GNP, M&A, EBITDA, P/E, NASDAQ, Econo-thread Part 10

[Colonâ„¢]

Roland, I mostly agree with your criticism but do you have reason to believe the uncertainty flatters US data in particular?

[Roland]

Originally posted by Colon
Roland, I mostly agree with your criticism but do you have reason to believe the uncertainty flatters US data in particular?

Well the gigantic service sector is "flatter". What qualifies as the final product in say legal services and education ? legal peace, a trial, or every page of paperwork ? Time spent in an institution, degrees, knowledge, social skills or "market value" of a graduate ? It is not so much whether GDP is correctly technically counted, but how well it captures welafre and how meaningful comparisons are.

[Colonâ„¢]

Yes, but why would US data be inflated by this vs EU data? and why would the size of the service sector be overestimated rather than underestimated?

[Roland]

Well if you take simply nominal amounts, you get some huge chunks. Let's say we have per capita income of 33.000 $ in the US vs 25.000 € in Austria.

Health care: 4000-5000 $ vs 2000-2500 €
Legal system: 800 $ vs 150 €
Education: 2000-2500 $ vs ~1500 €

(Those are spending figures that should be a bit higher than the GDP contribution)

So this pushes US nominal GDP up cosiderably. PPPs are pretty much taken from goods production and then somewhat adjusted for differences in service prices. I think that the "bias" from the nominal numbers carries through for that reason.

[Adam Smith]

Roland:

Let me see if I understand this. What you are citing is actual or purported per-capita spending figures. You are trying to make the point that the US and EU may have different efficiencies at producing whatever it is that people consume, be it health care, justice in some sense, or educational services.

If this is the case then there are at least three reasons I can think of why the numbers you cite don't get you where you want to go.

1. There can be a difference in preferences. The amount that Austrians spend per capita on skiing probably vastly exceeds that spent in the US. By your logic this would mean that the US is more efficient at producing good skiing.

2. There can be differences in incomes. Consumer demand depends on income and relative prices. The percentage of total budget spent on individual goods will vary with income, unless the elasticity of demand with respect to income is the same for all products, which it obviously is not. Any differences in income between countries may result in differences in amounts or percentages spent.

3. Consumers still have a budget constraint. So if incomes are roughly equal, and US consumers spend more on this commodity than Austrians do, then they must spend less on some other, such as skiing.

You need a more detailed analysis (ie., a system of demand equations for each country) to make the point.

[Roland]

AS, I have to sue you! The moment I wanted to reply to your post my PC exploded!

I wonder why...

I'm not sure about your points - maybe I should try to clarify mine. I'm representing a working thesis that simply says PPPs may be skewed. Let's forget those spending categories and look at output p.c. (ignoring agro):

Austria: 25.000 € - industry 8.000, services 17.000
US: 33.000 $ - industry 8.000, services 25.000

Now for goods we roughly have 1 €= 1 $. I wonder how the 25.000 $ in US services translate into €. Some estimates put them at 25.000 €, some at 22-23k, some may go down to 20.000. But all those estimates stick quite closely to the parity that goods suggest. I wonder - maybe there are radical differences ? Maybe 90 % of US lawyer activity is waste, vs just 70 % here ?

"You need a more detailed analysis (ie., a system of demand equations for each country) to make the point."

I think I'd need a better definition of output wrt services to make proper PPPs. Differences in preferences and price structures would be the next issue. For example, what do I compare in education ? What is the US equivalent of an Austrian HTL or HAK ? Average Public highschool, or good (public or private) highschool + college ?

When I look at the spending - are you USAers really so much healthier and more educated as the spending suggests ?

[Roland]

Hmm... remember that I ranted about Fannie Freddie, the bubbly housing bubble sponsors ? Seems people are slowly waking up - and the crooks running the schemes appear a bit nervous...

2 bloomberg stories:

Fannie Mae, Freddie Mac Face Risk Similar to Enron's, WSJ Says
By Todd Zeranski


Washington, Feb. 20 (Bloomberg) -- Fannie Mae and Freddie Mac, which own the majority of home mortgages in the U.S., have been increasing their debt at an annual rate of 25 percent and depending more on derivatives, the Wall Street Journal said in an editorial that suggests the two institutions face risk similar to that of Enron Corp.

The Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., both government-sponsored corporations, have $2.6 trillion in outstanding debt, the Journal said. Last year, Fannie Mae's debt to equity ration was 60 to 1, more than five times the average for commercial banks, the newspaper said.

