Sometimes, well, actually, many times, those without any economic background or education run at the mouth about related topics, getting relationships all wrong.
Such was the case earlier this morning, when I heard the first few minutes of the president's remarks about from where new jobs would come.
So often, we hear people with no economics training whatsoever harp on job growth, as if they can magically wave a wand or fund a program, and paying jobs will appear.
That's just not true. In fact, the whole point of a market economy is for government to enact stable, lasting policies which promote business and capital formation, which leads to economic growth, which then creates jobs.
A related common complaint by some pundits is the oft-proclaimed death of US manufacturing.
In a well-written editorial entitled The Truth About U.S. Manufacturing, in last Friday's Wall Street Journal, economics professor Mark Perry (University of Michigan at Flint) debunks that complaint.
Perry observes,
"In every year since 2004, manufacturing output has exceeded $2 trillion (in constant 2005 dollars), twice the output produced in America's factories in the early 1970s. Taken on its own, U.S. manufacturing would rank today as the sixth largest economy in the world, just behind France and head of the United Kingdom, Italy and Brazil. Despite recent gains in China and elsewhere, the U.S. still produced more than 20% of global manufacturing output in 2009.
The truth is that America still makes a lot of stuff, and we're making more of it than ever before. We're merely able to do it with a fraction of the workers needed in the past.
The average U.S. factory worker is responsible today for more than $180,000 of annual manufacturing output, triple the $60,000 in 1972.
These increases are a direct result of capital investments in productivity-enhancing technology, which last year helped boost output to record levels in industries like computers and semiconductors, medical equipment and supplies, pharmaceuticals and medicine, and oil and natural-gas equipment."
It's the productivity and volume of economic activity that drive further growth. And productivity is enhanced when more capital is provided. Sure, there are eventually diminishing returns. But it's simply wrong to try to force-feed an economy the jobs government thinks ought to exist.
Haven't we learned from Russia's failed 50+ year experiment with a centrally-planned economy that such efforts are pointless?
With capital availability, mobil labor resources and high productivity, and low barriers to new businesses and innovation, an economy is poised to grow, thus leading to new jobs as a consequence.
Jobs aren't the ultimate objective of economic policy, per se. They are important, but follow economic activity. Not vice versa.
Monday, February 28, 2011
Friday, February 25, 2011
GM's Misleading Results
I read this headline, GM Rebounds With Best Year Since 1999, in a section of this morning's Wall Street Journal, with great amusement.
Does anyone really believe the concept implied by this headline? That it's the same GM? Or that, if you think it is the same company, these results are either comparable or real, in the sense of being the result of completely normal business and accounting practices?
Because of course, they are not.
First, this GM exited a federally-distorted bankruptcy. It's not relevant to compare any of this GM's performances to the company with that name which existed prior to 2009.
Second, this GM is the beneficiary of some significant liability restructuring, as well as purchasing preferences by the federal government. From union concessions, related capital structure changes, and federally-mandated dealership closings to atypical tax loss carry-forwards, this bankruptcy was one for the record books. In an ideal capitalist world, GM wouldn't even exist anymore, unless someone bought the right to use the name again. Which would be unlikely, since it had become a symbol of corporate ineptitude, failure, and union excess.
Third, one year does not a turnaround make. Even the Journal article disclosed that the fourth quarter performance was relatively weak.
Sadly, the new GM seems to be just the latest example of the concept that everybody wins. Even a bankrupt corporate failure like GM is given special dispensations, favors and a tilted playing field so that its latest results may be celebrated as a record.
Don't be confused by this accounting magic and think it portends a healthy future in which GM earns consistently superior total returns for years to come.
Does anyone really believe the concept implied by this headline? That it's the same GM? Or that, if you think it is the same company, these results are either comparable or real, in the sense of being the result of completely normal business and accounting practices?
Because of course, they are not.
First, this GM exited a federally-distorted bankruptcy. It's not relevant to compare any of this GM's performances to the company with that name which existed prior to 2009.
Second, this GM is the beneficiary of some significant liability restructuring, as well as purchasing preferences by the federal government. From union concessions, related capital structure changes, and federally-mandated dealership closings to atypical tax loss carry-forwards, this bankruptcy was one for the record books. In an ideal capitalist world, GM wouldn't even exist anymore, unless someone bought the right to use the name again. Which would be unlikely, since it had become a symbol of corporate ineptitude, failure, and union excess.
Third, one year does not a turnaround make. Even the Journal article disclosed that the fourth quarter performance was relatively weak.
Sadly, the new GM seems to be just the latest example of the concept that everybody wins. Even a bankrupt corporate failure like GM is given special dispensations, favors and a tilted playing field so that its latest results may be celebrated as a record.
Don't be confused by this accounting magic and think it portends a healthy future in which GM earns consistently superior total returns for years to come.
Amazon Enters Subscription Video On Demand To Challenge Netflix
"For example, HBO, according to Faber, has recently lost more than one million subscribers to Netflix's instant video content viewing. With so many titles available to stream to computers and/or download to DVRs, HBO's value as a separate paid service is dimming.
Netflix is reputed to be responsible for as much as 25% of web traffic during prime hours, as vast amounts of video content is viewed via streaming.
I'm guessing that, if Netflix were part of the S&P500, It would have made appearances in my equity portfolios by now."
Earlier this week, Amazon announced a subscription service for video on demand for its best customers.
This is not surprising. I find that successful firms which earn consistently superior total returns for a certain periods tend to fail to do so anymore for one or more of three reasons: competitive reactions, inability to continue to surprise investors, or regulatory reactions.
In Netflix's case, it's the first. Amazon has seen the effects of Netflix on Blockbuster, HBO, and probably Amazon's own business of selling DVDs. After arranging the logistics of offering a similar service to their best customers, Amazon is now moving to limit Netflix' inroads into its business.
It's a natural response to a very successful business model. Just like we see competing tablet products coming forth to compete with the iPad.
I'll watch with interest to see if Amazon can actually dent Netflix' volumes, profits and stock price. Chances are, it can. Plus there are some critics of Netflix' accounting, including CNBC contributor Herb Greenberg. The details escape me, but he disagrees with the firm's capitalizing some expenses. If their growth rate falters due to Amazon's moves, and profits are squeezed, then we might see an even faster decline due to an inability to continue whatever aggressive accounting practices are in place.
Thursday, February 24, 2011
Regarding Endangered Jobs
Andy Kessler wrote another one of his quirky, mostly off-target editorials in the Wall Street Journal last Thursday, entitled Is Your Job an Endangered Species? Once again, I'm left wondering why the Journal gives this guy so much space so frequently? Compromising pictures of whom does he have?
Kessler began well enough, observing,
"Technology is eating jobs- and not just obvious ones like toll takers. Tellers, phone operators, stock brokers, stock traders: These jobs are nearly extinct. Since 2007, the New York Stock Exchange has eliminated 1,000 jobs. And when was the last time you spoke to a travel agent?"
It's hardly a novel observation, but a fair way to commence discussing the topic. But then he veers into the surreal with the following nonsequitor,
"So which jobs will be destroyed next? Figure that out and you'll solve the puzzle of where new jobs will appear."
Kessler goes on to sensibly divide jobs into "creators and servers." The latter basically do the non-intellectual things that implement innovators' (sorry- creators') solutions. Then he goes off the rails and sub-divides the servers into sloppers, sponges, supersloppers, slimers and thieves.
Supersloppers, by the way, are marketers who offer consumers features which may carry no economic value, but appeal to psychological or other bases of desire. Slimers are financial sector workers.
Then Kessler returns to his trademark of (re)stating the obvious,
"Like it or not, we are at the beginning of a decades-long trend."
Really? Beginning? How about, oh, 110 years into it? Ask buggy whip manufacturers.
"Watch the divergence in stock performance between companies that actually create and those that are in transition- just look at Apple, Netflix and Google over the last five years as compared to retailers and media."
Fair enough- there you have it in the nearby chart. Along with the S&P500 Index and online retailer Amazon.
Wait, how'd Amazon get in there? It's supposed to be tanking. And, for what it's worth, Andy, Netflix is an online and direct retailer, too.
So much for rigid, mutually exclusive taxonomies. Kessler seems better at selective recall and comparison, the better to make his narrow, but unfortunately for him, indefensible point.
You see, Netflix and Amazon have done well for the past five years, and they are retailers.
Google is the worst of the bunch, underrun only by the Index. Truth is, as Amazon and Netflix demonstrate, there are times when distribution of goods or services is valuable. It's not always just about production or even design.
Kessler finishes his perplexing piece with this passage,
"But be warned that this economy is incredibly dynamic, and there is no quick fix for job creation when so much technology-driven job destruction is taking place. Ultimately the economic growth created by new jobs always overwhelms the drag from jobs destroyed- if policy makers let it happen."
Kessler offers no statistics or empirical evidence of that last, bold assertion. I'm not at all sure it's even true.
That's the real point of this post. Not just to critique Kessler's weak, obvious and otherwise wrong-headed editorial. But to use it to make the following point.
It does little good to simply add up jobs lost and jobs created, and assume all is well when the latter is larger than the former. Wouldn't it be more informative to understand the life-cycle earnings and job types of workers from several different strata of US businesses over the past century? To have a set of benchmarks of life-cycle earnings relative to each worker's average? To see what normative patterns were, by era and job type, education, over the past century or more?
We don't know if Kessler's contentions are true without empirical data.
But I do think this much is true. There is a stronger, multi-lateral global economic competitiveness at higher levels of value-added now than for probably the last 90 years. As such, economies with, on balance, better-educated work forces will probably be able to create higher value-added goods and services. Certainly design them. Maybe produce them.
However, since populations are stratified by intellect and education, this means the US will continue to experience the challenge of employing the lower echelons of its labor force, by skill and education, as more of these jobs go overseas to more productive, cheaper workers in other countries.
Hopefully, America's entrepreneurs and innovators will create business ideas, solutions to consumer needs and wants, which also, with growth, create jobs that can be filled by not only well-educated, highly-skilled people, but the lower rungs of the US labor force, as well.
Kessler began well enough, observing,
"Technology is eating jobs- and not just obvious ones like toll takers. Tellers, phone operators, stock brokers, stock traders: These jobs are nearly extinct. Since 2007, the New York Stock Exchange has eliminated 1,000 jobs. And when was the last time you spoke to a travel agent?"
