Brown Leads Warren For MA Senate Seat On Intrade

The Intrade election security market prices show incumbent Scott Brown winning over Elizabeth Warren.

Intrade prices, on May 19, 2012, give Brown a 52.5 percent chance of winning the 2012 Massachusetts US Senate seat. Warren has a 47.5 percent chance of winning.

Elizabeth Warren's Odds Of Winning MA Senate Seat

Scott Brown's Odds Of Winning MA Senate Seat

Possible Reasons For JPMorgan Chase's Market Valuation Decline Of 12 Times The Announced Trading Losses

JPMorgan Chase's stock market value has dropped 17.8 percent from the May 10, 2012 closing share price of $40.74 to May 17, 2012 Friday's closing share price of $33.49. That is almost 4 times the 4.6 percent decline of the S&P 500 in the same time. The bank's stock market equity valuation shrunk during this interval from $155.1 billion to $127.5 billion for a shareholder loss of $27.6 billion.

It was on May 10th, after the stock market closed, that CEO Jamie Dimon announced the bank's trading loss of $2.3 billion. In after hours trading, after the announcement, the bank's stock value dropped 7 percent. Other major banks saw their stock value decline in after hours trading but by a third to half as much as JPMorgan Chase.

Extra Stock Value Loss Reasons

There are several possible reasons for the stock market valuation loss greater than the one time trading losses:

• The market expects the total losses from these trades to eventually be much greater than so far announced.


• The market is treating the bank's announcement of the trading losses as a sign of lax oversight and trading risk controls at the trading arm of the bank and the market expects other significant losses as yet unannounced, and possibly as yet undiscovered, from other trades at the bank.


• Investors anticipate that Congress with be able to use the bank's trading losses to pass new banking legislation, such as a return of a Glass-Steagall separation of banking and investment banking, a break up of the bigger banks, or more stringent amendments to Dodd-Frank, which will diminish future bank profitability.


• Or some other event is expected with a negative financial impact on the bank's market valuation.

RIP LaDonna Adrian Gaines AKA Donna Summers

Earth's Ecosystem Has Capacity To Absorb More Atmospheric Carbon Emissions

From ScienceNews, "Natural sinks still sopping up carbon: Ecosystems haven’t maxed out ability to absorb fossil fuel emissions" by Alexandra Witze:

Earth’s ecosystems keep soaking up more carbon as greenhouse gases accumulate in the atmosphere, new measurements find.

The research contradicts several recent studies suggesting that “carbon sinks” have reached or passed their capacity. By looking at global measurements of atmospheric carbon dioxide, the new work calculates instead that total sinks have increased roughly in line with rising emissions.

Obama's Politics Negate Clean Energy Goal

From Bloomberg, "Obama’s Tariffs on China’s Solar Products Will Cost U.S." by the Editors:

This week, the Obama administration is poised to slap potentially hefty tariffs on imports of Chinese solar products, a move that will satisfy a protectionist urge but undercut the U.S. energy agenda. It’s no secret China is aggressively subsidizing its solar manufacturers, driving down prices for solar panels and components. Here’s the question: Is that a bad thing?

One of the administration’s overarching goals -- and one we heartily endorse -- is fostering the adoption of clean, non- carbon-based energy, including solar. In a perfect world it should matter less where the technology comes from than whether affordable solar is enabling office buildings, universities and households to install the technology and cut down on fossil-fuel use.

Slapping tariffs on the Chinese may make for good politics, but it will slow solar adoption....

Standard Statistical Methods Are Too Likely To Find Variables That Explain Stock Market Returns And Anomalies

From "Pseudo-Predictability in Conditional Asset Pricing Tests: Explaining Anomaly Performance with Politics, the Weather, Global Warming, Sunspots, and the Stars" by Robert Novy-Marx, NBER Working Paper No. 18063, May 2012:

Ferson, Sarkissian and Simin (2003) warn that persistence in expected returns generates spurious regression bias in predictive regressions of stock returns, even though stock returns are themselves only weakly autocorrelated. Despite this fact a growing literature attempts to explain the performance of stock market anomalies with highly persistent investor sentiment. The data suggest, however, that the potential misspecification bias may be large. Predictive regressions of real returns on simulated regressors are too likely to reject the null of independence, and it is far too easy to find real variables that have “significant power” predicting returns. Standard OLS predictive regressions find that the party of the U.S. President, cold weather in Manhattan, global warming, the El Niño phenomenon, atmospheric pressure in the Arctic, the conjunctions of the planets, and sunspots, all have “significant power” predicting the performance of anomalies. These issues appear particularly acute for anomalies prominent in the sentiment literature, including those formed on the basis of size, distress, asset growth, investment, profitability, and idiosyncratic volatility.

