candidates tell it — especially those on the stump in Iowa — ethanol is the answer to America’s energy-security woes. And back in Washington, politicians since 1978 have been putting your money where their mouths are: Ethanol is currently subsidized to the tune of 51 cents per gallon when blended with gasoline.

To make sure foreigners don’t share the ride on the ethanol gravy train, moreover, Congress has imposed a 54-cent tariff on imported ethanol.

Carpe Diem

Goldilocks Rocks on Black Friday, +8.3% Increase

NEW YORK (AP)The nation’s retailers had a robust start to the holiday shopping season, according to results announced today by a national research group that tracks sales at retail outlets across the country. According to ShopperTrak RCT, which tracks sales at more than 50,000 retail outlets, total sales rose 8.3% to $10.3 billion on Friday, the day after Thanksgiving, compared with $9.5 billion on the same day a year ago. ShopperTrak had expected an increase of no more than 4-5%.

By the way, consider that gas prices last Thanksgiving were about $2.25 per gallon, and gas prices today are about $3.09. Even with gas prices 37% higher than a year ago, consumers spent a record amount this year on Black Friday. See the post below.