It's hardly a novel observation, but a fair way to commence discussing the topic. But then he veers into the surreal with the following nonsequitor,
"So which jobs will be destroyed next? Figure that out and you'll solve the puzzle of where new jobs will appear."
Kessler goes on to sensibly divide jobs into "creators and servers." The latter basically do the non-intellectual things that implement innovators' (sorry- creators') solutions. Then he goes off the rails and sub-divides the servers into sloppers, sponges, supersloppers, slimers and thieves.
Supersloppers, by the way, are marketers who offer consumers features which may carry no economic value, but appeal to psychological or other bases of desire. Slimers are financial sector workers.
Then Kessler returns to his trademark of (re)stating the obvious,
"Like it or not, we are at the beginning of a decades-long trend."
Really? Beginning? How about, oh, 110 years into it? Ask buggy whip manufacturers.
Fair enough- there you have it in the nearby chart. Along with the S&P500 Index and online retailer Amazon.
Wait, how'd Amazon get in there? It's supposed to be tanking. And, for what it's worth, Andy, Netflix is an online and direct retailer, too.
So much for rigid, mutually exclusive taxonomies. Kessler seems better at selective recall and comparison, the better to make his narrow, but unfortunately for him, indefensible point.
You see, Netflix and Amazon have done well for the past five years, and they are retailers.
Google is the worst of the bunch, underrun only by the Index. Truth is, as Amazon and Netflix demonstrate, there are times when distribution of goods or services is valuable. It's not always just about production or even design.
Kessler finishes his perplexing piece with this passage,
"But be warned that this economy is incredibly dynamic, and there is no quick fix for job creation when so much technology-driven job destruction is taking place. Ultimately the economic growth created by new jobs always overwhelms the drag from jobs destroyed- if policy makers let it happen."
Kessler offers no statistics or empirical evidence of that last, bold assertion. I'm not at all sure it's even true.
That's the real point of this post. Not just to critique Kessler's weak, obvious and otherwise wrong-headed editorial. But to use it to make the following point.
It does little good to simply add up jobs lost and jobs created, and assume all is well when the latter is larger than the former. Wouldn't it be more informative to understand the life-cycle earnings and job types of workers from several different strata of US businesses over the past century? To have a set of benchmarks of life-cycle earnings relative to each worker's average? To see what normative patterns were, by era and job type, education, over the past century or more?
We don't know if Kessler's contentions are true without empirical data.
But I do think this much is true. There is a stronger, multi-lateral global economic competitiveness at higher levels of value-added now than for probably the last 90 years. As such, economies with, on balance, better-educated work forces will probably be able to create higher value-added goods and services. Certainly design them. Maybe produce them.
However, since populations are stratified by intellect and education, this means the US will continue to experience the challenge of employing the lower echelons of its labor force, by skill and education, as more of these jobs go overseas to more productive, cheaper workers in other countries.
Hopefully, America's entrepreneurs and innovators will create business ideas, solutions to consumer needs and wants, which also, with growth, create jobs that can be filled by not only well-educated, highly-skilled people, but the lower rungs of the US labor force, as well.
Wednesday, February 23, 2011
What Is Productivity? What Is Efficiency?
Back in 1997, I wrote a 15-page white paper synthesizing concepts I'd read in various publications on economics, including some of Joseph Schumpeter's seminal papers from the 1920s. The short version of the paper enabled my mentor, Gerry Weiss, to get me a meeting with an influential, well-known former money center bank CEO to discuss the concepts and my resulting research as it applied to corporate performance, both internally for resource allocation, and externally for equity portfolio management.
I found that prior economic literature had, for the most part, failed to distinguish between productivity and efficiency. So I wrote, in part,
I found that prior economic literature had, for the most part, failed to distinguish between productivity and efficiency. So I wrote, in part,
"The critical difference between efficiency measures (called “volume efficiencies” in this paper instead of the popular term “productivity”) and productivity measures (called “resource value productivities” in this paper) is that the numerator of the latter are value-denominated, whereas the former are unit-denominated. Thus, volume efficiency measures can’t provide any information regarding the value of what was done more or less efficiently. By splitting what has come to be misnamed productivity into two properly different concepts, some of the confusion regarding the modern behavior of volume efficiency can be better understood."
Imagine my surprise, therefore, that 12 years later, the Wall Street Journal published an editorial in last Wednesday's edition by two McKinsey consultants addressing some of the same concepts. Except that they still didn't get it quite right.
Here's what James Manyika and Vikram Malhotra wrote in their editorial Productivity and Growth: The Enduring Connection,
"Productivity can come either from efficiency gains (i.e., reducing inputs for given output) or by increasing the volume and value of outputs for any given input (for which innovation is a vital driver.)"
The McKinsey guys are close to getting it right, but they still fail to properly split volume efficiency phenomena from the very different notion of creating more value for a level of output.
Further, from reading their article, it's clear that they still mistakenly deal in averages across an economy. They also misleadingly connect productivity and growth, as if one will drive the other.
Truth is, as I found in my proprietary research over a decade ago, the highest resource productivity gains aren't typically associated with raw growth in value for shareholders.
The actual relationships are much more complicated, but I can't discuss them here. It's proprietary.
But I can tell you this. McKinsey's contention that productivity is some amorphous concept which can be grown or driven higher across an economy to spur economic growth is wrong. That's not how Schumpeterian dynamics works. It has more to do with higher value-added solutions displacing older ones in an economy, not simply flogging older competitors' operations to somehow run leaner and faster. Those activities won't create more consumer value.
You might be able to measure these concepts across an economy. But that doesn't mean they are managed or occur at that level.
However, I'm quite sure Manyika's and Malhotra's puff piece in the Journal is just the public facet of a well-orchestrated push, complete with Powerpoint presentations, that's being delivered to every potential client. It makes for good face time and high-spot meetings with CEOs to suggest some new project for, naturally, McKinsey, to measure various aspects of the firm's efficiency and productivity.
For those CEOs and senior executives who can't think for themselves, it will sound very seductive. It reminds me of something Bob Gach, a partner at Andersen Consulting years ago when I worked there, used to say. He didn't like Morgan Stanley, his lead client, very much. He said they were a bad client because they knew too much. Ideally, he contended, a client had to be smart enough to know they needed help, but, unlike the old Salomon, Goldman or Morgan Stanley, not so smart as to know they could do most of the job themselves. That probably also describes the ideal McKinsey client.
For those CEOs and senior executives who can't think for themselves, it will sound very seductive. It reminds me of something Bob Gach, a partner at Andersen Consulting years ago when I worked there, used to say. He didn't like Morgan Stanley, his lead client, very much. He said they were a bad client because they knew too much. Ideally, he contended, a client had to be smart enough to know they needed help, but, unlike the old Salomon, Goldman or Morgan Stanley, not so smart as to know they could do most of the job themselves. That probably also describes the ideal McKinsey client.
From that perspective, this new spin on productivity sounds good, doesn't it? Won't actually help the companies, but it should help the McKinsey partners.
Tuesday, February 22, 2011
Wither Yahoo Now?
This past Tuesday's edition of the Wall Street Journal contained a long piece on Yahoo's coming to terms, as it were, with Facebook, entitled Yahoo Decides to Friend Facebook.
The piece chronicled the firm's changing attitudes toward it's most recent nemesis, Facebook. Nothing has changed since my last Yahoo post only a few weeks ago.
Here's another view. Since the late 1990s, Yahoo's absolute stock price peaked, as expected, during the bubble, then collapsed. But what's more interesting is that it was already flat to down by 2005, well before the latest equity market crisis.
Reading that Yahoo is now desperately trying to put links to Facebook on its own pages seems rather pathetic. Thanks to Terry Semel's inept choices while CEO of the firm, and Jerry Yang's subsequent incompetence in the role after Semel's departure, Yahoo just marked time with no particular strategy or mission in sight.
Now, it's too late. Even the typically-competent Bartz can't seem to do more than get a few dollars for using Bing and doing an ad deal with Microsoft. But Yahoo isn't lighting the world on fire with free content anymore, and missed its chance, long ago, to be a profitable, earlier version of Facebook.
To have seen its stock price fall from over $100 to under $18 in 11 years makes me wonder just who still owns this turkey? Back in mid-2008, Carl Icahn briefly ignited interest, amidst Microsoft's attempt to do some sort of deal with the firm. In retrospect, Yang missed a chance to let Ballmer make a huge blunder and give his own shareholders a way out of Yahoo's long, slow decline.
Where to now? With no clear mission for the firm going forward, what would a current investor do? I'd say sell. The risks of further erosion are probably at least as great, if not moreso, than Bartz magically getting a higher value now for selling the firm to someone who would, by some stretch, need whatever it is of value that Yahoo still offers.
There seems to be no solo act for Bartz at Yahoo which will do shareholders any good. Continuing to operate the firm will probably just result in a declining share price. Shutting it down would destroy value. I suppose, at some price above zero, some other tech firm will see some kind of value in the firm's assets, if only its internet traffic.
It's truly been sad watching the firm manage to evade natural exit strategies over the past few years, now to languish behind even the moribund Microsoft, watching upstart Facebook move on without even noticing Yahoo in the same general product/market space.
The piece chronicled the firm's changing attitudes toward it's most recent nemesis, Facebook. Nothing has changed since my last Yahoo post only a few weeks ago.The first nearby, two-year price chart, compares Yahoo, Google, Microsoft and the S&P500 Index.
Begun near the market's spring lows of 2009, shortly after Carol Bartz took the helm at Yahoo, it depicts just how badly Yahoo has lagged even the moribund Microsoft. Both trail the Index by significant margins.
Here's another view. Since the late 1990s, Yahoo's absolute stock price peaked, as expected, during the bubble, then collapsed. But what's more interesting is that it was already flat to down by 2005, well before the latest equity market crisis.Reading that Yahoo is now desperately trying to put links to Facebook on its own pages seems rather pathetic. Thanks to Terry Semel's inept choices while CEO of the firm, and Jerry Yang's subsequent incompetence in the role after Semel's departure, Yahoo just marked time with no particular strategy or mission in sight.
Now, it's too late. Even the typically-competent Bartz can't seem to do more than get a few dollars for using Bing and doing an ad deal with Microsoft. But Yahoo isn't lighting the world on fire with free content anymore, and missed its chance, long ago, to be a profitable, earlier version of Facebook.
