"Kee Points" with Jim Kee, Ph.D.


  • Expertise
  • Gasoline Shortages
  • Texas Muni Update


Expertise Wanted if the Conclusion is Right!


Expert opinion: The internet, which has dramatically increased the world’s access to information, has also been deemed responsible for what is called “the cult of the amateur” by helping to blur the distinction between professionals and laymen. For example, physicians often remark that many patients have self-diagnosed themselves before coming to see them, feeling fully competent to second-guess years of medical school training and on-the-job experience after a five-minute Google search. It is also true in my field (economics), where it is often said that, “people don’t really want an economists opinion as much as they want to have their own prejudices justified.” I noticed this early on in my career during discussions on inflation. As long as my answer was “it is going up,” or “inflation is actually higher than the official measures show,” everything was fine. But if I stated otherwise, my opinion was no longer valued, regardless of the fact that I wrote my dissertation on the subject and had a doctorate in economics.


San Antonio’s Gasoline Shortage


And so it is with San Antonio’s gasoline shortage. There is a commonality with “panics,” whether bank runs or at gasoline stations, because suddenly more people want more of something than what is available at the current price (perhaps because, as in the case of gasoline, of fears of gasoline being diverted to storm-affected areas). The last part of that sentence is important, for while laymen might argue over whether or not there is really a shortage, an economist will point out that there is a shortage any time the quantity demanded exceeds the quantity supplied at the current price (for whatever reason). Under such situations prices usually rise substantially until the quantity demand no longer exceeds the quantity supplied at the current price (like the price of a hot stock, for example). And of course higher prices encourage people to make a lot of money by trucking in new supplies from everywhere (which eventually brings prices back down). To an economist, saying that there is a shortage is the same thing as saying there is a “stuck price.” But in politics, allowing prices to rise and thus convey demand and supply conditions is called “price gauging,” and it is illegal. That’s why you didn’t see gas stations charging, say, a $50-$100 surcharge to fill up, or why you didn’t see gasoline rise to $10 per gallon. That’s also why gas stations were empty and why you had to stay home. But to wrap up with the first paragraph, I found no one over the weekend who was sympathetic with this view! Most of the people I talked to would rather not be able to get gasoline at all than have the option of paying $10 a gallon for it. (In all fairness, fear over public outrage regarding higher prices might have caused gas stations just to sell all they had and close the pumps anyway, even if it were legal).

 


Market Solutions Not Always Well Received


Perhaps the strongest example that I have seen of this distaste for market mechanisms, where prices communicate information about supply and demand conditions, is in the area of cadaveric organ markets. One of my old professors, David Kaserman, himself on the organ transplant waiting list, practically pioneered the idea of having a market for the organs of deceased individuals. Such a thing was made illegal by the 1984 National Organ Transplant Act, which according to Kaserman was a key reason why people died in line waiting for organs (quantity demand exceeded quantity supplied at the mandated zero price). Kaserman envisioned a professional “organ procurement” specialty arising from such a market, as few people now have an incentive to take on the disagreeable task of approaching the relatives of the deceased (hoping instead that they’ve signed a donor card). To Kaserman, allowing families of deceased organ donors to receive compensation (for charities, bills, whatever) made the same amount of sense as allowing compensation from other input providers, like healthcare workers, drug and medical device makers, etc. He died about 10 years ago, and I sense he found little acceptance for his ideas. He was always arguing with medical ethicists and I don’t think he could overcome the distaste for using markets in an area like organ procurement. And that makes sense, I suppose, unless you are on the waiting list for a liver or kidney.


Update on Texas Munis


A Barron’s article over the weekend cited several credit analysts describing trade in Houston municipal bonds as pretty normal, which has been our experience as well. Bloomberg points out that a similar, muted reaction followed Hurricanes Katrina and Sandy. That’s because, to cite Barron’s:


“As devastating as the losses are, local governments will receive federal relief funds, stat support, and insurance claims to allow them to recover. Texas enjoys a top-notch triple-A credit rating, which means it has the reserves to fund operations and make debt payments until additional funds become available or revenues return.”


The article states that property and casualty insurers, which hold tax exempt bonds to lower their tax burdens, will probably sell many of them to pay claims because the storm means losses for them, and tax exemptions are only useful if you have positive taxable income (rather than losses). However, given the low issuance (supply) of municipal bonds relative to the strong demand for them in recent years, most of these bonds sold by insurance companies would be expected to be snapped up right away by market participants.


But overall it is still just too early to say. For example, the impact on “MUDs” (Municipal Utility Districts), which issue property tax-backed bonds to finance infrastructure for new housing developments (Stifel Nicolaus & Co.), really depends upon how many people permanently abandon their houses/neighborhoods and never return. We won’t know that for quite a while. As far as downgrades go, where credit rating agencies lower the credit ratings of existing bonds (which puts downward pressure on their price), JP Morgan securities issued a piece today stating that the majority of credit downgrades following recent storms were temporary and confined to lower rating categories. We typically maintain municipal bond exposure in our clients’ portfolios in very high quality credit ratings (on average double-A), and have minimal exposure to lower rated municipal credits. As always we continue to monitor the municipal bond market on an on-going basis, and I will alert Kee Points readers to any interesting developments.