Recently in Business & Economics Category
The proliferation of welfare programs and the decline of the labor force have crushed America's post-2009 economic recovery. When it's more beneficial not to work, people won't work. Quoting within quoting:
So what accounts for America's anemic economy? Hall has about 50 pages of analysis, but since brevity is a virtue, let's look at some of what he wrote in his final paragraph.Labor-force participation fell substantially after the crisis, contributing 2.5 percentage points to the shortfall in output. The decline showed no sign of reverting as of 2013. ...an important part may be related to the large growth in beneficiaries of disability and food-stamp programs. Bulges in their enrollments appear to be highly persistent. Both programs place high taxes on earnings and so discourage labor-force participation among beneficiaries. The bulge in program dependence...may impede output and employment growth for some years into the future.
In other words, he pointed out that a large number of people have left the labor force, which obviously isn't good since our economy's ability to generate output (and boost living standards) is a function of the degree to which labor and capital are being productively utilized.
And his work suggests that redistribution programs are a big reason for this drop in labor-force participation.
Megan McArdle says that there's no magic lever for economic growth. Maybe there are a bunch of levers that deliver economic growth when you don't pull them?
Republicans and Democrats suffer from a common delusion that there is some magic lever we can use to make the economy grow, if only we elect a president with the vision and iron determination to grab that sucker and pull really hard. This illness presents differently, depending on the patient. Democrats think the government needs to get right in there and micromanage our way back to 1950, preferably Sweden in 1950, while Republicans think that the road to prosperity is paved with low marginal tax rates. But no matter what the symptoms, it is still a sickness. Economic growth is mostly a matter of millions of individuals making decisions to save, invest and consume in new and better patterns -- and as amazing as this may sound, most of these people are thinking about things other than the government when they make those decisions.
For your financial entertainment here are two very different approaches to family finances. First, here's a name-dropping advocate for "wife bonuses".
As I stroll around the mall on a recent trip to Houston, Texas, moving from designer store to designer store, my mind is crunching numbers. Will I splurge on the elegant $750 French navy Chanel ballet pumps that I've been lusting after for months? Or shall I be pulling out my gold card to grab a pair of limited-edition $800 Louboutins, with striking red Valentine's hearts on the toe, to match their distinctive sole?
As I tally up the total, I can't help but smile -- I can easily stretch to both pairs of shoes, and still have plenty left of my five-figure bonus.
These pricey pairs of designer footwear will join a lineup of Jimmy Choo, Manolo Blahnik, Diane Von Furstenburg and Rupert Sanderson heels and a closet crammed with handbags from Prada, Chanel and Anya Hindmarch. Every single one was bought with one of my annual bonuses -- the nod from a happy boss for a job well done.
But, in this case, the boss in question is my husband, Al. The role he's rewarding me for is my work as a stay-at-home wife and mother. And the luxury labels are purchased with the "wife bonus" -- 20 percent of his own company bonus -- that I'm proud to receive for putting his career before my own, and keeping our lives together.
There were common threads in this group. These were people who had all made the money in their own lifetimes and done that as much by saving, investing and making careful choices about spending as by making large salaries.
One of the big choices was what they spent money on. A common thread was frugality about cars. Not only did they buy modestly priced vehicles, they kept them for a long time.
But fancy cars were more of a proxy for unnecessary purchases. Steve Ingram, a real estate and oil and gas lawyer in Albuquerque, said he and his wife simply didn't care that much about material possessions.
"We have some nice things, but I drive a car for 10 years and then trade it in and get another car for 10 years," he said. "We like to travel, and we'll spend the money for that because it's worth it having a real experience together."
There are many paths you can follow in life. Scout ahead and see where your choices will take you.
Even China -- home of the world's "cheap labor" (though not as cheap anymore!) -- is investing in robotic manufacturing. The numbers look big, but these are baby-steps. Once the bugs in the robotic systems get ironed out we'll see robots displacing millions of workers.
Robots are set to take over in many factories in the Pearl River Delta, the area of southern China known as the 'world's workshop' because of the huge export manufacturing industry there, as labour shortages bite and local authorities face the need to spur innovation to counter the economic slowdown.
Since September, a total of 505 factories across Dongguan have invested 4.2 billion yuan in robots, aiming to replace more than 30,000 workers, according to the Dongguan Economy and Information Technology Bureau.
By 2016, up to 1,500 of the city's industrial enterprises will began replacing humans with robots.