The two companies hedge interest-rate risk using derivatives, and their combined derivative position was valued at $780 billion at the end of 2000, the Journal said. Last year, Fannie Mae had to write down $7.4 billion in shareholder equity following changes in the value of its derivatives' holdings, the newspaper said.

Neither lender is required to file financial statements with the U.S. Securities and Exchange Commission, the Journal said. While the New York Stock Exchange requires they report to shareholders, the two companies keep disclosure and clarity to a minimum, the Journal said.

Fannie Mae Calls Editorial on Its Risk `Egregious' (Update2)
By Robert Burgess


Washington, Feb. 20 (Bloomberg) -- Fannie Mae shares fell after a Wall Street Journal editorial criticized rising debt and use of derivatives at the company and Freddie Mac. Fannie Mae called the editorial ``egregious'' and ``irresponsible.''

Fannie Mae and Freddie Mac, the two largest buyers of mortgages, have been increasing their debt at an annual rate of 25 percent and depend more on derivatives to keep earnings growing, the editorial said, adding that the two institutions face risk similar to that of Enron Corp.

The editorial ``is so replete with factual errors that it undermines anyone's ability to agree with its assertions and conclusions,'' Fannie Mae Chairman and Chief Executive Officer Franklin Raines wrote in a letter to investors. The ``editorial was so egregious in its disregard for the facts and irresponsible on its assertions that it is crucial to set the record straight.''

The Washington-based company's shares fell $1.26 to $77.19 in late trading, after dropping as low as $75.40. Freddie Mac, based in Arlington, Virginia, fell 77 cents to $63.15 after touching $61.30.

A Fannie Mae spokeswoman, Janis Smith, confirmed the contents of the letter. A Freddie Mac spokeswoman, Sharon McHale, said the company will send a letter to the paper seeking to rectify what it describes as inaccuracies.

The two companies are government-sponsored enterprises and together own or guarantee more than 40 percent of the roughly $5.8 trillion in outstanding U.S. mortgage loans.

Echoes Concerns

The editorial echoes concerns raised by some analysts. In December, Fannie Mae was rated ``sell'' in new coverage by Fulcrum Global Partners analyst Sean Ryan, who said there may be a ``dangerous beast'' lurking in the company's mortgage portfolio. Ryan said the company's $23 billion in equity supports $767 billion in assets, mainly mortgage loans and bonds.

Earlier this month, U.S. Treasury Secretary Paul O'Neill said the Bush administration is considering whether to support moves to more closely regulate Fannie Mae, Freddie Mac and other government- sponsored enterprises, weighing concentration in the mortgage business against the benefits of strong institutions that finance homeownership.

``We're aware of the concerns that people have and we're looking with them to see if there are ways that we could reduce the anxiety that people have without hurting the process of home ownership accumulation in the country,'' O'Neill told the Senate Budget Committee on Feb. 7.

No congressional hearings are scheduled on Fannie Mae and Freddie Mac and several Washington-based analysts said they don't expect any legislation affecting the companies this year.

``The headline risk outweighs the political risk,'' Steven East, managing director for economic and policy research at Friedman, Billings, Ramsey & Co. Inc. in Virginia.

Oversight of Fannie Mae and Freddie Mac is sufficient, said Raines, who denied the companies have similarities to energy trader Enron, which last year filed the biggest-ever U.S. bankruptcy.

Constant Examination

``After constant, on-site examination by our regulator and 11 congressional hearings over the last two years, no company including Enron has been more closely scrutinized, more frequently, than Fannie Mae,'' Raines wrote.

Some investors said they are more concerned about the perception of increased risk at Fannie Mae and Freddie Mac than they are about the quality of their businesses.

``Our motivation for reducing exposure is not based upon the fundamental credit risk but a clear perception that headline and political risk exists and is increasing,'' said Marc Seidner, who oversees $40 billion in fixed income at Standish Mellon Asset Management in Boston.

Mellon has reduced its allocation to so-called federal agency debt over the past month to zero from 8 to 10 percent.

$2.6 Trillion Debt

Fannie Mae and Freddie Mac have $2.6 trillion in outstanding debt, the paper said. Last year, Fannie Mae's debt-to-equity ratio was 60 to 1, more than five times the average for commercial banks, the newspaper said.

Raines countered that the size of the companies' debt was overstated by more than $1 trillion, and their leverage was overstated by a factor of 100 percent.