To have seen its stock price fall from over $100 to under $18 in 11 years makes me wonder just who still owns this turkey? Back in mid-2008, Carl Icahn briefly ignited interest, amidst Microsoft's attempt to do some sort of deal with the firm. In retrospect, Yang missed a chance to let Ballmer make a huge blunder and give his own shareholders a way out of Yahoo's long, slow decline.
Where to now? With no clear mission for the firm going forward, what would a current investor do? I'd say sell. The risks of further erosion are probably at least as great, if not moreso, than Bartz magically getting a higher value now for selling the firm to someone who would, by some stretch, need whatever it is of value that Yahoo still offers.
There seems to be no solo act for Bartz at Yahoo which will do shareholders any good. Continuing to operate the firm will probably just result in a declining share price. Shutting it down would destroy value. I suppose, at some price above zero, some other tech firm will see some kind of value in the firm's assets, if only its internet traffic.
It's truly been sad watching the firm manage to evade natural exit strategies over the past few years, now to languish behind even the moribund Microsoft, watching upstart Facebook move on without even noticing Yahoo in the same general product/market space.
Monday, February 21, 2011
What Lesson Did the Phone Wars Provide for Energy Policy?
Holman Jenkins, Jr. in last Wednesday's edition of the Wall Street Journal, provided a very concise view of the evolution of mobile telephony in the US and Europe. He discussed how the US eschewed the unified, monolithic European GSM mobile standard. And how Nokia, one of the originators of that standard, is nearly dead, while Apple and Google, thanks to the US indecision on such a standard, flourished with new approaches.
Isn't this a commentary on government's unwanted, unnecessary intrusion in sectors where competing private solutions drive better ultimate solutions?
Jenkins describes the process as messy and inefficient, but, in the end, delivering superior results. Nokia has run into the arms of Microsoft, having fallen on hard times after initially leading in the GSM standards setting process. Jenkins ended his piece,
"The lesson for the new Nokia and everyone else is an old one: Nobody knows anything, and there's no substitute for messy, wasteful competition as a finder of solutions to problems we didn't even kow we needed solutions for. Whether the mobile world will settle into one proprietary or many proprietary ecosystems is far from decided."
Interestingly, from my reading of Amity Schlaes' The Forgotten Man several summers ago, those cries of how competition is so messy and wasteful are the very same arguments that FDR and his minions used to seize control of so much of American business. They decried the waste and inefficiency of free market competition, only to stifle innovation and mismanage the economy for most of the 1930s.
There's a larger lesson here. Right now, and in a technologically intensive sector- energy.
Doesn't Jenkins' illustrative tale of the mobile phone sector over the past few years suggest that we are making a horrific mistake by acceding to demands for monolithic, command-economy directives to subsidize and produce certain energy- wind, solar, ethanol- without subjecting them all to real, fair economic forces?
What ever happened to price as a market signal? As gasoline prices rise, largely silently, above $3/gallon, pundits predict a weakening of the US economy. So be it.
I wrote this post back in the summer of 2008 after reading a WSJ piece on Air Force experimentation with synfuel for jet aircraft. We have lots of coal and a known, reliable process to liquify that energy source to burn instead of gasoline or jet fuel.
If you worry about sending dollars abroad to buy oil, then promote synfuels. If you're simply worried about carbon emissions, then admit that you want to turn the US standard of living back about 110 years.
But this government system of choosing energy source winners is going to end badly. Market forces may entail some initial waste and inefficiency, but the result is the best solution, with much less long term waste and inefficiency, while satisfying consumer needs and desires. The latter of which is the point.
Not to have government dictate what consumers want, and how they'll get it.
Isn't this a commentary on government's unwanted, unnecessary intrusion in sectors where competing private solutions drive better ultimate solutions?
Jenkins describes the process as messy and inefficient, but, in the end, delivering superior results. Nokia has run into the arms of Microsoft, having fallen on hard times after initially leading in the GSM standards setting process. Jenkins ended his piece,
"The lesson for the new Nokia and everyone else is an old one: Nobody knows anything, and there's no substitute for messy, wasteful competition as a finder of solutions to problems we didn't even kow we needed solutions for. Whether the mobile world will settle into one proprietary or many proprietary ecosystems is far from decided."
Interestingly, from my reading of Amity Schlaes' The Forgotten Man several summers ago, those cries of how competition is so messy and wasteful are the very same arguments that FDR and his minions used to seize control of so much of American business. They decried the waste and inefficiency of free market competition, only to stifle innovation and mismanage the economy for most of the 1930s.
There's a larger lesson here. Right now, and in a technologically intensive sector- energy.
Doesn't Jenkins' illustrative tale of the mobile phone sector over the past few years suggest that we are making a horrific mistake by acceding to demands for monolithic, command-economy directives to subsidize and produce certain energy- wind, solar, ethanol- without subjecting them all to real, fair economic forces?
What ever happened to price as a market signal? As gasoline prices rise, largely silently, above $3/gallon, pundits predict a weakening of the US economy. So be it.
I wrote this post back in the summer of 2008 after reading a WSJ piece on Air Force experimentation with synfuel for jet aircraft. We have lots of coal and a known, reliable process to liquify that energy source to burn instead of gasoline or jet fuel.
If you worry about sending dollars abroad to buy oil, then promote synfuels. If you're simply worried about carbon emissions, then admit that you want to turn the US standard of living back about 110 years.
But this government system of choosing energy source winners is going to end badly. Market forces may entail some initial waste and inefficiency, but the result is the best solution, with much less long term waste and inefficiency, while satisfying consumer needs and desires. The latter of which is the point.
Not to have government dictate what consumers want, and how they'll get it.
Friday, February 18, 2011
Kelly Evans Gets It Right On US Standards of Living vs. Inflation
Kelly Evans' Ahead Of The Tape column in yesterday's Wall Street Journal contained a concise, distilled read on the US economy over the past 25+ years.
Evans began,
"The threat of inflation is real. It is just a different threat than many realize."
She then reminded readers that much of the price pressure on commodities comes from smaller, faster-growing economies. It's a demand-push phenomenon.
Then she noted that "median income for men was actually higher, in real terms, in 1973 than in 2009."
But the best, punchiest passage was,
"The globalization of the labor force, meanwhile, continues to exert pressure on the U.S. job market even as it pushes up commodity prices by expanding the middle class world-wide.
This vulnerability was highlighted in mid-2008 when oil prices soared and consumer spending promptly tanked. That was before the worst of the recession. Households are hardly better able to handle such a run-up now."
Thus, the more we look backward, protect union jobs at defunct auto makers and such, the more we pour scarce economic resources into the wrong opportunities. And you wonder why the US is a slowing economic power, relative to some other nations?
Evans then delivers an apolitical shot of truth in her last sentence,
"The real risk is that the U.S. faces a poverty cycle rather than an inflationary one."
That word, poverty, should rivet you. It did me. But that's what happens when your economy no longer focuses on ever higher value-adding opportunities, seeking, instead, to subsidize less robust value-adding economic situations.
Evans began,
"The threat of inflation is real. It is just a different threat than many realize."
She then reminded readers that much of the price pressure on commodities comes from smaller, faster-growing economies. It's a demand-push phenomenon.
Then she noted that "median income for men was actually higher, in real terms, in 1973 than in 2009."
But the best, punchiest passage was,
"The globalization of the labor force, meanwhile, continues to exert pressure on the U.S. job market even as it pushes up commodity prices by expanding the middle class world-wide.
This vulnerability was highlighted in mid-2008 when oil prices soared and consumer spending promptly tanked. That was before the worst of the recession. Households are hardly better able to handle such a run-up now."
Thus, the more we look backward, protect union jobs at defunct auto makers and such, the more we pour scarce economic resources into the wrong opportunities. And you wonder why the US is a slowing economic power, relative to some other nations?
Evans then delivers an apolitical shot of truth in her last sentence,
"The real risk is that the U.S. faces a poverty cycle rather than an inflationary one."
That word, poverty, should rivet you. It did me. But that's what happens when your economy no longer focuses on ever higher value-adding opportunities, seeking, instead, to subsidize less robust value-adding economic situations.
Thursday, February 17, 2011
Kyle Bass On CNBC Yesterday
Occasionally David Faber has a worthwhile guest on his noontime CNBC program, Strategy Session. Yesterday was one such occasion.
Kyle Bass, a hedge fund manager who scored big by correctly betting against the residential finance boom in its latter years, was on to give his opinions on a variety of market topics.
You can probably find his appearance in a video on the CNBC website. But here, in brief, is what he said.
On municipal defaults, he agrees with Meredith Whitney.
On equity markets, he's swearing off of them, because he believes what we are now seeing is mostly just a result of QE2 and too easy money. He believes it's a global phenomenon which will end very badly. I don't recall his measure of choice, but he mentioned a particular rate which one could watch to discern when the top in equities had been reached, and the fall would begin.
One interesting anecdote he told was being at a conference of alleged observers of credit markets or some such relevant group. He asked how many of the several hundred people in the room in which he was speaking new the weighted average cost of the Greek government's debt? Nobody did. Bass said it was about 4.3%. He expressed shock and amazement at the faulty, shoddy, poor quality of basic analysis by people whose job it was to know that type of data.
The lesson, of course, is that, like the anecdotes he told in the CNBC House of Cards documentary, about Wall Street mortgage finance desks, you can't really trust the so-called experts and analysts to know what they are doing, or to have proper incentives to know it and tell you.
Bass has become recently well-known for being right on US mortgage finance markets. His comments and manner convey a sensible, thorough, reasonable approach to what he does. Very credible.
Kyle Bass, a hedge fund manager who scored big by correctly betting against the residential finance boom in its latter years, was on to give his opinions on a variety of market topics.
You can probably find his appearance in a video on the CNBC website. But here, in brief, is what he said.
On municipal defaults, he agrees with Meredith Whitney.
On equity markets, he's swearing off of them, because he believes what we are now seeing is mostly just a result of QE2 and too easy money. He believes it's a global phenomenon which will end very badly. I don't recall his measure of choice, but he mentioned a particular rate which one could watch to discern when the top in equities had been reached, and the fall would begin.
