Not So Dismal

Making Economics a Little Easier to Understand

Charlton Heston on America’s Energy Future

leave a comment »

Gotta love the prescience.

Advertisements

Written by caseyayers

15 October, 2008 at 11:02 pm

Cheap Macs Aren’t the Point

with one comment

Here’s an excellent article from Daring Fireball’s John Gruber on why the “$800 Macbook”, a concept that began as literally one man’s rumor and grew into some sort of backwards conventional wisdom, was not announced at yesterday’s Apple event. One stat in particular that is so telling as to Apple’s philosophy toward their product line: the Mac had 18% of US marketshare, but 31% of revenue share for the industry. Where others are commodities, Macs are not. This makes Apple more protected in a period of economic uncertainty like the one we face today than, say, Dell because with the Mac, it never comes down to price. “PCs” are inferior goods (in the economic sense), but Apple’s most loyal customers are the ones that have nowhere else to turn. The creatives and professionals rely heavily on the type of tools that either only exist or exist in their best forms under OS X, an operating advantage that no other company can have.

[Disclaimer: I own AAPL shares.]

Written by caseyayers

15 October, 2008 at 3:54 pm

Bailout 2.0

leave a comment »

From today’s Politico Arena question, which is “Bailout II: Does the New Plan Sound Better Than the Old? What else must happen?”

It’s “better”, but only insofar as it’s shoving open the credit markets.

One of the weapons that has helped most in the past few days is one that is hardly being mentioned: FASB, an accounting standards organization, released changes regarding mark-to-market accounting for illiquid assets, suggesting that it might be okay to value mortgage packages and other securities that simply aren’t being traded at their cash value, rather than at the bidding price. This is important because the bidding price is far below both the actual hold-to-maturity value of these securities and even discounted prices many companies might accept to simply get rid of them. If the change is enough to allow auditors the latitude to sign off on less paranoid financial statements, then we may see that many companies on the cusp of problems are, in fact, doing okay from a cash flow perspective.

But the crush of new money bursting through the gates remains a big part of this, to be sure. And that’s what should be most concerning: this money may be useful to break open the clogged pipes, but now the fear should be focused on when they burst. In other words, having hundreds of billions of new dollars in the market that aren’t really needed will lead to massive inflation, and sooner than many people think.

Written by caseyayers

14 October, 2008 at 8:34 am

Government’s Role in Stability

leave a comment »

My answer to today’s Politico Arena question, “What can government do right now to stabilize markets or reassure the public? Bonus question: How low will the Dow go?”

The best thing government can do to stabilize the market is to declare fully, and with the greatest finality possible for such a tenuous situation, the level to which they intend to continue meddling in the markets. The reason we keep seeing day after day of multi-hundred swings this way and that is that noone can price the market. There are too many shadowy variables for traders to really get their hands around this thing.

Protect all deposits to an unlimited value. This should help to stop any runs on banks in their tracks. Provide short-term liquidity to businesses that prove both creditworthy under normal circumstances and unable to obtain credit in these troubled times. Don’t buy stakes in banks, don’t keep throwing money blindly at the sector. Doing this does very little to truly help break the credit logjam; rather, the money is simply being brought in by the truckload to any destination that might have given the slightest hint of illiquidity. This will lead to massive inflation later when we finally figure out that smaller, far more targeted sets of money, such as those the Fed auctions using its term lending facilities, were the smarter solution.

The Dow will go as low as fear can take it. But salvation here lies in greed: already valuations on some companies are absurdly low. Many companies with no exposure whatsoever to housing and with more than enough cash on hand to survive any credit freeze have been trashed. Somewhere between 7000 and 7500, the bargains will become too great to ignore for the savvy investors.

Written by caseyayers

10 October, 2008 at 8:48 am

Stop the Bailout Train

with one comment

In response to today’s Politico Arena question, “Does McCain’s ‘Homeowner Resurgence Plan’ announced at the debate make sense?” (Text of plan from the campaign’s website can be found here.)

The problem with the McCain campaign’s proposal is that it favors certain types of investment (namely, housing and real estate) and does so with taxpayer money. What compensation is to be given to those that own Apple or Google stock, with both companies’ market capitalization nearly sliced in half in the past year? Will there be a bailout for stock market investors that were “misled” into buying at prices that make the investment seem unpalatable today?

Government assistance in guaranteeing low interest rates is still an affront to the free market, but a more necessary and less harmful one. It is true that many homeowners were misled into accepting deceptive mortgage terms, and many families may be willing to continue to pay down the original principal of the loan if their payments at the very least do not go up from here.

Free market adjustment of mortgage values should be encouraged, too. Homeowners have every right to simply walk away from the mortgage they signed. The banks that hold these loans will often be very willing to rewrite mortgages to lower values on their own accord, rather than assume the responsibility of the property and be left with a house they may not resell for a long time.

Involving the federal government in yet another facet of a problem that, at its origin, is the result of artificially low interest rates will only serve to increase the national debt, lower the dollar’s prestige, and accelerate the rate of inflation, only further penalizing those that continue to pay their mortgages or invested in assets other than real estate.

Written by caseyayers

9 October, 2008 at 8:08 am

Convenience of Money

leave a comment »

An interesting piece by Tim Harford, the author of The Underground Economist, appeared in Slate Magazine last year that discussed price rigidity, using a classic example. The price of a bottle of Coca-Cola remained at a nickel for over Glass Bottles Always Taste Betterseventy years, an incredible fact given the long-term inflation of so many other prices, including those of its main ingredients. Yet Coke was hard-pressed to raise the price in order to stabilize their margins because of the vast leap between a nickel and a dime. Indeed, the next-highest denomination resulted in a full doubling of the price of a bottle of the world’s favorite soft drink. In the 1950s, when a price change was absolutely necessitated, Harford tells us that the, “…boss of Coca-Cola wrote to his friend President Eisenhower in 1953 to suggest, in all seriousness, a 7-and-a-half cent coin.”