Minorities Pay Higher Prices Than Whites For Similar Homes But Racial Prejudice Ruled Out As Cause

From "Price Discrimination in the Housing Market" by Patrick Bayer, Marcus D. Casey, Fernando Ferreira, Robert McMillan, NBER Working Paper No. 18069, May 2012:

using novel panel data from over two million repeat-sales housing transactions in four metropolitan areas. The results indicate that black and Hispanic homebuyers pay premiums of around 3 percent on average across the four cities – differences that are not explained by variation in buyer income, wealth or access to credit. The estimated premiums do not vary significantly with the racial composition of the neighborhood or, most strikingly, the race of the seller. This latter result rules out racial prejudice or animosity on the part of sellers as the primary explanation for the estimated premiums.

As California Raises Tax Rates, Tax Revenues Fall Short

From The Wall Street Journal Opinion, "California Ugly: Soaking the rich isn't working on the left coast." :

California Controller John Chiang reported last week that April tax collections were a gigantic 20.2%, or $2.44 billion, below 2012-13 budget projections. You have to admire Mr. Chiang's capacity for understatement as he noted that "revenues disappointed." Yes, and J.P. Morgan's whale trade was a $2 billion rounding error.

Among the biggest surprises is a 21.5% or nearly $2 billion decline in personal income tax payments from what Governor Jerry Brown had anticipated. This reinforces the point that when states rely too heavily on the top 1% of taxpayers to pay the bills, fiscal policy is a roller coaster ride. [Emphasis Added]

JP Morgans' Stock Value Loss Far In Excess Of Trading Loss: Market Fear Of Government Response Likely Cause

The dollar amount of JP Morgan Chase's derivative hedging trading loss alone did not justify the drop in the bank's share price in the stock market. JP Morgan Chase lost 9.3 percent, $14.4 billion, of its stock market value on the announcement of a one time trading loss of $2.3 billion. The one time trading loss is about a half percent of its managed investment portfolio, 1 percent of the bank's net worth and 10 percent of last years pre-tax earnings. The bank is substantially solvent after the losses and the trading losses do not affect its future earning power and financial outlook. The other financial entity counterparties, banks, hedge funds, etc., to JP Morgan Chase's derivative trades will realize the gains equal to the bank's losses. Derivatives are a zero sum financial instrument. One investor's losses are another's gain. It is unlike the housing crisis where the decline in home values affected the mortgage collateral of all financial institutions negatively.

It is also unlikely that there are more hidden losses at the bank.

Governmental, regulatory and legislative overreach are the major risk factors affecting financial institutions these days after an unexpected trading or earnings loss. The fear of governmental dysfunctional and chaotic intrusion into the banking business of targeted financial institutions is the lasting legacy of the government's response to Bear Stearns, Lehman and AIG. It is my guess that the eagerness of the government to micromanage business when an opportunity arises, especially the financial business, is the reason behind the stock market value decline far in excess of the trading loss at JP Morgan Chase. Government intrusion into business reduces decision making responsiveness, management flexibility, increases costs and consequently reduces the profitability and value of the business.

From The Wall Street Journal, "Bank Order Led to Losing Trades: J.P. Morgan's Efforts to Shield Itself From European Market Fallout Prompted Disastrous Bets" by Dan Fitzpatrick, Robin Sidel And David Enrich:

The instructions were to find a way to reduce the bank's exposure to positions in the credit markets that had grown too large. But some of the trades they made didn't work, culminating in the company's announcement Thursday of more than $2 billion in losses.