One interesting anecdote he told was being at a conference of alleged observers of credit markets or some such relevant group. He asked how many of the several hundred people in the room in which he was speaking new the weighted average cost of the Greek government's debt? Nobody did. Bass said it was about 4.3%. He expressed shock and amazement at the faulty, shoddy, poor quality of basic analysis by people whose job it was to know that type of data.
The lesson, of course, is that, like the anecdotes he told in the CNBC House of Cards documentary, about Wall Street mortgage finance desks, you can't really trust the so-called experts and analysts to know what they are doing, or to have proper incentives to know it and tell you.
Bass has become recently well-known for being right on US mortgage finance markets. His comments and manner convey a sensible, thorough, reasonable approach to what he does. Very credible.
On The NYSE-Deutsche Borse Merger
I saw an interesting take on the NYSE-Deutsche Borse merger from a floor broker the other day on CNBC.
A periodic guest/contributor named, I think, Peter Costas, he was livid about the merger. It shows you how far the NYSE has come from its once-cozy specialists world. The world of legal front-running, inefficient personal involvement in trades, and an avoidance of acknowledging the reality and capabilities of modern technology. For all his faults taking the Merrill Lynch CEO job and botching it, NYSE ex-CEO John Thain probably saved the place.
Yet, Costas mentioned some risks on which the Germans and current NYSE CEO Ducan Niederauer are silent. Think of it as a rerun of the Daimler-Chrysler merger.
Costas wondered aloud what would happen to the New York trading floor, should profits drop or costs rise? How committed would the merged, Germany-headquartered company really be to maintaining the current physical presences in the US?
Since so many pundits characterize the deal as really all about derivatives and other non-equity products, I suspect Costas' fears are not trivial. Nor totally misplaced.
On the other hand, also on CNBC earlier this week, Jim Chanos expressed no interest nor concern about the NYSE-Deutsche merger. But Chanos doesn't really seem all that emotional about that sort of issue to begin with. He didn't say he thought the concerns people had about the NYSE being controlled by overseas management/ownership was misplaced. He simply said he didn't really care.
Niederaur is taking pains to stress how current ownership of the NYSE and Deutsche Borse is predominantly American, by shareholders. A situation which is both fluid and uncontrollable. But his temper came out when CNBC co-anchor Mark Haines accused him of selling out Americans and repeatedly invoked the "buttonwood tree." In retaliation, Niederauer said, in a close paraphrase, while punching Haines on the arm,
'That's what I get for giving CNBC the first interview about this deal.'
Niederauer looked like he feels he needs to do all he can to convince investors, regulators and politicians to allow this merger.
Perhaps the real issues here aren't even being spotted yet. For example, listing standards. If the NYSE becomes controlled by European owners, who is to say that listing standards for what was America's largest equity market won't be controlled by Europeans?
That would indicate, however, truly global equity markets.
One thing that does make sense to me, however, is the comments of pundits regarding derivatives. Exchanges tell customers that they provide efficiency and best execution. But the truth is, profits for these entities come primarily, in a margin sense, from newer, less-well-understood, complex instruments. Like, well, derivatives.
That's why, over time, human floor specialists have declined in value. The instruments of which they allegedly facilitate the buying and selling have simply grown less profitable to intermediate.
A periodic guest/contributor named, I think, Peter Costas, he was livid about the merger. It shows you how far the NYSE has come from its once-cozy specialists world. The world of legal front-running, inefficient personal involvement in trades, and an avoidance of acknowledging the reality and capabilities of modern technology. For all his faults taking the Merrill Lynch CEO job and botching it, NYSE ex-CEO John Thain probably saved the place.
Yet, Costas mentioned some risks on which the Germans and current NYSE CEO Ducan Niederauer are silent. Think of it as a rerun of the Daimler-Chrysler merger.
Costas wondered aloud what would happen to the New York trading floor, should profits drop or costs rise? How committed would the merged, Germany-headquartered company really be to maintaining the current physical presences in the US?
Since so many pundits characterize the deal as really all about derivatives and other non-equity products, I suspect Costas' fears are not trivial. Nor totally misplaced.
On the other hand, also on CNBC earlier this week, Jim Chanos expressed no interest nor concern about the NYSE-Deutsche merger. But Chanos doesn't really seem all that emotional about that sort of issue to begin with. He didn't say he thought the concerns people had about the NYSE being controlled by overseas management/ownership was misplaced. He simply said he didn't really care.
Niederaur is taking pains to stress how current ownership of the NYSE and Deutsche Borse is predominantly American, by shareholders. A situation which is both fluid and uncontrollable. But his temper came out when CNBC co-anchor Mark Haines accused him of selling out Americans and repeatedly invoked the "buttonwood tree." In retaliation, Niederauer said, in a close paraphrase, while punching Haines on the arm,
'That's what I get for giving CNBC the first interview about this deal.'
Niederauer looked like he feels he needs to do all he can to convince investors, regulators and politicians to allow this merger.
Perhaps the real issues here aren't even being spotted yet. For example, listing standards. If the NYSE becomes controlled by European owners, who is to say that listing standards for what was America's largest equity market won't be controlled by Europeans?
That would indicate, however, truly global equity markets.
One thing that does make sense to me, however, is the comments of pundits regarding derivatives. Exchanges tell customers that they provide efficiency and best execution. But the truth is, profits for these entities come primarily, in a margin sense, from newer, less-well-understood, complex instruments. Like, well, derivatives.
That's why, over time, human floor specialists have declined in value. The instruments of which they allegedly facilitate the buying and selling have simply grown less profitable to intermediate.
Pepsi Joins Companies Which See Inflation Coming
My latest post concerning companies behaving differently in light of the inflation they see coming was earlier this month.
In last Friday's Wall Street Journal, Pepsi CEO Indra Nooyi defended her company's projections for lower earnings in the future,
"We have no idea what the commodity markets are going to look like in 2012 and beyond."
While one analyst was quoted in the article as chiding Nooyi and Pepsi for citing commodity price pressures, claiming that "everybody else" is facing these, as well, I think he is missing the point.
The article contends,
"At the same time, consumers are still holding back and so it will be difficult to raise prices on drinks and snacks enough to offset the higher costs."
And Nooyi is quoted, again, as saying,
"Had we not had the continued macroeconomic sluggishness and this commodity inflation, we are a solid, double-digit [percentage] player."
Simply put, commodity price inflation, at least partially induced by US monetary-policy, is affecting yet another, very large US company.
Despite Fed officials', current and former, claims to the contrary, US businesses continue to talk and behave as if inflation is coming and will affect their operations and financial results materially.
In last Friday's Wall Street Journal, Pepsi CEO Indra Nooyi defended her company's projections for lower earnings in the future,
"We have no idea what the commodity markets are going to look like in 2012 and beyond."
While one analyst was quoted in the article as chiding Nooyi and Pepsi for citing commodity price pressures, claiming that "everybody else" is facing these, as well, I think he is missing the point.
The article contends,
"At the same time, consumers are still holding back and so it will be difficult to raise prices on drinks and snacks enough to offset the higher costs."
And Nooyi is quoted, again, as saying,
"Had we not had the continued macroeconomic sluggishness and this commodity inflation, we are a solid, double-digit [percentage] player."
Simply put, commodity price inflation, at least partially induced by US monetary-policy, is affecting yet another, very large US company.
Despite Fed officials', current and former, claims to the contrary, US businesses continue to talk and behave as if inflation is coming and will affect their operations and financial results materially.
Wednesday, February 16, 2011
Borders' Bankruptcy & William Ackman
Back in early December- could it be that long ago?- I wrote this post regarding William Ackman's Pershing Square's attempt to have Barnes & Noble merge with Borders, one of his firm's holdings. I wrote, in part,
"It's unclear to me why Ackman has so diligently and doggedly pursued either physical book retailer over the past few years. With Amazon and Google targeting the space, and Apple's recent iPad adding to the mix, it wouldn't seem to be an easy product/market in which to earn substantial gains by maneuvering with the remaining two, damaged retailers, would it?
Ackman has a track record as a smart investor. But, then, so did Ed Lampert before his plunge into owning retailers K-Mart and Sears.
Why on earth would anyone have bought into these turkeys even as long as three years ago? Their underperformance has only increased since then.
I suppose Ackman has a very short-term, 'turnaround' sort of mentality that seeks a quick, abrupt rise in share price from an unexpected reorganization, followed by a hasty exit from his positions.
I'm just not seeing the logic to this situation for Ackman, other than desperation to rescue some value from his 1/3+ ownership of the worse-performing, lesser-sized turkey in the sector."
Perhaps I was more prophetic than I knew. This past weekend's edition of the Wall Street Journal carried the news of Borders' Chapter 11 filing. According to the article,
"Mr. LeBow, who became CEO of Borders Group last year, invested $25 million last May as Borders tried to rework its finances. Mr. Ackman's Pershiing Square Capital Management LP is expected to lose at least $125 million in its investment."
Since I don't follow Borders, I had no idea Ben LeBow had become involved. Seeing LeBow and Ackman lose at least $130MM in this turkey is surprising. Especially since LeBow's investment was so recent. Ackman's investors can't be happy to have read about this over the weekend, can they?
Why do these investors with such great reputations get involved with one of the worst companies in a market segment? Ackman is also involved with Penney's, hardly a leading retailer, either.
The Journal piece catalogued Borders' decline and fall, amidst a general shrinking of the sector. Considering its ills, I really can't comprehend why these two marquee investors got involved with the firm.
I haven't followed LeBow's moves for years, but Ackman makes generous use of CNBC, so he's much more visible.
Let's see...the failed Target deal, then Borders, now Penneys. Is he losing his touch?
"It's unclear to me why Ackman has so diligently and doggedly pursued either physical book retailer over the past few years. With Amazon and Google targeting the space, and Apple's recent iPad adding to the mix, it wouldn't seem to be an easy product/market in which to earn substantial gains by maneuvering with the remaining two, damaged retailers, would it?
Ackman has a track record as a smart investor. But, then, so did Ed Lampert before his plunge into owning retailers K-Mart and Sears.
Why on earth would anyone have bought into these turkeys even as long as three years ago? Their underperformance has only increased since then.
I suppose Ackman has a very short-term, 'turnaround' sort of mentality that seeks a quick, abrupt rise in share price from an unexpected reorganization, followed by a hasty exit from his positions.
