Today's massive market plunge, in full perspective
After the AP’s Twitter account was hacked today, we saw a lot of scary charts on how much the market moved. Here’s the view of today’s stock market volatility that you’ve probably seen:
Pay attention to the y-axis though — it’s absurdly cropped. As it is here and many other places, or here, here, and here if you’re interested in the Dow. Sure, the market recovered in a few minutes, but that’s a scary looking chart.
Reuters Stephen Culp pulled together a different view. The y-axis goes all the way to zero, as it should:
Unlike the first example, on this chart the market drop has to be highlighted so it isn’t obscured by a speck of dust on your monitor. Much more soothing, isn’t it? – Ben Walsh
"Rebuilding revenue streams [in Stockton] in the short-term is nearly impossible. The City exhauseted all reserves long ago. Without voter approval, state law forbids the General Fund from borrowing money from other funds or from private creditors unless the City can repay the advances from revenues raised in the same fiscal year. The City cannot do so. Raising taxes also is illegal without voter approval. And voter approval of new debt or new taxes is highly unlikely in a city with 20% unemployment, a high rate of foreclosures, a high level of poverty, and widespread distrust of the City’s past fiscal practices.
Because raising revenues has not been a realistic tool for solving its chronic budget deficits, the City has resorted to increasingly drastic cost-cutting measures. It balanced its fiscal year 2009-10 and 2010-11 budgets largely by reducing services and employee compensation and benefits. These actions were necessary, but came with a cost. Stockton has the highest crime rate for a large city in California, but has 22% fewer police officers on the streets than it did four years ago. Violent crime, murders, gang activity, and drug trafficking are on the rise. Fire protection, building, vehicle, road, and tree maintenance, and community programs have also been slashed.
“In Stockton, California, public safety workers earn on average 126 percent of the maximum salary and at least 200 percent of the minimum wage for their respective wage categories.”—Cate Long on how runaway pay for police officers and firefighters contributed to Stockton’s insolvency
U.S. Bankruptcy Court Judge Christopher Klein’s ruling permits Stockton to proceed with its Chapter 9 bankruptcy protection filing from last June in a case with precedent-setting potential for other cash-strapped U.S. cities.
In a lengthy preamble to his ruling, Klein said Stockton’s bondholders had failed to negotiate in good faith with the city prior to its filing for protection. He added the city was “by any measure insolvent” prior to its filing.
“The idea that American manufacturing is on the cusp of a renaissance is everywhere these days—except in the hard numbers. It’s true that industrial production has grown twice as fast as the economy as a whole in this recovery, and manufacturers are adding jobs again. But economists see those gains as too small relative to what was lost in previous years to suggest a full-blown revival… “There’s simply no statistical evidence of a broader renaissance at this point,” says Daniel Meckstroth, chief economist with the Manufacturers Alliance for Productivity and Innovation, an Arlington, Va., group that represents mostly large U.S. producers.”—The WSJ’s Timothy Aeppel examines whether or not the return of US manufacturing is a real phenomenon. He largely concludes not.
The Consumer Financial Protection Bureau has released its database of complaints against credit card companies, and “well-to-do neighborhoods of Florida and New York that are supplying the most grievances”:
Of the top four zip codes contributing to the 18,539 complaints published as of March 18, two are on Manhattan’s Upper West Side and two in south Florida — Boca Raton and Palm Beach Gardens. Almost 60 percent of complaints originated in zip codes where the median household income is higher than the national median of $52,762, according to the analysis.
This is amusing, but also instructive. To end up in the CFPB’s credit card complaint database, you must fit a fairly narrow set of criteria, from having a credit card, to knowing when you’ve been had, to caolling yur credit card company, all the way to knowing the CFPB exists and how to register your complaint. And of course, a certain sense of justified indignation.
Each one of these steps requires a specific level of financial understanding, bureaucratic knowledge, social literacy, and disposable time. And, of course, you have to belive that your grievances can be righted through bureaucratic channels, and that public institutions are responsive and responsible. All of which requires a very specific type of personal agency, and explains why complaining about your credit card company is actually rare behavior. — Ben Walsh
Stephen Gandel has a smart post on the Buffett-Goldman deal. Instead of looking at it from Buffett’s perspective, as I did yesterday, he looks at it from Goldman’s perspective. His conclusion is that in the fall of 2008, Goldman “may have been in more trouble than is understood”. It needed Buffett’s investment far more than he needed to make it, and he got very favorable terms:
Almost all of the gain Buffett got on his Goldman investment comes from the special structure of the investment — the preferreds and the warrants. As a straight stock pick, Goldman hasn’t been all that remarkable since Buffett put his money in…
So how much trouble was Goldman in at the height of the financial crisis: $2.4 billion worth. That’s how much extra the bank paid Buffett above what he would have earned if he had just bought the shares on the open market…
Gandel is spot-on in identifying the perpetual preferreds as the key to the profitability of the investment, and Buffett’s ability to charge a hefty premium for his imprimatur. — Ben Walsh
As of yesterday, the warrants (rights to buy) that Buffett acquired from Goldman Sachs as part of his fall 2008 $5 billion investment are woth $1.34 billion.