The trading losses reverberated Friday, as J.P. Morgan shares fell 9.3%, or $3.78, to $36.96 in New York Stock Exchange composite trading at 4 p.m., erasing $14.4 billion in stock-market value.***The trading losses—$2.3 billion, according to a person close to the bank—accumulated over just 15 days in late April and early May, or an average of $153 million a day. The chief investment office managed a securities portfolio worth about $374 billion.***Several teams were assigned to review the positions, and they discovered the trading mistakes. These ranged from errors in how the bank hedged an existing hedge to how it offset the size of an existing trade that served to protect the bank, said people familiar with the situation.***One trader estimated more than a dozen hedge funds and banks profited by taking the other side of J.P. Morgan's trades.

From Brookings, "Putting JPMorgan Chase’s $2 Billion Loss in Context" by Douglas J. Elliott:

Although I am disturbed by the loss, both as a citizen and as a former employee of JPMorgan, it is also important to keep the loss in context. $2 billion is a large number, but it represents less than a tenth of last year's pre-tax earnings for the company, roughly a hundredth of the $189 billion of the firm's net worth, and about one-thousandth of its $2.3 trillion of assets.

Warren Brown Massachusetts US Senate Election Odds Even: 50-50

The Intrade 2012 US Senate election odds for Democratic candidate Elizabeth Warren and Republican incumbent Scott Brown are even at 50 to 50 as of May 11, 2012.

Warren's odds declined over the last 30 days from the mid 70s to the current 50 percent chance. Over the same time, Brown's odds increased from the low 30s to the current 50 percent chance.

Warren Intrade Price

Intrade: MA US Sen. Democratic candidate to win

Brown Intrade Price

Intrade: MA US Sen. Republican candidate to win

Bank Systemic Risk Definitions Lack Transparency And Political Accountability; Require Ad Hoc Judgments Using Unreproducible And Bureaucratically Self-Serving Data; Incentivizes Banks To Increase Risk And Under Reserve For And Conceal Losses; Promotes Regulatory Arbitrage And Unconventional Central Bank Monetary Policies

From "Variation in Systemic Risk at US Banks During 1974-2010" by Armen Hovakimian, Edward J. Kane, and Luc Laeven, NBER Working Paper No. 18043, May 2012:

Definitions of systemic risk articulated by the Basel Committee and US policymakers lack the transparency needed to establish political accountability. Assessments based on these definitions turn on ad hoc judgments and confidential data that third parties cannot reliably replicate. The judgments in question combine subjective perceptions of individual-institution distress with projections of the ex ante potential for spillovers of individual defaults across a particular country's financial sector and from this sector to the national and global real economy.

This way of looking at systemic risk is not only unreproducible, it is logically incomplete, and can be bureaucratically self-serving. It excludes from the risk-generation process the channels through which financial safety-net management can mitigate or amplify financial stability. The existence of a safety net incentivizes banks to raise their risk profiles, underreserve for loss exposures, and to conceal actual losses (Kane, 1989; Demirguc-Kunt and Huizinga, 2004; Skinner, 2008; Huizinga and Laeven, 2011). Unless policymakers vigilantly and conscientiously address this incentive problem and the regulatory arbitrage it produces, aggressive firms will be tempted to abuse the financial safety net in clever ways.

Regulatory arbitrage is exemplified today by the growing use of unconventional monetary policies by central banks, including the provision of liquidity support against weak collateral. When hidden risk-taking goes sour, it can transform a firm’s riskiest exposures into political games of chicken whose outcome generates bailout expense for taxpayers. Because it is the path of least resistance, fiscal and monetary authorities tend to shift losses to taxpayers when deep or widespread insolvencies emerge (Honohan and Klingebiel, 2003; Veronesi and Zingales, 2010; Laeven and Valencia, 2011).

Authorities take refuge in the untested claim that it is in society’s best interest to minimize the possibility of contagious defaults. This hypothesis leads them to short-circuit the default process by characterizing firms that are politically, economically, or administratively difficult to fail and unwind (DFU)5 as “systemically important“ and supporting a DFU firm’s access to credit whenever difficulties in rolling over the firm’s liabilities suggests it may have to become economically insolvent. Until and unless sovereign credit support loses its credibility, authorities can prevent widespread substantial spillovers of actual defaults across the private financial sector from actually taking place.