I'm just not seeing the logic to this situation for Ackman, other than desperation to rescue some value from his 1/3+ ownership of the worse-performing, lesser-sized turkey in the sector."
Perhaps I was more prophetic than I knew. This past weekend's edition of the Wall Street Journal carried the news of Borders' Chapter 11 filing. According to the article,
"Mr. LeBow, who became CEO of Borders Group last year, invested $25 million last May as Borders tried to rework its finances. Mr. Ackman's Pershiing Square Capital Management LP is expected to lose at least $125 million in its investment."
Since I don't follow Borders, I had no idea Ben LeBow had become involved. Seeing LeBow and Ackman lose at least $130MM in this turkey is surprising. Especially since LeBow's investment was so recent. Ackman's investors can't be happy to have read about this over the weekend, can they?
Why do these investors with such great reputations get involved with one of the worst companies in a market segment? Ackman is also involved with Penney's, hardly a leading retailer, either.
The Journal piece catalogued Borders' decline and fall, amidst a general shrinking of the sector. Considering its ills, I really can't comprehend why these two marquee investors got involved with the firm.
I haven't followed LeBow's moves for years, but Ackman makes generous use of CNBC, so he's much more visible.
Let's see...the failed Target deal, then Borders, now Penneys. Is he losing his touch?
Eddie Lampert & Gap
Shares of Gap Inc. (GPS) climbed Tuesday as hedge fund billionaire and Sears Holding Corp. (SHLD) Chairman Edward Lampert reported holding a 5.8% stake in the retailer.
At midday yesterday, the Wall Street Journal reported,
"Lampert, known for large, concentrated bets on the stocks of a small number of companies, reported the stake in a 13G filing, or a filing for passive investors, with the Securities and Exchange Commission late Monday.
Lampert's ESL Partners, along with affiliates, reported beneficially holding 35 million common shares as of Monday.
Gap shares were recently trading 5.8% higher at $22.72.
Investors are "excited that he may see some value in a retailer that has been struggling with its merchandising," said Wedbush Securities analyst Betty Chen."
Looking at the price chart for Sears Holdings, Gap, Inc. and the S&P500 Index since late 2003, it's difficult to see why Gap shareholders would cheer Lampert's control over the struggling retailer. Granted, anyone buying into it would be cause to celebrate- after dumping your shares.
But look at the price curve for Sears after Lampert's early-2005 takeover. It's worse than the S&P and Gap, which tracked together over the period.
Just how is it that Lampert will do for Gap what he hasn't managed to do at Sears/KMart?
Beats me.
Has Lampert lost his touch, too, as I muse about William Ackman in today's next post?
Tuesday, February 15, 2011
Will Services Truly Go Global?
Mr. Joseph Sternberg edits the Wall Street Journal Asia's Business Asia column and recently wrote an editorial entitled Now Comes the Global Revolution in Services.
Of course this has been a feared development by many in the US economy, since our services sector is so large. The first such globally competitive service which probably comes to mind is call centers.
Sternberg wrote,
Of course this has been a feared development by many in the US economy, since our services sector is so large. The first such globally competitive service which probably comes to mind is call centers.
Sternberg wrote,
"Asia has been a big winner from the development of global manufacturing supply chains. Japan and the four tigers—Hong Kong, Singapore, South Korea and Taiwan—showed how cheaper shipping could create opportunities for factories far from the intended market. As supply chains have grown more complex, the benefits have spread. Components now travel from Thailand, the Philippines, Malaysia and Taiwan to a factory in China, where they're assembled before hitting the shelves of an Apple store in New York as a finished iPhone.
Even as the manufacturing supply chains continue their evolution, a new question confronts Asia: How to profit from increasingly sophisticated supply chains in services? Despite all the political hype in the West about the ills of outsourcing and the perceived ubiquity of overseas customer-service call centers, services supply chains are still in their infancy."
It's thought-provoking to realize how the economics of various manufactured and assembled parts of goods such as an iPhone make it affordable to ship the incomplete item around so much of the world simply to take advantage of lower labor costs. Sternberg then contends,
"We're heading for a day when a Malaysian architect will sketch out a new office tower for London Bangalore will administer health benefits for a Kansas
That's particularly apparent on the infrastructure front. Ask experts what a government needs to do to develop a services- outsourcing industry, and the first answer is usually "provide more reliable electricity" or "lay fiber-optic cable." True, but more important will be the human intangibles. Educating a sufficiently skilled work force—no small task in itself—is only the start."
Sternberg's example sounds simple enough. But will it really occur? Are language barriers really so easy to overcome that complex building design will be piece-parted out as he describes?
He concluded with this passage,
"Manufacturing supply chains applied modern transportation technologies to a millennia-old principle that if someone in a neighboring village can make a good more efficiently than you can, you should buy it from him. Service supply chains derive a new principle—that you no longer need to be geographically near the person providing you a business service—from modern communications technologies. Now countries need to figure out how they fit into this trend, and how to profit from it."Sternberg's example sounds simple enough. But will it really occur? Are language barriers really so easy to overcome that complex building design will be piece-parted out as he describes?
He concluded with this passage,
Personally, I believe Sternberg is far too optimistic about the globalization of high value-added services. Especially services involving high levels of complexity.
Why?
Well, for one, globalization of product manufacture and assembly has a simple test. Does the resulting product function at a competitive price? The proof is easy to see.
Services aren't so simple. The success of a globally-designed building or other complex system using services provided in so many countries and languages might not be apparent for years. And they tend to be one-off projects, rather than, like products, things of which millions are sold and used.
Even the lowly call center has seen a reversal of outsourcing overseas from the US. Too many problems with language and basic service quality levels has resulted in some firms regaining an edge by relocating their call centers back in the US.
Then there's the recent comments of Boeing CEO Jim McNerney on CNBC. In answer to questions concerning the Dreamliner's continuing delays, McNerney confessed that the firm had overreached with its design outsourcing. He said that they won't be doing that again, focusing instead on more onshore engineering and design.
If one of the most sophisticated engineered systems we have, a modern jetliner, has failed to be reliably designed and produced globally on time, what are the prospects for equally-sophisticated systems? At least the Dreamliner results in a testable product on which quality control may be performed before it actually goes live in its initial commercial flights. And Boeing has been building such systems for decades.
I think it says a lot that they got the mix and management of global design of the various parts and subsystems of their newest jet fouled up, and are planning to move back to more centrally-sourced services in the future.
Thus, it's my guess that Sternberg's concerns and visions are very premature. And a big chunk of US exports in the service-based sector remains somewhat safe for a while.
Monday, February 14, 2011
Cisco's Continuing Woes
I didn't think much of it, until I read, later that day, of Cisco CEO John Chambers' downbeat outlook and the lackluster quarterly earnings report.
I wrote this post last November, on the occasion of the company's and Chamber's last sobering, disappointing quarterly outlook and earnings report.
"However, a much more revealing chart is the next one, spanning the public life of the firm. It produced shareholder value so fast in its early years that comparisons with the index are really pointless. But it's easy to see that, like Microsoft, Cisco has really 'enjoyed,' or, more pointedly, its shareholders have not, a lost decade. From its peak at the peak of the technology bubble in 2000, Cisco slid dramatically and really never substantially recovered.
I have checked my own records, and do not find evidence of the firm in any of my portfolios after early 2000. Between its dismal total return performance, relative to better-performing firms, and, I expect, slowed revenue growth, the firm joined the list I mentioned earlier in the post. Those technology firms whose charmed life of meteoric total return and revenue growth has slipped into history, almost certainly never to return.
Thus my amazement that pundits still put so much emphasis on the firm's every move. The information is clearly available for all to see- Cisco hasn't been a consistently superior performer worthy of long term holding for a decade. You'd have to be a market timer to have earned significant gains by owning the firm during that period. And if you simply bought and held, you'd be a big loser."
The price chart for Cisco, Dell, Intel, Microsoft and the S&P500 Index which appears at the beginning of this post bears out my contention.
More surprisingly, Thursday, on CNBC, one pundit was actually arguing that it's time for Chambers to find a new job. And whereas Microsoft is usually given a magical pass for its lost decade, Cisco doesn't seem to merit the same kid glove treatment.
A Wall Street Journal article in the Heard On The Street column matter of factly notes that the switch market, which Cisco rode to success a decade ago, has matured and become much more competitive. Revenues and margins are down. Like so many other technology firms have experienced, it appears that Cisco's main engine of profitable growth has flamed out, or settled down to a constant, slow burn, with no similar product/market to replace its earlier performance.
John Chambers and Cisco, meet Joseph Schumpeter's world of competitive, dynamic capitalism. Cisco hasn't been selected for my equity portfolios in at least a decade. Like the other firms I included in the price chart- Dell, Intel and Microsoft- all were once profitable contributors to earlier portfolios. But, once growth ebbed and returns came back down to earth, they were jettisoned, never to reappear.
Friday, February 11, 2011
The US Economy's Looming Job Creation Challenge
I began to consider risks to a robust US economic recovery in this recent post, in which I noted,
"But if commodity input costs are rising, that will result in either lower margins and a curtailment of job growth, or higher prices which will cause lower quantity demand by consumers in the face of so much inflation.
One is somehow left feeling that there's considerably more economic turmoil ahead than many pundits would have us believe. We're seeing the first reactions by businesses to known inflation in input costs. How and where those costs, and the actions they have spurred, find their way into consumer prices, and how consumers react with their buying behavior, isn't being widely discussed.
However, with job growth still anemic, and US unemployment still uncomfortably high, will the Fed dare to raise rates? And would that not result in a stalled economy and job growth as higher rates choke demand?"
In an editorial in yesterday's edition of the Wall Street Journal, entitled Doing the Math on a Jobless Recovery, Brad Schiller explored the job growth component of the putative, but weak, US economic recovery.
An economics professor at the University of Nevada, he wrote, in part,
"The latest employment reports have not been encouraging. At the rate of 36,000 new jobs a month—the number gained in January—we will never get back to full employment. Even if we keep adding jobs at the December rate of 121,000 new jobs, we wouldn't achieve full employment in this millennium.
Each year brings another two million-plus workers to the labor force (new workers plus the re-entry of discouraged workers). Thus we would need monthly job gains of 460,000 to achieve full employment in time for the 2012 presidential elections.
We created that many jobs one time in the last four years (May 2010)."