This may seem like a bit of a comical notion, but the lack of flexibility in US denominations did adversely hurt Coke, allowing its time-honored competitor Pepsi the chance to use their famous slogan, “Costs a nickel, worth a dime.” A similar situation faces soft drink bottlers and various other vendors today. Across the country, it appears that prices are being pushed past $1.00 for a 20 Oz. bottle and $0.50 for a can en masse. While prices obviously differ from place to place, the new ceiling for cans tends to be around a dollar, indeed a doubling in price.

No Coke, PepsiBut the fact that it costs twice as much isn’t the issue anymore. Indeed, even the poorest among us would rarely be found complaining about the average price of a can of pop/soda/insert-your-regional-slang-here. The problem now is what I call “convenience of money”. While $1.00 is a nice, round figure, bottles are left in an odd predicament. In most cases, $2.00 would be seen as too high of a price, and on an ounces-per-dollar basis would be less of a value than a dollar can. Prices for bottles have fidgeted often around the $1.25 point. Even though this is much more reasonable than $2, I would surmise that Pepsi and Coke’s sales don’t show as large of a difference between $2 and $1 as they show between $1 and $1.25 due to a demand curve bent as if by gravity to the easiest combinations of monetary denominations.

The problem is that blasted quarter. People just don’t carry change like they used to, and while there may be a few $1 bills in their wallets, the likelihood of being able to finish the transaction with a quarter is much smaller. Indeed, in this day and age, it is a $1.25 bill that Coke and Pepsi should request from the US Mint, rather than the 7 1/2 cent piece of old.

Broadly speaking, it might be even better for the soda companies if dollar bills were to simply be taken out of circulation, replaced with dollar coins entirely. The Mint has tried again and again to get people to switch over voluntarily to a higher-denomination coin. Yet the embattled green portrait of George Washington survives with nary a scratch.

Dollar-scanning machines tend to break down more often than their coin-only counterparts and can become an issue when dispensing return funds when more than one dollar bill has been submitted. Vending machines have already mostly been converted to accept dollar coins, whether they are of the Susan B. Anthony, Sacagawea or Presidential variants (all share the same size and weight). Coinage loves company, as well; having dollar coins on hand makes it more likely that smaller coins will again find their way to people’s pockets, making $1.25 not so awkward a price, after all.

Another tactic has been to switch to plastic: more and more machines include credit card swipers on the front, which allow consumers to either swipe their RFID-enabled card or their old-fashioned magnetic strip to purchase some edible goodies. Overseas, cell phones are often used for transactions, with the final tab simply added on to a phone subscriber’s bill at the end of the month. Both methods take the actual money out of the equation, leaving only the true price for customers to consider; having a quarter on hand isn’t a part of this purchasing decision. While these alternatives do carry transaction costs, a price point of, say, $1.35 for credit card purchases vs. $1.25 for cold, hard cash would not scare away many customers looking for a caffeine fix. Or, perhaps, not having to be as concerned about machine break-ins, drivers having to carry around so much coinage and cash and technicians having to fix the mechanical pieces required to process the money would present a large enough savings to vending companies to make the transaction costs a wash.

One caveat is that higher prices still carry a psychological barrier to customers. Especially in these smaller denominations, people have been taught to think in coins. Perhaps $1.35, then, is a larger leap for some people than it honestly should be. Certainly $1 seems like a much better value than $1.15 would be, for example. But alternative payment systems strip away the physical tie to this price psychology and affords companies more flexibility in adding more balance-sheet “bounce to the ounce”.

Written by caseyayers

8 October, 2008 at 4:00 pm

Daily Dismal: West Side’s the Best Side

leave a comment »

Gotta love the Jaguars, right? Although they lost to the Pittsburgh Steelers Sunday night, the stadium atmosphere was electric and reminded many people, including me, why they are season ticket holders in the first place. Here’s an interesting question, though. Look at the pricing graph that Jacksonville used in the pre-season while selling those season tickets:

Duuuuuuuvaaaaallll

Focus on the light-blue on the west side versus the bright-orange on the east side, then take a gander at the prices. Since there’s ten games in a season, those west-side tickets cost $14 per game more on average than those on the east-side of the stadium. What’s up, here?

The sun, that’s what. Those fans on the west side are slightly less likely to get toasted, at least in solar terms, throughout the season. Fans on the east side, alternatively, are looking right into the source of what is often blistering heat early in the season. And at all times, of course, the sun can create a bit of glare, especially with those Sunday, 1PM games that make up the majority of the season. So why aren’t all of the seats on the west-side more expensive? Because those seats are the first ones to really gain any effect, since the sun tends to fall down the southwest corner of the stadium. The sun issue is also why a select number of more affordable club seats are available on the east side, while they all garner the highest price point on the west side.

A few other benefits exist, as well. One could argue it’s a little easier to enter and exit the stadium, traffic-wise, from the west, which points towards downtown. Also, the Jaguars bench is on the west side and most on-field entertainment focuses on the west side. But at the end of the day, it’s all about what SPF fans need to apply early in the season. As a Jags ticket agent once told me, “West side is the best side.”

Written by caseyayers

6 October, 2008 at 7:51 pm