© 2012 by Armen Hovakimian, Edward J. Kane, and Luc Laeven. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.

Over A Decade, A Third Of Americans In Bottom Half Income Percentile Are Upwardly Mobile

From The New York Times (via Yahoo Finance), "Memo to Would-Be Members of the 1%: Move to the Northeast or Mid-Atlantic" by By Catherine Rampell:

Reaching for the American dream? Your best chances are probably in New York, New Jersey or Maryland.

Those states are best at helping Americans move up the income ladder, both in absolute terms and relative to their peers, according to a groundbreaking new study from the Economic Mobility Project at the Pew Center on the States.***[Researchers] examined how each individual’s earnings had changed exactly one decade after the initial income number was collected.

Across the country, the income of the typical American rose by about 17 percent in inflation-adjusted terms during that time. There was great variation among the states, though.

In a handful of states, including New York, Utah and Massachusetts, residents’ incomes rose at least 20 percent over the course of a decade. On the other hand, in Alabama and South Carolina, average incomes rose only 12 percent after adjusting for inflation.***For example, a person who started out in the 20th percentile would have to climb to at least the 30th percentile after a decade in order to be considered “upwardly mobile” in this study.

Across the country, about a third of Americans who started in the bottom half in income were able to move up that much.

At the more upwardly mobile end, in Connecticut, 40 percent of the state’s residents who started in the bottom half moved up at least 10 percentiles over the course of a decade.

At the other extreme, in North and South Carolina only about a quarter — 26 percent — of people who started at the bottom were able to lift themselves up that much.

The Executive Summary of the Pew State Mobility Report is available.

CBO Infographic On Energy Security

CBO Infographic on Energy Security:

One In Three US Workers Needs Government License To Work

From "License to Work: A National Study of Burdens from Occupational Licensing" by Dick M. Carpenter II, Ph.D., Lisa Knepper, Angela C. Erickson and John K. Ross:

License to Work: A National Study of Burdens from Occupational Licensing is the first national study to measure how burdensome occupational licensing laws are for lower-income workers and aspiring entrepreneurs.

The report documents the license requirements for 102 low- and moderate-income occupations—such as barber, massage therapist and preschool teacher—across all 50 states and the District of Columbia. It finds that occupational licensing is not only widespread, but also overly burdensome and frequently irrational.

On average, these licenses force aspiring workers to spend nine months in education or training, pass one exam and pay more than $200 in fees. One third of the licenses take more than a year to earn. At least one exam is required for 79 of the occupations.

Barriers like these make it harder for people to find jobs and build new businesses that create jobs, particularly minorities, those of lesser means and those with less education.

License to Work recommends reducing or removing needless licensing barriers. The report’s rankings of states and occupations by severity of licensure burdens make it easy to compare laws and identify those most in need of reform.

From web press release for Institute of Justice Job Licensing Report:

Noted licensure expert Morris Kleiner found that in the 1950s, only one in 20 U.S. workers needed government permission to pursue their chosen occupation. Today, it is closer to one in three. Yet research to date provides little evidence that licensing protects public health and safety or improves products and services. Instead, it increases consumer costs and reduces opportunities for workers.

Real Investment Back To Lower 1993 Trend Level: Portends Lower US Productivity And Economic Growth

From Federal Reserve Bank Of Cleveland, Economic Trends, "A Return to Lower Levels of Investment Activity" by Margaret Jacobson and Filippo Occhino:

After growing 3.46 percent on average during the 1970s and 1980s (more precisely, between the peaks of the 1969–1970 and 1990–1991 cycles), investment accelerated during the 1990s and remained elevated until the 2007 recession. Between 1995 and 2007, investment exceeded the level consistent with a 3.46 percent constant growth rate by about 20 percent to 40 percent. Relative to real GDP, investment measured in real terms rose from 12 percent to record-high levels above 17 percent. Several factors contributed to this period of high investment activity, including the introduction and spread of new information and communication technologies, which raised the productivity and return of investment; the steep decline of the relative cost of investment goods; and the greater supply of funds made available by the larger flow of foreign capital entering the U.S.