I edited out Schiller's more overtly political conclusions. But what he makes painfully clear is that there's just no prospect of sufficiently robust employment growth anytime soon that will bring unemployment, as dynamically calculated going forward, into a range that would allow the Fed to declare full-employment victory.
If that's true, then it means the Fed might hold rates too low for some time, stoking commodity-based inflation. If not, and the Fed raises rates, then, according to Schiller's calculations, unemployment is likely to remain distressingly high.
Then you have a persistent drag on US economic growth of a significant part of the workforce being unemployed. Will this not affect overall demand? That
Like it or not, we seem to have wandered back into the bad old days of Carter-era economics: high unemployment, prospects of higher inflation, and a need to raise rates in the face of a less-than-robustly-healthy US economy.
"But if commodity input costs are rising, that will result in either lower margins and a curtailment of job growth, or higher prices which will cause lower quantity demand by consumers in the face of so much inflation.
One is somehow left feeling that there's considerably more economic turmoil ahead than many pundits would have us believe. We're seeing the first reactions by businesses to known inflation in input costs. How and where those costs, and the actions they have spurred, find their way into consumer prices, and how consumers react with their buying behavior, isn't being widely discussed.
However, with job growth still anemic, and US unemployment still uncomfortably high, will the Fed dare to raise rates? And would that not result in a stalled economy and job growth as higher rates choke demand?"
In an editorial in yesterday's edition of the Wall Street Journal, entitled Doing the Math on a Jobless Recovery, Brad Schiller explored the job growth component of the putative, but weak, US economic recovery.
An economics professor at the University of Nevada, he wrote, in part,
"The latest employment reports have not been encouraging. At the rate of 36,000 new jobs a month—the number gained in January—we will never get back to full employment. Even if we keep adding jobs at the December rate of 121,000 new jobs, we wouldn't achieve full employment in this millennium.
At the trend growth rate of 1.2% annually, we get another 1.8 million labor force participants a year, and with them, the need for another 1.8 million new jobs.
To get back to full employment tomorrow, we could get by with another seven million new jobs. To reach full employment by the end of this year, we would need at least nine million new jobs (some 750,000 a month). There's simply no way we will experience that kind of job creation.
Each year brings another two million-plus workers to the labor force (new workers plus the re-entry of discouraged workers). Thus we would need monthly job gains of 460,000 to achieve full employment in time for the 2012 presidential elections.
We created that many jobs one time in the last four years (May 2010)."
I edited out Schiller's more overtly political conclusions. But what he makes painfully clear is that there's just no prospect of sufficiently robust employment growth anytime soon that will bring unemployment, as dynamically calculated going forward, into a range that would allow the Fed to declare full-employment victory.
If that's true, then it means the Fed might hold rates too low for some time, stoking commodity-based inflation. If not, and the Fed raises rates, then, according to Schiller's calculations, unemployment is likely to remain distressingly high.
Then you have a persistent drag on US economic growth of a significant part of the workforce being unemployed. Will this not affect overall demand? That
Like it or not, we seem to have wandered back into the bad old days of Carter-era economics: high unemployment, prospects of higher inflation, and a need to raise rates in the face of a less-than-robustly-healthy US economy.
Thursday, February 10, 2011
More Questionable Financial Coverage on CNBC
I've never really liked CNBC's equity options programs. The original, Fast Money, once hosted by now-departed Dylan Ratigan, airs after the market's close, with a 12:30PM spinoff, as well. It's not because of Melissa Lee, Ratigan's replacement, for whom I actually have great respect as a reporter and anchor. Nor several of the program's continuing contributors, including John Najarian.
It's just the fact that the network airs two programs on the topic of short-term options trading. As I've written elsewhere in a few prior posts, I don't believe many, if any, retail investors have any business dabbling in equity options. Beyond relatively safe strategies, such as covered calls, it is mostly likely an expensive waste of time and money for most retail investors. Something like 90% or more of all equity options expire without gains.
To me, the Fast Money programs aim for a rather odd segment. Few retail investors are probably interested or sufficiently confident to try to follow any of the advice emanating from the program's personalities. Institutional investors would be unlikely to need such advice- they either already have their own professional opinions as options pros, or don't go near the instruments.
Now, an even more troubling asset class is looming on CNBC's horizon- foreign exchange.
Within the past week, I was asked to complete a CNBC survey on the topic. The network's surveys are typically pretty obvious in their focus. This one probed my unaided recall of advertising by various FX trading vendors, then segued into how I felt about the companies and the concept of CNBC airing an FX trading program.
You can see what's coming here. One or more retail FX platform vendors approach CNBC about sponsoring a program focusing on their instruments. With all the cross-currency plays available, plus various forces- interest rates, trade, intervention, etc.- driving FX valuations and expectations, there would be a lot to discuss.
That's also the downside- for retail would-be investors. FX is a dicey area for professionals. Never mind allowing retail investors loose in this toxic candy store.
I continue to feel that CNBC knowingly entices retail investors to believe they can and should engage in investing activities for which they are unsuited. Most retail investors should stick to managed equity and fixed income funds. Few really have the time, knowledge and skill to add unique value by selecting individual equities or bonds, let alone derivatives thereon. For CNBC to devote so much air time- as much as 2 1/2 hours now, including two Fast Money programs and Cramer's Mad Money- is, in my opinion, irresponsible. To add FX to this brew is even worse.
It's just the fact that the network airs two programs on the topic of short-term options trading. As I've written elsewhere in a few prior posts, I don't believe many, if any, retail investors have any business dabbling in equity options. Beyond relatively safe strategies, such as covered calls, it is mostly likely an expensive waste of time and money for most retail investors. Something like 90% or more of all equity options expire without gains.
To me, the Fast Money programs aim for a rather odd segment. Few retail investors are probably interested or sufficiently confident to try to follow any of the advice emanating from the program's personalities. Institutional investors would be unlikely to need such advice- they either already have their own professional opinions as options pros, or don't go near the instruments.
Now, an even more troubling asset class is looming on CNBC's horizon- foreign exchange.
Within the past week, I was asked to complete a CNBC survey on the topic. The network's surveys are typically pretty obvious in their focus. This one probed my unaided recall of advertising by various FX trading vendors, then segued into how I felt about the companies and the concept of CNBC airing an FX trading program.
You can see what's coming here. One or more retail FX platform vendors approach CNBC about sponsoring a program focusing on their instruments. With all the cross-currency plays available, plus various forces- interest rates, trade, intervention, etc.- driving FX valuations and expectations, there would be a lot to discuss.
That's also the downside- for retail would-be investors. FX is a dicey area for professionals. Never mind allowing retail investors loose in this toxic candy store.
I continue to feel that CNBC knowingly entices retail investors to believe they can and should engage in investing activities for which they are unsuited. Most retail investors should stick to managed equity and fixed income funds. Few really have the time, knowledge and skill to add unique value by selecting individual equities or bonds, let alone derivatives thereon. For CNBC to devote so much air time- as much as 2 1/2 hours now, including two Fast Money programs and Cramer's Mad Money- is, in my opinion, irresponsible. To add FX to this brew is even worse.
Wednesday, February 09, 2011
"Crony Capitalism"- CNBC Style
This morning's CNBC SquawkBox segment from the Harvard Business School marked a new low in the network's contribution to the notion of "crony capitalism."
It began with Carlos Q's typical looks of surprise, shock and awe as a guest who is apparently and adjunct professor, when he's not a hedge fund manager, discussed teaching HBS students about the new roles of finance in the economy. Of course the guy proclaimed such appearances with students as challenging and engaging.
Duh. He's a hedge fund manager, and the students want a job in 1-2 years. How does he think they'll react to him?
Then Bill Ackman was interviewed, giving him a platform from which to stump for his latest investment position, JC Penney. Despite his recent involvement in attempting to merge Borders and Barnes & Noble, Ackman's interest in clothing/general retailers goes back at least to his attempts to influence Target during the financial crisis of late 2008. What I notice now is that Ackman has, in both cases, ended up with interests in a more troubled firm in a sector. This morning, he actually, when asked, contended that Target's operational skills are better than Penney's. He was also a bit more vague on precisely how he'd use real estate values to turn Penney's around. Given the apparent setting of the CNBC segment in the business school library, to drive home the HBS surroundings, I'm unsure what the academic takeaway of Ackman's appearance was. Vulture hedge fund acquisition strategies? Shoot for the less-competent company in a sector and agitate from outside?
Ackman then pontificated on banking, announcing that lending to the largest US corporations was no longer profitable.
Gee, thanks for that stunning insight, Bill. We already knew that at Chase Manhattan 20 years ago.
It seemed mostly to be little more than another opportunity for Ackman to republicize his fund's Penney's position, demonstrating, once more, that it's nice, professionally, to be a crony of CNBC.
Then it was time for Michael Porter to trade on his decades-old reputation for a series of strategy books which mostly restated existing microeconomics. He babbled on about exchange-rate-based terms of trade and the usual verbiage about retaining a US base of suppliers and production. Nothing new, nor particularly relevant to his supposed specialty of strategy.
You'd like to hear Porter expound on how we should expect other countries to naturally compete for and capture lower value-added, less-technically complex production and other business functions and processes. That US competitiveness and ability to employ our workforce depends upon creating more value-added production and service jobs and functions. That we don't want to simply take back lower-skilled jobs, but, ideally, leave businesses free to innovate and create value that necessitates new jobs with different, greater value added. But that we have to accept the fact that an evolving, multi-lateral global economy will force the US to cede lower value-added jobs and grow only by creating new, higher value-added positions.
But nothing remotely like that escaped Mike's lips.
More cronyism in search of a purpose.
Perhaps the most egregious example of cronyism came next, as the hapless Vik Pandit, CEO of government-rescued Citigroup, appeared.
First, Carlos Q let everyone know that, off camera, Ackman had told Pandit he was 'the most underrated CEO in America.'
Really? Do tell, Bill. Why the sudden, undeserved accolade? Is Ackman greasing the skids for backup funding for his next takeover?
Meanwhile, Pandit gave one of the most stomach-churning performances I've seen on business/financial television in ages. After saying how grateful he and his bank are to the US taxpayer for saving his mismanaged company, he then went on to characterize his bank an institution. It's more than a bank, he claimed- it's an institution. So, you know, the US has to rescue Citigroup, no matter how ineptly it is run. Along the way, he mentioned a $12MM profit for the Treasury in exchange for saving Citi from bankruptcy. That's it? That's all we got for all the risk inherent in propping up that mess?
