Financial Methods

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Food Prices Climbing Due to Ethanol

This month, the price of milk in the United States surged to a near-record in part because of the increasing costs of feeding a dairy herd. The corn feed used to feed cattle has almost doubled in price in a year as demand has grown for the grain to produce ethanol. ¹

So let's review the process.

1.  Government takes money from consumers via taxes
2.  Government pays special interests to burn food
3.  Consumers pay more for food

Interfering with free markets has consequences.  In this case, encouraging the burning of corn through subsidies results in less corn available to eat (or feed to livestock).  So prices for corn, beef, poultry, and now ice cream increase.

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Source:

1. Suzy Jagger and Carl Mortished. Ice-cream makers frozen out as corn price rises.
The Times. July 16, 2007.
http://business.timesonline.co.uk/tol/business/markets/united_states/article2080599.ece

© 2007 Michael Cale

O.A.R. in Kansas City 2007

Another summer, another excellent O.A.R.  show in Kansas City.   This time the show was behind the Beaumont Club in Westport.

The band is promoting their most recent CD/DVD release Live From Madison Square Garden, which includes a 17-minute version of the crowd favorite "That Was a Crazy Game of Poker".  Streaming portions of the DVD are available at AOL Music, and an audio preview is on the band's myspace page.

The depth and breadth of band's musical talent continues to impress.  The show was a series of seamless instrument changes.  Lead singer Marc Roberge often switches between acoustic and electric guitar depending on the song.  In addition of a variety of wind instruments, Saxophonist Jerry Dipizzo also does some percussion and augments the bands incredible guitar sound with his own axe on "Love and Memories".  Lead guitarist Richard On, bassist Benj Gershman, and drummer Chris Culos also turn in their standard high level of expertise. 

The regular set kicked of with "Hey Girl" and wrapped up with Poker.  A single 3-song encore concluded the evening  with "Love and Memories".  Notably missing from the set was "City on Down".  The unique addition of a cover of Billy Joel's "The Downeaster Alexa" compliments the band's northeast U.S. roots.

Highly Recommended.

The band is scheduled to release their next album in early 2008.

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© 2007 Michael Cale

Keeping Up With Mr. Jones

Terence Burnham of Harvard University recently discovered that testosterone apparently has an effect on economic decision making.

Dr. Burnham asked a group of men to play a game of ultimatum.  In this game,the subjects have a pot of $40.  One subject makes an offer to split the money.  If the offer is accepted, the participants split the money.  If the offer is rejected, the participants walk away empty handed.  There is only one round in the game.  The only options available are to offer to split the money $25/$15 or $35/$5.  The participant chosen to make the offer decides whether to offer the other player $25 or $5.

Regardless of the offer, the strictly economic decision is to accept the offer.  Even though the offer of $5 out of $40 seems unfair, both participants walk away with more money.

What Dr. Burnham found is that subjects who rejected the $5 offer had, on average, a testosterone level more than 50% higher than those that accepted the offer.

[Dr Burnham's result] backs the idea that what people really strive for is relative rather than absolute prosperity. They would rather accept less themselves than see a rival get ahead. That is likely to be particularly true in individuals with high testosterone levels, since that hormone is correlated with social dominance in many species.

Economists often refer to this sort of behaviour as irrational. In fact, it is not. It is simply, as it were, differently rational. The things that money can buy are merely means to an end—social status—that brings desirable reproductive opportunities. If another route brings that status more directly, money is irrelevant. ¹

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Source:

1. The Economist. Money isn't everything.
The Economist. July 5th 2007.
http://www.economist.com/science/displaystory.cfm?story_id=9433782

© 2007 Michael Cale

Digital Purchases Rise as Album Sales Fall

Record companies continue to cling to their outdated album-oriented business model.

Album sales fell again in the first half of the year - down 15% from the same period last year. This follows a 4% decrease last year and a 10% drop in 2005.¹

Although album sales are dropping, digital music downloads continue to sky-rocket - up 49% this year and up 659% since 2004.¹

Since consumers are able to pick and choose which tracks to purchase, overall song volume is down. Combining these individual music sales into album-size packages gives us a 9.2% sales decrease so far this year, instead of the 15% headline figure.² Consumers are no longer willing to purchase an entire album just to get the song or two that they really like.

This new digital marketplace allows consumers to be exposed to a larger number of artists.

The music industry has gotten hyper-competitive.  Record labels have become over-reliant on the mega-hit.  The digital revolution in music requires a different model.  The labels are built to sell a lot of songs from a few artists.  But the world has changed.  The winners in this new era will be adept at selling fewer songs from more artists.

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Source:

1. Ken Barnes. Slow start puts '07 album sales 'in a hole' .
USA Today. July 5, 2007.
http://www.usatoday.com/life/music/news/2007-07-04-album-sales_N.htm

2. Associated Press. Digital Purchases Rise as Album Sales Fall .
New York Times. July 5, 2007.
http://www.nytimes.com/2007/07/05/business/05music.html

© 2007 Michael Cale

Freedom At Risk

Czech Republic President Vaclav Klaus points out that freedom is again being threatened.  This time it is not communism, but pessimism (in the form of "ambitious environmentalism").

As someone who lived under communism for most of his life, I feel obliged to say that I see the biggest threat to freedom, democracy, the market economy and prosperity now in ambitious environmentalism, not in communism. This ideology wants to replace the free and spontaneous evolution of mankind by a sort of central (now global) planning.

The environmentalists ask for immediate political action because they do not believe in the long-term positive impact of economic growth and ignore both the technological progress that future generations will undoubtedly enjoy, and the proven fact that the higher the wealth of society, the higher is the quality of the environment. They are Malthusian pessimists.¹

Thomas Malthus was the English economist who theorized that population increases faster than the means of subsistence and population growth must be held in check (by morality, war, famine, disease, etc.) to prevent widespread poverty.²

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Source:

1. Vaclav Klaus. Freedom, not climate, is at risk.
Financial Times. June 13, 2007.
http://www.ft.com/cms/s/9deb730a-19ca-11dc-99c5-000b5df10621.html.

2. Merriam-Webster. Malthusian.
http://www.m-w.com/cgi-bin/dictionary/malthusian

© 2007 Michael Cale