***The higher level of investment had a positive impact on aggregate demand and economic activity. And by deepening the capital stock, it raised labor productivity and economic growth. After averaging 1.6 percent between 1987 and 1995, productivity growth accelerated to 2.6 percent. Of this productivity acceleration, capital deepening was a major contributor, raising the growth of labor productivity by about 0.6 percentage points during 1995–2010 relative to the previous 1987–1995 period.

Both Male And Female Labor Force Participation Rate For 25-54 Year Olds Below Pre-Recession Level: Percentage Not In Labor Force But Want To Work Has Increased

From Federal Reserve Bank of Cleveland, Economic Trends, "Labor Markets: Glass Half Empty…Glass Half Empty" by Timothy Dunne and Kyle Fee:

looking at the labor force participation rate for prime-age workers, 25 to 54 years old. The labor force participation rate for prime-age workers should be less sensitive to schooling and retirement decisions, which often affect the labor force participation rates of younger and older cohorts. Even for males aged 25-54, we saw steady declines in participation rates not only during the recession, but also during the recovery. A recent Chicago Fed Letter by Daniel Aaronson, Jonathan Davis, Luojia Hu reports that only one-quarter of the decline in labor force participation rates in the period from 2008 to 2011 can be explained by demographic factors.

***Each of these projections shows that the current labor force participation rate is well below the trend rate predicted from these official agency models, and it is likely the case that cyclical factors continue to play an important role in explaining the gap. In fact, a recent Kansas City Fed Economic Review article by Willem Van Zandweghe estimates that cyclical factors explain about a half of the decline in the labor force participation rate between 2007 and 2011. This suggests that if the economy improved, individuals that are not in the labor force (not counted in the unemployed) would re-enter the workforce—putting some upward pressure on unemployment rates, but also expanding the labor force.

And there is evidence that the number of individuals not in the labor force but available for work has increased. The Bureau of Labor of Statistics estimates that the number of individuals who are not in the labor force but want a job is roughly 6.3 million or 7.2 percent of the total number of people not in the labor force. This is up by roughly 1.5 million from before the recession. Still, the pace of economic growth will need to accelerate from the first quarter’s rate of 2.2 percent in order to generate the rise in labor demand needed to induce more individuals to re-enter the workforce.

Inequality Statistics Are Distorted By Foreign Earned Income Of Americans Living Abroad

As can be seen from the following table, there are a significant number of high income US tax returns filed by US citizens living and working abroad that distort the reported income inequality statistics.

From IRS Statistical Tables, "Individual Income Tax Returns With Form 2555: Source of Income, Deduction, Tax Items, and Foreign-Earned Income and Exclusions, by Size of Adjusted Gross Income, Tax Year 2006":

Individual Income Tax Returns With Foreign-Earned Income by Size of Adjusted Gross Income, Tax Year 2006

Adjusted Gross Income	Number of Tax Returns
$200,000 under $500,000	24,326
$500,000 under $1,000,000	7,180
$1,000,000 under $1,500,000	2,034
$1,500,000 under $2,000,000	843
$2,000,000 under $5,000,000	1,341
$5,000,000 under $10,000,000	309
$10,000,000 or more	209

There were a total of 334,851 US tax returns filed with foreign earned income, but the above table is for returns with over $200,000 in AGI.

From IRS publication, International Tax Overview, Statistics of Income Bulletin, Summer 2010, "Statistics of Income Studies of International Income and Taxes" by Melissa Costa and Nuria E. McGrath:

Foreign income earned by individuals living abroad rose substantially between Tax Years 2001 and 2006. For 2001, about 295,000 taxpayers reported $27.4 billion of foreign earned income ( in constant 2006 dollars), while for 2006, about 335,000 taxpayers reported almost $37 billion, an increase of about 18 percent.***Of the total number of U.S. individuals reporting foreign earned income for 2006, 8.4 percent lived in the United Kingdom and earned 17 percent of the total foreign earned income reported. One noticeable shift, however, is the growth of foreign income earned in Iraq. While no taxpayers listed Iraq as a tax home for 2001, 18,325 did so for 2006, reporting a total of $1.8 billion of foreign earned income ( Figure J ). Other countries with large increases in foreign earned income include China, with a real increase of 110.2 percent, and the United Arab Emirates, with a real increase of 80.2 percent. However, foreign earned income from taxpayers with a tax home in China or the United Arab Emirates accounts for less than 7 percent of the total.