Pandit then claimed that his bank is 'back to basics,' but will repay American taxpayers by advising their companies abroad as the nation's 'only international bank.'
Can it get more cronyish than this? Here's the guy whose hedge fund, which was eventually closed amidst poor performance, was generously bought for cash by Citigroup, then magically elevated to CEO by a board dominated by a non-executive chairman, Bob Rubin, who helped lead the firm into near-ruin. Pandit doesn't have a banking background. He ran a middle-office operation at Morgan Stanley, then left to open a hedge fund. If there were ever an unqualified and unprepared guy heading a major bank, it would have to be Pandit.
If you look at the nearby price chart for Citi and the S&P500Index, beginning at December, 2007, when Pandit became CEO, you see how dismally the bank has performed.
Why on earth Ackman thinks Pandit has done well is anyone's guess. Why Pandit merits an appearance on CNBC's program, moreover at HBS, is equally curious.
Seems to be just more of CNBC's brand of crony capitalism.
It began with Carlos Q's typical looks of surprise, shock and awe as a guest who is apparently and adjunct professor, when he's not a hedge fund manager, discussed teaching HBS students about the new roles of finance in the economy. Of course the guy proclaimed such appearances with students as challenging and engaging.
Duh. He's a hedge fund manager, and the students want a job in 1-2 years. How does he think they'll react to him?
Then Bill Ackman was interviewed, giving him a platform from which to stump for his latest investment position, JC Penney. Despite his recent involvement in attempting to merge Borders and Barnes & Noble, Ackman's interest in clothing/general retailers goes back at least to his attempts to influence Target during the financial crisis of late 2008. What I notice now is that Ackman has, in both cases, ended up with interests in a more troubled firm in a sector. This morning, he actually, when asked, contended that Target's operational skills are better than Penney's. He was also a bit more vague on precisely how he'd use real estate values to turn Penney's around. Given the apparent setting of the CNBC segment in the business school library, to drive home the HBS surroundings, I'm unsure what the academic takeaway of Ackman's appearance was. Vulture hedge fund acquisition strategies? Shoot for the less-competent company in a sector and agitate from outside?
Ackman then pontificated on banking, announcing that lending to the largest US corporations was no longer profitable.
Gee, thanks for that stunning insight, Bill. We already knew that at Chase Manhattan 20 years ago.
It seemed mostly to be little more than another opportunity for Ackman to republicize his fund's Penney's position, demonstrating, once more, that it's nice, professionally, to be a crony of CNBC.
Then it was time for Michael Porter to trade on his decades-old reputation for a series of strategy books which mostly restated existing microeconomics. He babbled on about exchange-rate-based terms of trade and the usual verbiage about retaining a US base of suppliers and production. Nothing new, nor particularly relevant to his supposed specialty of strategy.
You'd like to hear Porter expound on how we should expect other countries to naturally compete for and capture lower value-added, less-technically complex production and other business functions and processes. That US competitiveness and ability to employ our workforce depends upon creating more value-added production and service jobs and functions. That we don't want to simply take back lower-skilled jobs, but, ideally, leave businesses free to innovate and create value that necessitates new jobs with different, greater value added. But that we have to accept the fact that an evolving, multi-lateral global economy will force the US to cede lower value-added jobs and grow only by creating new, higher value-added positions.
But nothing remotely like that escaped Mike's lips.
More cronyism in search of a purpose.
Perhaps the most egregious example of cronyism came next, as the hapless Vik Pandit, CEO of government-rescued Citigroup, appeared.
First, Carlos Q let everyone know that, off camera, Ackman had told Pandit he was 'the most underrated CEO in America.'
Really? Do tell, Bill. Why the sudden, undeserved accolade? Is Ackman greasing the skids for backup funding for his next takeover?
Meanwhile, Pandit gave one of the most stomach-churning performances I've seen on business/financial television in ages. After saying how grateful he and his bank are to the US taxpayer for saving his mismanaged company, he then went on to characterize his bank an institution. It's more than a bank, he claimed- it's an institution. So, you know, the US has to rescue Citigroup, no matter how ineptly it is run. Along the way, he mentioned a $12MM profit for the Treasury in exchange for saving Citi from bankruptcy. That's it? That's all we got for all the risk inherent in propping up that mess?
Pandit then claimed that his bank is 'back to basics,' but will repay American taxpayers by advising their companies abroad as the nation's 'only international bank.'
If you look at the nearby price chart for Citi and the S&P500Index, beginning at December, 2007, when Pandit became CEO, you see how dismally the bank has performed.
Why on earth Ackman thinks Pandit has done well is anyone's guess. Why Pandit merits an appearance on CNBC's program, moreover at HBS, is equally curious.
Seems to be just more of CNBC's brand of crony capitalism.
The AOL-Huffington Post Deal
In Monday's post, I commented dismissively on AOL buying the Huffington Post with this passage,
"AOL, now spun back out from the disastrous TimeWarner linkage, just announced this morning that it is buying the online Huffington Post for $315MM. Does anyone really care that much? What does AOL bring to the table?"
Since then, various pundits have weighed in on the deal. Tim Armstrong and Arianna Huffington appeared on CNBC to tout the deal. Armstrong somewhat disingenously claimed there was "no risk" to the deal, while Huffington claimed that those who took AOL stock would outperform the cash recipients. This despite some observers chortling that the HuffPost owners had learned from TimeWarner-AOL and demanded mostly greenbacks this time.
As the Wall Street Journal noted,
"No doubt Huffington Post Chairman and co-founder Ken Lere, an AOL veteran who saw the Time Warner nightmare firsthand, knew the dangers of accepting too much stock in AOL."
Regarding Armstrong's claim, check out the nearby price chart showing that the new AOL has languished since its inception. Armstrong, I am sure, badly hopes that the Huffington Post's readership can work magic on AOL's ad revenues. Putting Arianna in charge of a bigger chunk of content? Who knows how that will turn out? She's known for liberal politics, despite what Armstrong yammered about new content 'beyond left and right.'
Given the only-recent profits realized by Huffington, and just a $50MM revenue estimate for FY2011 for the online media property, the $300MM in cash plus $15MM of AOL equity seems a pretty rich price. I always wonder, in these situations, why the acquirer doesn't just form a marketing alliance, exchanging cash for product and/or access? Thus saving shareholders' the risks of actual acquisition, while extending financial benefits to the media property, and forcing continued performance for the deal to continue.
But, as I noted in my initial comment, so what? What's really clear is that the four owners of Huffington got a nice $300MM for a recently-, barely-profitable online business. Sounds a lot like TimeWarner-AOL, only one company removed, doesn't it? What AOL gets is anybody's guess. But investors clearly didn't like the deal. And it's going to take a lot to get AOL anywhere near the S&P since its rebirth.
Personally, I don't think Armstrong and the addition of the Huffington Post properties, including Arianna herself, are going to do the trick.
Since then, various pundits have weighed in on the deal. Tim Armstrong and Arianna Huffington appeared on CNBC to tout the deal. Armstrong somewhat disingenously claimed there was "no risk" to the deal, while Huffington claimed that those who took AOL stock would outperform the cash recipients. This despite some observers chortling that the HuffPost owners had learned from TimeWarner-AOL and demanded mostly greenbacks this time.
As the Wall Street Journal noted,
"No doubt Huffington Post Chairman and co-founder Ken Lere, an AOL veteran who saw the Time Warner nightmare firsthand, knew the dangers of accepting too much stock in AOL."
Regarding Armstrong's claim, check out the nearby price chart showing that the new AOL has languished since its inception. Armstrong, I am sure, badly hopes that the Huffington Post's readership can work magic on AOL's ad revenues. Putting Arianna in charge of a bigger chunk of content? Who knows how that will turn out? She's known for liberal politics, despite what Armstrong yammered about new content 'beyond left and right.'
Given the only-recent profits realized by Huffington, and just a $50MM revenue estimate for FY2011 for the online media property, the $300MM in cash plus $15MM of AOL equity seems a pretty rich price. I always wonder, in these situations, why the acquirer doesn't just form a marketing alliance, exchanging cash for product and/or access? Thus saving shareholders' the risks of actual acquisition, while extending financial benefits to the media property, and forcing continued performance for the deal to continue.
But, as I noted in my initial comment, so what? What's really clear is that the four owners of Huffington got a nice $300MM for a recently-, barely-profitable online business. Sounds a lot like TimeWarner-AOL, only one company removed, doesn't it? What AOL gets is anybody's guess. But investors clearly didn't like the deal. And it's going to take a lot to get AOL anywhere near the S&P since its rebirth.
Personally, I don't think Armstrong and the addition of the Huffington Post properties, including Arianna herself, are going to do the trick.
Tuesday, February 08, 2011
Paul Ryan Teaches Economics To The "Senior Economics Reporter" On CNBC This Morning
Now that he's Chairman of the House Budget Committee, Wisconsin Republican Paul Ryan has been appearing on CNBC's morning program, SquawkBox, more frequently.
If you haven't seen, heard or read Ryan, he's a remarkably intelligent and economically savvy elected official.
This morning saw a priceless moment wherein Ryan befuddled the economically-challenged, CNBC so-called "senior economic reporter" Steve Liesman.
Ryan was responding to questions regarding monetary policy and the Fed. He had contended in a remark that the nation's fiscal and monetary policies are heading for conflict. Liesman, hoping for an easy chance to make Ryan look bad, jumped in to ask for elaboration.
By way of background, Ryan offhandedly referred to a piece he and heavyweight monetary policy economist John B. Taylor had co-authored in Investors Business Daily recently. Taylor is, of course, the author of the influential Taylor Rule, explained below by Taylor,
"Let me start with the example of the Taylor rule. It says that the short term interest rate equals one-and-a-half times the inflation rate plus one-half times the real GDP utilization rate plus one. So, in 1989, for example, when the federal funds rate was about 10 percent in the United States you could say that the 10% was equal to 1.5 times the inflation rate of 5% (or 7.5) plus .5 times the GDP gap of about 3% (or 1.5, which takes you to 9) plus 1, which gives you 10. Now this is a very specific rule, and it can be written down mathematically as shown in Figure 1, which also shows the way the rule was written when first presented in 1992. Of course, I did not name it the Taylor rule. Others did that later. Originally the rule was meant to be normative: a recommendation of what the Fed should do. It was derived from monetary theory, or more precisely from optimization exercises using new dynamic stochastic monetary models with rational expectations and price rigidities. Like most rules or laws in economics it is not as precise as most physical laws, though that does not mean it is less useful. It was certainly not meant to be used mechanically, though it now appears that monetary policy might operate even better if it stayed closer to the rule."
