What is Costs?

What is Costs, the website answers the question in its name. With short articles on the cost of a plethora of things from Fenway Park, to getting a pilot license, to brewing your own beer. The articles are decent and kind of fun.

h/t to metafilter

New Measure Suggests Stock Market May Have Hit Bottom

Jeremy Siegel An Economist at the U Penn has come up with a new way to look at the price to earning ratio (P/E) (see an article here). P/E tells us for a given stock price how much the stock earns [or price divided by earnings]. Typically this ratio is about 15. To find the P/E ratio for the whole market, Standard and Poor's adds up all the prices of every stock in their S&P 500 index, then adds up all the earnings. The total market P/E just take those to sums and divides them.

Siegel points out this means that AIG's losses are just as important as Exxon's gains. However, investors own 20 times as much Exxon Stock as AIG (since AIG is worth a lot less now). Siegel argues that Exxon should be weighted more heavily. In other words we should count Exxons gains 20 times as much.

Siegel claims a weighted P/E ratio is most important when a few companies have giant losses. This means current P/E may be too pesimistic about the outlook of the stock market. Siegel thinks we have already hit the bottom of the market.

I guess the real question is the weighted P/E more predictive of where the stock market is going than the P/E?

h/t to Greg Mankiw

Random Economic Thoughts on Passover

Tonight is the first night of Passover. Traditionally, Jews have a Seder, which is a big meal with a bunch of Matzah. As part of the meal we retell the story of the Jews exodus from Egypt from Let me people go to the plagues to parting the Red Sea.

So 4 economic musings for Passover.

1.In many places people would be happy to see a large population of migrants return to their home country. I wonder if there weren’t some Egyptian at the lower end of the economic spectrum hoping for the Jews to leave to open up jobs building pyramids. However, for the Pharoh more cheap labor was probably better.
2.Not letting the bread rise because of fear of being attacked a great demonstration of opportunity cost.
3.Less developed economies are mainly reliant on agriculture, thus the plague of cattle disease was probably one of the worst economically. Although it is also hard to work if you are covered in boils and it is dark.
4.The last plague was killing of the first born son. According to the Solow model population growth inhibits growth and capital destruction allows for me easy growth. So we would expect strong economic growth from Egypt after the plagues. Someone will have to ask this to Solow at his Sedar.

Also enjoy my previous posts on passover and economics!

We Need Leading Indicators Not Lagging

I've lost a little momentum with blogging, let's see if I can't get it back.

So a post I've been meaning to write for a while. It seems a favorite topic recently of blogs/media has been indicators the economy is not doing well.

These indicators can be helpful if they are leading indicators, that is we can notice there is a problem before it happens. A leading indicator example, if the mall parking lots are empty on the Saturday before Christmas, then we know Christmas sales will be bad. It is leading because it tells us what will happen before it happens. A lot of economic data takes a while to get released. Unemployment data is monthly, and GDP is 4 times a year and information on the previous quarter is released 3 months later. In other words we just found out two weeks ago the economic growth from Oct- Dec of last year.

As Meghan McArdle points out unemployment is a lagging indictor, so it shows us where the economy has been.

So where might we find a leading indicator in this economy. I think we want to know if consumer spending will recover, since that drives the US economy. So I'm going to go lots of baseball games this summer. If I notice people start to buy more snacks at the game, it will indicate they are ready to spend again in other parts of the economy.

Ok, I have no idea what a good leading indicator will be that people will start spending again, but I will be going to more baseball games.