Matt Phillips writes that this means that, to-date, Buffett’s investment in Goldman has generated $3.1 billion in returns — a healthy 62%. Over the same period, the S&P 500 with dividends reinvested — the benchmark Buffett sets for himself — returned 44%.
Buffett may have “out-Goldmaned Goldman”, as Market Watch put it, or got ahold of “10 million Goldman Sachs shares without handing over a penny”, in the WSJ’s accurate but misleading words, but he still has an index underperformance problem. Berkshire has underperformed the S&P over the last four years, and is on track for its first ever five-year period of underperformance. Part of that is cyclical — the equity market has boomed since late 2008, and Buffett knows this isn’t good for Berkshire.
Berkshire ended 2012 with a book value of $187 billion. If the S&P repeats its average yearly return over the last four years of 14%, Buffett will need the equivalent return of nine Goldmans to beat the S&P in 2013. — Ben Walsh
While it is hard at the current time to be confident about the degree of likely declines in GDP, it seems plausible that the cumulative decline could amount to as much as 20% of GDP in 2013-15…
The near-term dislocation caused by the extended bank holiday will cause a sharp drop in activity (and a rise in the unemployment rate). This dislocation will be compounded by the huge loss in national wealth resulting from the decline in the perceived value of bank deposits, as well as other asset holdings (equity and property prices). Moreover, the forced downsizing of the financial system will push many highly skilled financial services sector workers out of a job
The details of the capital controls include a ban on cashing checks, restricting cash exports in any currency to no more than €3000 per person, and limiting credit card purchases abroad to €5000 per month.
Cyprus remains a nominal euro member, but as David Keohane had said, capital controls are anathema to the idea of a currency union. — Ben Walsh
“Output on [Cyprus] could easily decline by 25% or more, and I don’t think that will involve much subsequent mean-reversion. There will be a deflationary shock, an uncertainty shock, an “austerity shock,” a credit contraction shock, and a few other negative shocks as well. The Cypriot government will not be fiscally well situated to support the safety net or automatic stabilizers”—Tyler Cowen on the shocks on shocks on shocks facing Cyprus
While last week saw dozens of well-heeled Russians and their representatives fly down to Cyprus to check on bank accounts and confer furiously with Cypriot officials, they are being closely followed by another wave of visitors: the European bankers who hope Cyprus’s loss will be their gain. […]
Mr Mikhin complains that the Cypriots do not appreciate the extent to which Russia has propped up the local economy. “When the Russians leave who is going to stay at the Four Seasons for $500 a night? Angela Merkel?”
“In a case like Cyprus, there’s just no way to beat the instant access to data, insight, and on-the-ground observations that can be obtained through a well-curated twitter stream. In a fast-moving story that combines lots of moving parts (economics, markets, politics) no research shop could compete.”—Joe Weisenthal on how Twitter is displacing traditional research reports from Wall Street analysts
It’s hard to imagine now, but for more than three decades after World War II financial crises of the kind we’ve lately become so familiar with hardly ever happened. Since 1980, however, the roster has been impressive: Mexico, Brazil, Argentina and Chile in 1982. Sweden and Finland in 1991. Mexico again in 1995. Thailand, Malaysia, Indonesia and Korea in 1998. Argentina again in 2002. And, of course, the more recent run of disasters: Iceland, Ireland, Greece, Portugal, Spain, Italy, Cyprus.
What’s the common theme in these episodes? Conventional wisdom blames fiscal profligacy — but in this whole list, that story fits only one country, Greece. Runaway bankers are a better story; they played a role in a number of these crises, from Chile to Sweden to Cyprus. But the best predictor of crisis is large inflows of foreign money: in all but a couple of the cases I just mentioned, the foundation for crisis was laid by a rush of foreign investors into a country, followed by a sudden rush out
Take a look at the chart below, which shows that men’s earnings have become increasingly volatile over two year periods. This has big implications for the economy: It’s one thing to lose your job, get a new one, and get by on a slightly lower income. It’s an entirely other thing for your income to swing wildly from year to year.
The study’s authors find that the effects of this variance are increasingly lasting. They differentiate between “transitory inequality” and “permanent inequality”. The former might come from getting laid off in a bad economy or from people moving up the economic ladder by pulling in higher salaries. Permanent inequality, the authors find, is the key driver of the growth in income inequality for men. Worse, “for household income, both before and after taxes, the increase in inequality over this period was predominantly, although not entirely, permanent,” the study’s authors find.