Ryan is an explicit Friedmanite on most economics issues. Especially, if you listen closely to his comments, monetary policy.
The priceless moment came when Liesman demanded that Ryan cite, on the spot, the rule he preferred the Fed follow for monetary policy.
Ryan slowly, carefully explained that he is a member of Congress, not a professional economist. Therefore, he said, he could not and should not specify the rule, but he knew he preferred that the Fed use one.
All the while, the camera showed Liesman's pudgy face in a frown, with a sort of dull-witted mask of slow comprehension. He began to slowly realize that Ryan is far, far more intelligent than he, Liesman, is, both economically as well as in terms of the media dynamics going on at the moment.
You can't possibly script this sort of thing. Ryan just seems to mesmerize Liesman and leave him dumbfounded. Emphasis on the dumb part.
Immediately on the heels of that exchange, Rick Santelli chimed in to chide Liesman for being harder on Ryan than he's ever been on Bernanke. Whereupon the so-called senior economic reporter retorted/admitted that he'd never actually interviewed the Fed Chairman.
Priceless, unscripted business and economic comedy this morning.
If you haven't seen, heard or read Ryan, he's a remarkably intelligent and economically savvy elected official.
This morning saw a priceless moment wherein Ryan befuddled the economically-challenged, CNBC so-called "senior economic reporter" Steve Liesman.
Ryan was responding to questions regarding monetary policy and the Fed. He had contended in a remark that the nation's fiscal and monetary policies are heading for conflict. Liesman, hoping for an easy chance to make Ryan look bad, jumped in to ask for elaboration.
By way of background, Ryan offhandedly referred to a piece he and heavyweight monetary policy economist John B. Taylor had co-authored in Investors Business Daily recently. Taylor is, of course, the author of the influential Taylor Rule, explained below by Taylor,
"Let me start with the example of the Taylor rule. It says that the short term interest rate equals one-and-a-half times the inflation rate plus one-half times the real GDP utilization rate plus one. So, in 1989, for example, when the federal funds rate was about 10 percent in the United States you could say that the 10% was equal to 1.5 times the inflation rate of 5% (or 7.5) plus .5 times the GDP gap of about 3% (or 1.5, which takes you to 9) plus 1, which gives you 10. Now this is a very specific rule, and it can be written down mathematically as shown in Figure 1, which also shows the way the rule was written when first presented in 1992. Of course, I did not name it the Taylor rule. Others did that later. Originally the rule was meant to be normative: a recommendation of what the Fed should do. It was derived from monetary theory, or more precisely from optimization exercises using new dynamic stochastic monetary models with rational expectations and price rigidities. Like most rules or laws in economics it is not as precise as most physical laws, though that does not mean it is less useful. It was certainly not meant to be used mechanically, though it now appears that monetary policy might operate even better if it stayed closer to the rule."
Ryan is an explicit Friedmanite on most economics issues. Especially, if you listen closely to his comments, monetary policy.
The priceless moment came when Liesman demanded that Ryan cite, on the spot, the rule he preferred the Fed follow for monetary policy.
Ryan slowly, carefully explained that he is a member of Congress, not a professional economist. Therefore, he said, he could not and should not specify the rule, but he knew he preferred that the Fed use one.
All the while, the camera showed Liesman's pudgy face in a frown, with a sort of dull-witted mask of slow comprehension. He began to slowly realize that Ryan is far, far more intelligent than he, Liesman, is, both economically as well as in terms of the media dynamics going on at the moment.
You can't possibly script this sort of thing. Ryan just seems to mesmerize Liesman and leave him dumbfounded. Emphasis on the dumb part.
Immediately on the heels of that exchange, Rick Santelli chimed in to chide Liesman for being harder on Ryan than he's ever been on Bernanke. Whereupon the so-called senior economic reporter retorted/admitted that he'd never actually interviewed the Fed Chairman.
Priceless, unscripted business and economic comedy this morning.
How GSE's Stifle Mortgage Finance Innovation
Peter Wallison wrote a clearly expressed editorial in a recent edition of the Wall Street Journal explicitly identifying the GSE-provided subsidy to conventional 30-year, fixed-rate mortgages.
Wallison's point was that many people mistakenly believe that you can't offer an uninsured 30-year, fixed-rate mortgage, completely ignoring the existence of the jumbo-loan market. He went on to catalogue the mistakes Fannie Mae made in easing eligibility requirements for its mortgage guarantees, including downpayments of as little as 3%.
The editorial got me thinking about the reasons for such long duration mortgages. Wallison pointed out that they build equity value very slowly, maximizing the interest expense deductions available in the current tax code.
If I'm not mistaken, part of the reason for the lengthy duration was the experience Americans had with balloon-payment mortgages of shorter duration during the 1930s. When monetary policy brought about a severe contraction of the monetary base, money simply wasn't to be had. And many borrowers probably couldn't requalify for a mortgage during the Depression.
I'm familiar with the current existence of shorter-duration mortgages, but, of course, those leave a homeowner vulnerable to needing to refinance at an inopportune time. Those mortgages don't typically get the exposure that traditional 30 year fixed-rates do. However, many homeowners never come close to living in their home for 30 years.
Is it possible that the GSE's backing of selected mortgages stifled innovation in the field? Wallison concentrates on the dubious policy of government subsidies to conventional mortgages. But it occurs to me that another cost of those subsidies is to make it harder for other, more innovative mortgages to gain popularity. I'm not talking about lower downpayments but, rather, a homeowner choosing to take duration risk in exchange for a lower rate.
It would seem that, as is frequently the case, government-sponsored distortions in credit markets may have created unintended consequences which rob consumers of more choices in their buying behaviors. In this case, in choosing the duration of their mortgage, should they have reason to believe they do not need a 30-year funding commitment.
Wallison's point was that many people mistakenly believe that you can't offer an uninsured 30-year, fixed-rate mortgage, completely ignoring the existence of the jumbo-loan market. He went on to catalogue the mistakes Fannie Mae made in easing eligibility requirements for its mortgage guarantees, including downpayments of as little as 3%.
The editorial got me thinking about the reasons for such long duration mortgages. Wallison pointed out that they build equity value very slowly, maximizing the interest expense deductions available in the current tax code.
If I'm not mistaken, part of the reason for the lengthy duration was the experience Americans had with balloon-payment mortgages of shorter duration during the 1930s. When monetary policy brought about a severe contraction of the monetary base, money simply wasn't to be had. And many borrowers probably couldn't requalify for a mortgage during the Depression.
I'm familiar with the current existence of shorter-duration mortgages, but, of course, those leave a homeowner vulnerable to needing to refinance at an inopportune time. Those mortgages don't typically get the exposure that traditional 30 year fixed-rates do. However, many homeowners never come close to living in their home for 30 years.
Is it possible that the GSE's backing of selected mortgages stifled innovation in the field? Wallison concentrates on the dubious policy of government subsidies to conventional mortgages. But it occurs to me that another cost of those subsidies is to make it harder for other, more innovative mortgages to gain popularity. I'm not talking about lower downpayments but, rather, a homeowner choosing to take duration risk in exchange for a lower rate.
It would seem that, as is frequently the case, government-sponsored distortions in credit markets may have created unintended consequences which rob consumers of more choices in their buying behaviors. In this case, in choosing the duration of their mortgage, should they have reason to believe they do not need a 30-year funding commitment.
Monday, February 07, 2011
More Bad News from Yahoo
Sadly, even last month's improved Yahoo profit didn't do enough to lift it's equity price up anywhere near enough to make Carol Bartz' 18 months heading the firm look positive.
In fact, the firm's performance over the period now stands at roughly half the return of the S&P500 Index, as shown in the nearby chart.
It seems that Facebook's rise as the social networking phenomenon- large enough to worry Google- has now totally eclipsed the old self-proclaimed social networking site- Yahoo.
In this post, written last May, I confirmed my belief that Bartz was brought in too late for even someone with her considerable talents to rescue Yahoo. That post mentioned Facebook's performance as surpassing Yahoo's on a measure of ad display impressions.
The language emanating from Yahoo concerning their recent results has become full-mode corporate speak. For example, this from Bartz,
"We're not trying to cut our way to revenue growth. We're investing for future revenue growth."
Well, yes. Except it's just not working. In a Facebook world, nobody thinks about Yahoo as a connection site anymore. It's just one more free information site. With a deal with Microsoft involving Bing, if I recall, that brought some much-needed money.
AOL, now spun back out from the disastrous TimeWarner linkage, just announced this morning that it is buying the online Huffington Post for $315MM. Does anyone really care that much? What does AOL bring to the table?
In the natural, Schumpeterian order of business, Yahoo and AOL, two giants of the early internet era, have now lost purpose and significance. I wonder just who even owns shares in these firms anymore?
It seems that Facebook's rise as the social networking phenomenon- large enough to worry Google- has now totally eclipsed the old self-proclaimed social networking site- Yahoo.
In this post, written last May, I confirmed my belief that Bartz was brought in too late for even someone with her considerable talents to rescue Yahoo. That post mentioned Facebook's performance as surpassing Yahoo's on a measure of ad display impressions.
The language emanating from Yahoo concerning their recent results has become full-mode corporate speak. For example, this from Bartz,
"We're not trying to cut our way to revenue growth. We're investing for future revenue growth."
Well, yes. Except it's just not working. In a Facebook world, nobody thinks about Yahoo as a connection site anymore. It's just one more free information site. With a deal with Microsoft involving Bing, if I recall, that brought some much-needed money.
AOL, now spun back out from the disastrous TimeWarner linkage, just announced this morning that it is buying the online Huffington Post for $315MM. Does anyone really care that much? What does AOL bring to the table?
In the natural, Schumpeterian order of business, Yahoo and AOL, two giants of the early internet era, have now lost purpose and significance. I wonder just who even owns shares in these firms anymore?
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