Fannie Mae and Freddie Mac hedge interest-rate risk using derivatives, and their combined derivative position was valued at $780 billion at the end of 2000, the Journal said. Last year, Fannie Mae had to write down $7.4 billion in shareholder equity following changes in the value of its derivatives' holdings, the paper said.

``The claim about a write-down of shareholders equity is a gross mischaracterization of a well-known effect of implementing the new'' Financial Accounting Standard 133 ``and in now way impairs our regulatory capital,'' Raines wrote.

Neither company is required to file financial statements with the U.S. Securities and Exchange Commission. While the New York Stock Exchange requires they report to shareholders, the two companies keep disclosure and clarity to a minimum, the Journal said. Raines said the claim about limited financial disclosure was ``ridiculous.''

Such strong words...

[DanS]

Franklin Raines? A crook?

[Roland]

Running a pyramid scheme qualifies.

[el freako]

DanS,

By the look of Mr Wolf's Data he is using the old 1996 PPPs - but bear in mind that the 1999 PPP data only came out in January.

It is also interesting to note that he uses figures for 2001 - but we only have GDP data for the USA, UK, Germany, Spain and Holland for the whole of 2001 and for population data only the US has released data so obviously the data he puts forward are forecasts.


Using the latest data here are the GDP per head figures for 1990 and 2000 as a % of the USA.

Country, 1995, 2000

Canada: 81%, 81%
Mexico: 25%, 26%
United States: 100%, 100%

Australia: 74%, 76%
Japan: 80%, 75%
South Korea: 32%, 43%
New Zealand: 60%, 59%

Austria: 79%, 78%
Belgium: 73%, 75%
Denmark: 74%, 84%
Finland: 71%, 72%
France: 77%, 72%
Germany: 72%, 75%
Greece: 41%, 49%
Iceland: 76%, 85%
Ireland: 51%, 84%
Italy: 71%, 73%
Luxembourg: 104%, 135%
Netherlands: 72%, 80%
Norway: 76%, 87%
Portugal: 42%, 52%
Spain: 53%, 59%
Sweden: 77%, 72%
Switzerland: 93%, 87%
Turkey: 20%, 19%
United Kingdom: 70%, 70%

EU-15: 69%, 71%


It is interesting to calculate the underlying growth rates for the US, EU and Japan - using the US's growth rate form 1990-2000 and the shares of US GDP at PPP's of the EU and Japan in 1990 and 2000, also using OECD estimates of the output gap for 1990 and 2000 then it appears that the US's underlying growth rate for the 1990's was 3.1%, the EU's was 2.9% and Japan's was 2.0%.
As US population growth was 1.2% compared with 0.3% in the EU and Japan then whilst the US and Japan had underlying Growth per head of 1.8%-1.9% the EU managed 2.7%.



I have also attached a Zipped Excel file showing how I calculated the data for 1995 and 2000

[DanS]

ef: The bulletin board mangled your zip file--it probably uploaded the file as ascii when a zip file is binary. If you have the zip handy, please send it to dschmelzer@hotmail.com. Thanks! I'm interested.

[Colonâ„¢]

I just learned that FT's website is going to switch to paid-subscription... I knew this would happen one day, but damn this sucks...

[DanS]

I told you so...

Colon: That's a shame, but that's actually one publication that might be worth it, if they don't charge too much. One thing that I've noticed that I don't like about FT is that they are covering US news too much nowadays. It makes FT less worthwhile for me...

Anyway, I might note that I probably hit the high of the unemployment rate on the head--5.8%. And no, I'm not going to put any stock in peoples' whining that the numbers should be higher because the # of people seeking work dropped precipitously.

The economy is doing some screwed up stuff. Productivity revised up to 5.2% in Q4. Spending growth is staying robust. The dollar still strong.

But at least it isn't as bad as what the Japanese are doing to their economy.

[Colonâ„¢]

Yeah Dan, FT may be worth it, but nowadays I don't use the site the read the daily current affairs, only to read analyses and comments and do some looking-up. I’m afraid the charge will be too much for just that, but I’ll see I suppose.

The US economy scares me, the recession was hardly worthy of its name and all the imbalances remained or were exacerbated.

And if anyone still has any doubts in money supply as an indicator, it predicted this upturn since long ago.

[Roland]

Re: I told you so...

Originally posted by DanS
But at least it isn't as bad as what the Japanese are doing to their economy.

Yet.

Colon: Let's wait what final demand does. So far we're essentially in the inventory cycle.