What does this mean? It could lend credence to the idea that American men simply don’t have the skills that economy needs right now. “Our data would imply stories such as skill-biased technical change or globalisation that has increased the inequality of lifetime incomes,” one of the study’s authors told the FT.
It could also mean that a key component of the the way we think about the U.S. economy could be broken. We tend to think that America is a pull-yourself-up-by-the-bootstraps economy. Lose your job? Just work harder, move or get new skills. This study — and the 4.8 million Americans who are officially considered among the long-term unemployed — suggest that it’s much harder to get back on our feet economically than we think. “The rich are getting richer and staying richer. The poor are getting poorer and staying poorer,” University of Michigan economist Justin Wolfers said in an audio intro to the paper. — Ryan McCarthy
CHART: China's clean energy failure, America's stagnation
Sure, US carbon emissions have hit their lowest level in 18 years. But the US has barely moved the needle on clean energy capacity in the last four years. China’s still way, way behind, thanks largely to coal use.
Germany, on the other hand, has seen a “veritable explosion” of clean energy use: “At times, solar generated-electricity alone accounts for more than half of Germany’s total generation.”
“Facebook is a large, inefficient engine for transforming electricity and programmers into a down-market place to sell low-value advertising.”—Our quote of the week goes to @mims on Facebook’s latest earnings. Recommended.
“The entire financial system is rendered riskier when all of the largest institutions are cajoled by regulators into adopting a similar view of asset risk—which is exactly what led to our recent financial crisis.”—
A really smart thought by John Carney on the newly-watered down Basel III regulations, which broadens what banks can count as “high-quality liquid assets”.
“One has to ask whether or not a more innovative monetary policy framework could have ameliorated the impacts of the dragon-induced economic downturn. If the peoples of Middle Earth had abandoned their gold specie standard, and switched instead to a paper currency, they could have revived trade-flows without sacrificing so many lives. Unfortunately, the lack of a central bank, or indeed any but the most rudimentary monetary institutions, was a major obstacle to currency reform.”—The macroeconomics of Middle Earth: Smaug the dragon as a “severe monetary shock”.
“Say what you want about Taleb’s writing—and Romano is not the only critic—he doesn’t produce antiseptic prose, and there’s something fun about his surly, middle-finger-to-the-experts attitude. And the digressions! One moment he’s telling you why convexity leads to philostochasticity and the next he’s explaining why he doesn’t eat papayas. For the record, he avoids all fruits without a Greek or Hebrew name because his ancestors would not have eaten them. And he drinks only beverages that are at least a thousand years old. Don’t offer the man an orange Shasta.”—“This is not a profile of Nassim Taleb" by Tom Bartlett.
He notes two key numbers: One is that, if the economy were operating at about full potential (as measured by the CBO) the government would be collecting about $450 billion more in taxes. The other is that since the crisis, spending on “income security” (Food stamps, unemployment benefits, etc.) has jumped by about $250 billion. As such, it’s probably safe to surmise, that just a return to economic normality, would entail a deficit closure of around $600 billion.
Here’s a chart that shows the correlation between the decifit/GDP and the national unemployment rate:
“Jack Whittaker’s downfall began at the Pink Pony strip club in Cross Lanes, W. Va., a crenelated building with pink-frosted stucco walls and black glass doors. The club’s unsettling combination of girlish innocence and highway-access-road menace might serve as a metaphor for the lottery winner’s inner life.”—
Ben Protess and Mark Scott of Dealbook as a significant scoop on the UBS Libor charges (emphasis ours):
Federal prosecutors are close to securing a guilty plea from a UBS subsidiary at the center of a global investigation into interest rate manipulation, the first big bank to agree to criminal charges in more than a decade.
It can be so hard to get those pesky multinational Too Big to Fail banks to “agree to” be charged with a crime these days…
“It’s really frustrating to see someone get a PhD in chemistry and decide what the world really needs is a better way to share photos in real time to music.”—The best quote we’ve heard about the current state of the startup world is from an entrepreneur who’s trying to revolutionize scientific research. Sarah Lacy has more.
“How does that translate into a $5 billion write-off?” said Lynn E. Turner, former chief accountant of the U.S. Securities and Exchange Commission and a managing director at LitiNomics Inc., an economic and forensic consulting firm. “The big issue isn’t the fraud they’re talking about. The big issue is that HP has made acquisitions that have turned out to be a disaster.”—
The second day stories on HP’s disastrous Autonomy acquisition are pointing the finger at HP.
Today in bureaucracy, college administration edition
Bloomberg’s John Hechinger has a great piece today on the rise of “administrative bloat” at increasingly unaffordable public universities.
