Friday, March 25, 2011

Time for Congress to STAND DOWN!

I was tooling around my bank’s website the other day when a poll caught my eye.  The poll asked to gauge my support for the federal STANDUP Act.  Being a libertarian, my natural state of balance leans hard away from most kinds of federal action.  But in order to appear reasonable, I thought I would at least read the article before voting.

The STANDUP Act seeks to impose Washington’s will on every soon-to-be driver.  Congress, in its infinite wisdom, would like to strip states of their inherent right to dictate licensing terms for young drivers.  Implied in this legislation is that state legislatures and governors, elected by the people, lack the expertise, obviously enjoyed by their federal counterparts, to enact and administer a teenage licensing system.  Yes, the U.S. Congress, brimming with years of experience and firsthand knowledge of administering driver’s licensing programs will strip yet another right away from the states.

As you may know, each state fashions its own licensing requirements.  (after all, states issue a driver’s licenses, not the feds)  Some states allow drivers to sit for a learner’s permit as young as 14, while others require youngsters to be at least 16.  Some states employ a graduate driver’s license or GDL.  The GDL system utilize phases and restrictions normally over the course of a few years before granting full driving privileges. Initial studies have indicated that GDL systems better equip young drivers with good driving skills, thus preventing accidents.  Now Congress would like every state to adopt a single standard – the famous one-size-fits-all approach.

Of course, Washington has no Constitutional power to force the states into action, but they’ll use something just as compelling: federal highway funds.  Fail to adopt our ways and we withhold cash for your roads.  For once, I’d love for a state to tell Congress to keep their laws and money and go pack sand.

One-size-fits-all legislation rarely works, and it won’t work here.  Do New York City drivers face the same obstacles, circumstances, and challenges as Idaho drivers?  No.  Do West Virginia drivers and Kansas drivers encounter the same driving challenges?  No. 
Here’s how I see it.  As the parent, you can impose any number of restrictions on your kid as you see fit.  Just because the state says my kid can drive at age 16 doesn’t necessarily mean she will.  I will be the judge of her driving abilities, and I will determine when, where, and how she drives.  I say Congress needs to Stand Down and butt out of my state’s business and mine.

Sunday, March 20, 2011

My Birthday

Happy birthday to me,
Happy birthday to me.
Happy birthday dear Brad,
Happy birthday to me.

On Speculation

Well it looks like the nitwittery about oil speculation has started again. Some people are blaming the current high price of oil (and therefore gasoline) on oil speculators. Speculators make a handy scapegoat, but does this argument hold water? Or oil?

The argument, as far as I can tell, goes something like this:

A) We observe relatively high prices for oil. This is always in nominal terms.
B) We say that such high prices cannot be explained by fundamental factors like shifting demand and supply curves.
C) Therefore, it must be those dastardly speculators!

This is poor logic at best. First, is crude oil relatively expensive right now? You be the judge.

Second - where is the analysis to back up the conclusion in B? I see very little. The action in the middle east is unsettling and that can disturb oil production leading to a leftward movement in the supply curve - less supply, same demand equals higher prices. Also realize that domestic (U.S.) oil production is curtailed by regulations. If supply remains pretty stable in general, then occasional shocks make a big and noticeable difference. Also, demand drives price changes in such a case, which results in seasonality in oil and gas prices.

Third - speculation is widely misunderstood. Apparently the fear about speculation is being generated by action in the futures markets. Now, on the 15th of March, WTI quote for light sweet crude was 97.23/bbl. Futures prices from the Chicago Mercantile Exchange are here. The prices are all /bbl, and the volume and open interest are in contracts. Each contract is for 1000 barrels. Volume is the number of contracts traded, and open interest is the number of open contracts at the end of the trading day.

As one can see, this is a very active market. What's critically important about the futures world is that for every buyer there is a seller. In other words, for every contract there is equal buying pressure and selling pressure. So the idea that speculation should necessarily lead to higher prices is already suspect.

If I am long a futures position (meaning I promise to buy crude oil in the future) then that means I think spot (the price for immediate delivery) crude prices in the future will be higher than the price I can lock in today. Oil users like to lock in prices today and eliminate the chance of having to pay those higher prices in the future. At the same time, they eliminate the change of paying a lower future price. That's risk management.

If I am short a futures position (I promise to sell crude in the future) then that means I think spot prices in the future will be lower than the price I can lock in today. Oil producers manage risk using such contracts to lock in a certain future sales price, at the cost of not getting happy surprises either.

The speculators are those who do not have an underlying interest in the commodity (oil). Thus they are not producers or users of crude oil. They do serve an important function though - they provide liquidity to the market. If it was just hedgers, getting prices in small increments and a lot of dates would be more difficult, resulting in unwanted exposure.

Keep in mind a few factors that are also in play right now: most central banks are creating money, which has inflationary effects (although not uniform); China's industrial base continues to grow, along with their consumer base - thus the demand for oil is continually shifting outwards; the supply of oil is also shifting out, but much more slowly than demand. These factors, fundamentals really, have a much greater capacity to explain oil and gas prices than speculation in futures markets.

Saturday, March 19, 2011

Budget Battle: Some Perspective

As you may know, Congress has been inching the FY11 budget forward all year.  This occurred because the last Congress failed to pass a single appropriation (0 of 12 appropriation bills).  Thus, we’ve been living under a CRA (Continuing Resolution Authority) for the last 6 months, and the knuckleheads just approved the latest one, which will last 3 weeks.  Why can’t we get a full year budget you ask? The problem: Reps want cuts, and Dems don’t.  Let’s see examine the magnitude of the proposed cuts.

The entire budget for fiscal year 2011 is about $3.8 trillion.  The projected deficit for this year is around $1.65 trillion – an astonishing figure.  The bar labeled “Discretionary” is about $1.05 trillion and is the source of the squabbling.  Mandatory spending needs no annual appropriation – things like Medicare and Social Security run on autopilot. 
The last bar, labeled “Cuts”, represents about $50 billion.  The Reps want to shave this amount from discretionary spending, but the Dems consider this draconian.  Get real people.  $50 billion out of a $3.8 trillion is budget dust – a rounding error. 

Friday, March 18, 2011

A ban I can Support

The US House of Representatives voted to stop giving taxpayer money to National Public Radio.  Finally, a ban I can support.  Interestingly, the WSJ poll (not scientific) indicates that 73% of folks agree with me.  Awesome.  

See here for the story.