The US is the only country to tax its citizens on their foreign earned income while they reside outside their country of citizenship.

Additionally, many foreign countries have moved away from an income tax and rely on VAT (valued added sales tax), other consumption taxes, such as a gasoline tax, Social Security taxes and wealth taxes as their countries' sources of tax revenues. The US does not allow a tax credit to its citizens for foreign taxes paid as VAT, social security or wealth tax. In effect, the tax burden on US citizens of foreign earned income can be greater than the US tax burden on US earned income.

In Good Economic Times, Income Growth Of The Upper Income Group Looks Like It Grows Faster Than The Lower Income Group Because There Is No Uppermost Boundary

After the uppermost ten (or one or twenty) percent income group experiences an increase in income, the group remains in the top percent ranking. There is no upper boundary point for those in the top grouping that allows them to move up beyond the group. The top is the top.

In a lower income bracket, an individual wage earner can move up and out of the group's income range. When all or some of those in the bottom ten percent group experience an increase in income, some or all of those individuals do not stay in the bottom ten percent group. They move up, beyond the upper boundary of the low income bracket, into higher income groupings and the lowest income group is replenished keeping the income growth rate of the lowest group low.

In the lowest income group, along with full time wage earners with low annual salaries, there are part-time workers, inexperienced workers and workers who work less than a full year, such as retirees, new graduates, rehired unemployed and other new workforce entrants, who will report less than a full year's earnings and some of whom will earn beginners' salaries. Inequality statistics do not adjust part-time or less than full year wages to full time equivalent, annualized earnings when making inequality comparisons, nor are the statistics adjusted for work experience.

There is a constant workforce replenishment stream of part-time, less than annual wage earners and inexperienced new entrants. Many workers in this replenishment stream are most likely in the lower income groupings. Their lower earnings will replace the rising earnings of the individuals in the lower income groups that move into higher income groups. Their lower earnings will keep the earning's growth rate and the average earnings of the lowest income group low.

When an economy is growing and hiring new entrants as it did for the last 30 to 40 years until the recent recession, companies' hires will include new graduates, inexperienced workers and mid-year new workers. For many, when partial year workers' salaries are full year and when inexperienced workers and new graduates gain experience and job promotions, their incomes will rise and be counted as part of a higher income grouping.

A growing economy over years will capture higher and higher upper income wage earners in its uppermost bracket, while replenishing its lower income brackets with part-time, less than annual salary, inexperienced workers who will keep the average wage and earnings growth of the lower groups low.

A natural effect of a growing economy with new entrants into the workforce is an increase in the inequality measures between the uppermost and lowest income groups. When an economy slows and there are fewer new hires and fewer promotions, there will be less growth in wage inequality.

Having A Job Is The Most Important Measure Of Inequality, Fairness And The Economy: The US Has Replaced Less Than Half The Jobs Lost During The Recession

From TheEnterpriseBlog  AEI, "Why the job market might not be normal until 2019 or beyond …" by James Pethokoukis:

Source: AEI

the plunging labor force participation rate has been distorting the true picture of the labor market.

From The Wall Street Journal, "Depth of Recession Makes Recovery Look Worse" by Ben Casselman:

The problem is that the employment hole is much deeper this time around. The U.S. lost nearly 8.8 million jobs from 2008 to 2010, more than in the previous four recessions combined. Nearly three years into the recovery, the U.S. still employs 5 million fewer workers than before the recession. [Emphasis added.]

US Inflation Adjusted Home Prices At 1895 Levels

From The Wall Street Journal, SmartMoney, "Why U.S. House Prices Won't Recover: Taking inflation into account, U.S. home prices are down to 1895 levels." by Jack Hough:

The latest S&P / Case-Shiller numbers, reported last week, show that prices in 20 major markets declined 3.5% over the year through February. They're now back to 2002 levels. If we subtract for inflation, they're back to 1998 levels.

But consider: After subtracting for inflation, prices are also back to 1986 levels. And 1955 levels. And 1895 levels (see chart).

Source: The Wall St Journal