Not only are high-level bueracrats pulling in mid six-figure salaries at this institutions, but there are now armies of vice presidents, “engagement” officers and maginally useful functionaries, all of which are being paid for by taxpayers. This includes some particularly startling examples at Purdue University, where administrators must be hired before the school can even consider switching to a trimester system:
Frank Dooley, a $172,000-a-year associate vice provost and professor of agricultural economics. Dooley and a part-time financial analyst will cost the university $212,000 a year, excluding benefits.
The associate vice provost works in an 8-by-10-foot windowless office in the building that houses Purdue’s president. Dooley plans to establish seven or eight committees of professors, administrators, students and others for discussion and fact-gathering. He expects a decision in 2015.
“I look at myself as an envoy or ambassador,” Dooley said. “My job is to make sure these seven or eight committees are aware of what’s going on in the other committees.”
“Mahoney, the firm’s specialist in global securities and derivative structures, is a student at East Carolina University.”—COLLEGE STUDENTS LAUNCH HEDGE FUND! And they’re “Chairman and Principal Managing Partner” can already speak in nonsense like “Globalization has increased correlation and volatility among international financial markets”!
“In 2010, researchers from Harvard and Toronto found all the trials looking at five major classes of drug – antidepressants, ulcer drugs and so on – then measured two key features: were they positive, and were they funded by industry? They found more than 500 trials in total: 85% of the industry-funded studies were positive, but only 50% of the government-funded trials were.”—
Absolutely shocking story on the reality of drug trials. Pharmaceutical companies very rarely release negative trial results for new drugs.
Another study found industry-funded trials were four times more likely to produce positive results. Researchers are often contractually prohibited from releasing negative information.
From Fortune’s excerpt of the former FDIC chair’s new book “Bull By the Horns”. Maybe, Bair wonders, we kind of overdid it:
The fact remained that with the exception of Citi, the commercial banks’ capital levels seemed to be adequate. The investment banks were in trouble, but Merrill had arranged to sell itself to BofA, and Goldman and Morgan had been able to raise new capital from private sources, with the capacity, I believed, to raise more if necessary. Without government aid, some of them might have had to forgo bonuses and take losses for several quarters, but still, it seemed to me that they were strong enough to bumble through. Citi probably did need that kind of massive government assistance (indeed, it would need two more bailouts later on), but there was the rub. How much of the decision-making was being driven through the prism of the special needs of that one, politically connected institution? Were we throwing trillions of dollars at all the banks to camouflage its problems? Were the others really in danger of failing? Or were we just softening the damage to their bottom lines through cheap capital and debt guarantees?
“In the very near term [QE3] has virtually no transfer mechanism whatsoever to the customer”—That’s an anonymous executive at a “leading lender,” quoted by the FT on why QE3’s impact on homeowners could be smaller than you think.
If you’re looking to buy a house, from a financing perspective, you’re getting something like a historically great deal from the rates the Fed has kept so low.
But, for taxpayers, there’s a corollary to the era of low rates: now is also a great time for the U.S. government to finance large-scale projects. As Ezra Klein and many others have suggested, today’s ultra-low rates are an opportunity for the government to essentially borrow for free. When interest rates are low, it makes sense that the government would invest in building things that boost the economy, like bridges, roads and various infrastructure investments. (Klein called the failure to take advantage of low rates “a financial mismanagement on an epic scale”). Corporations, ideally, would follow suit, using low rates as an opportunity to fund ambitious new endeavors.
Because we’re gluttons for punishment, we wanted to see if either the U.S. government or private companies actually boost investment as money gets cheaper. What we found, in a very, very rough calculation, is that they generally haven’t.
What you’re looking at here is how various types of investment correspond to interest rates. That descending red line is a measure of interest rates since 1997. The blue line represents our shorthand for investment, which includes a mix of public and private investment data, pulled from FRED, plus corporate R&D.
As money gets cheaper, you’d think that the U.S. government and big corporations would move to lock in financing for investments. But since sometime in 2008, our measure of total public and private investment has actually fallen as money has gotten cheaper.
There are some big caveats. For governments, it’s quite hard to determine what counts as an economy-boosting “investment”; unemployment benefits, for example, boost the economy, but generally aren’t considered investments. We decided to use Modeled Behavior’s ”nice things" calculation — Federal nondefense investment plus state and local Investment plus private investment in structures, if you’re score at home — as a way of estimating total investment. Private R&D data comes from the National Science Board. Private investment is far, far outweighed by its public counterpart, but that likely owes to the difficulty in tracking it than anything else.
And, of course, this isn’t a comprehensive way of looking at the economic benefits of low rates. But it’s an interesting thought experiment: what if governments and corporations actually looked at low rates as investment financing? — Ben Walsh and Ryan McCarthy