At current exchange rates that's about $22,500 per worker.
Jeremy Warner writes that widespread negative interest rates demonstrate that the world is fighting for every scrap of demand. If you're young enough, stay employed and ride out the coming correction by staying fully invested.
The flip side of the cheap money story is soaring asset prices. The bond market bubble is just the half of it; since most other assets are priced relative to bonds, just about everything else has been going up as well. Eventually, there will be a massive correction, in which creditors will suffer sickening losses.
Nobody can tell you when that moment will arrive. We live in an "extend and pretend" world in which economies pathetically fight between themselves for any scraps of demand. One burst of money printing is met by another in an ultimately futile, zero-sum game of competitive currency devaluation.
Happy Monday! If you're looking for some encouragement, check out this bullish article about imminent American energy dominance. We've got the right combination of geography and culture to harness oil and natural gas resources that no one else in the world can touch.
"We're just fifteen years into a 150-year process," said Steve Mueller, head of Southwestern Energy, the fourth biggest producer of gas in the US.
Our buddy Putin in Russia is worried.
Russian president Vladimir Putin warned at the St Petersburg economic summit last year that US shale gas was abruptly changing the international order, with serious implications for his country. The early effects have forced down global LNG prices, creating a rival source of gas supply in Europe.
Any future American cargoes would further erode Gazprom's pricing power in Europe, and erode the Kremlin's political leverage. The EU already has a large network of import terminals for LNG.
Lithuania has just finished its "Independence" terminal, opening up the Baltic states to LNG. Poland's new terminal should be ready this year.
Russia has the gepgraphy, but not the know-how or culture to support fracking.
Lukoil analysts say Russian extraction costs for shale are four times higher that those of US wildcat drillers. Sanctions currently prevent the Russians importing the know-how and technology to tap its vast Bazhenov basin at a viable cost.
John Hess, the founder of Hess Corporation, said it takes a unique confluence of circumstances to pull off a fracking revolution: landowner rights over sub-soil minerals, a pipeline infrastructure, the right taxes and regulations, and good rock. "We haven't seen those stars align yet," he said.
Above all it requires the acquiescence of the people. "It takes a thousand trucks going in and out to launch a (drilling) spud. Not every neighbourhood wants that," he said.
Certainly not in Sussex, Burgundy, or Bavaria.
The 21st Century will be another American Century.
Or a young woman, of course! But if you're in your late 30s and you still spend the majority of your time at work writing code you'd better be really good.
They don't prepare you for this in college or admit it in job interviews. The harsh reality is that if you are middle-aged, write computer code for a living, and earn a six-figure salary, you're headed for the unemployment lines. Your market value declines as you age and it becomes harder and harder to get a job.
I know this post will provoke anger, outrage, and denial. But, sadly, this is the way things are in the tech world. It's an "up or out" profession -- like the military. And it's as competitive as professional sports. Engineers need to be prepared.
This is not openly discussed, because employers could be accused of age discrimination. But research, such as that completed by University of California, Berkeley, professors Clair Brown and Greg Linden shows that even those with masters degrees and Ph.Ds have reason to worry.
Basically as you get older you need to diversify your skills beyond coding. As a software engineer in my late 30s, I'm not sure this is "age discrimination" -- you can't keep doing the same work and get 5% raises every year. Sure, you've got a family to support now, but that doesn't entitle you to more pay: you've got to create more value! Integrate your deep experience with software development with some other skills and you'll be golden:
Move up the ladder into management, architecture, or design, and diversify your experience. Work with business executives in your company, in areas such as sales, finance, marketing/product management, legal, and operations. Develop a broader set of skills that make you more valuable to your employer and that differentiate you from others with just coding skills.
Airlines are trying to maximize revenue per flight. This means charging more or less over time depending on what they predict will maximize total revenue for the flight -- using sophisticated quasi-academic tactics which they call "revenue management" or "yield management".
It's not very good to leave a lot of seats empty (you charged too much and could have made more money with a sale). It's also not good to go out completely full (you charged too little and are losing money on the trip).
Read the whole thing to learn about how inventory and fares interact in real-time. There's also this bit, which I didn't know:
Every few months, US airlines try to push a $2 or so hike across the board on all of their base fares; if their competitors match, the new price point takes hold. This is sort of a macroeconomic tweak.
Bank of America says that OPEC is dead and oil is going to $50 a barrel -- great news all around. Who's hurt? Petro-funded enemies like Russia, Iran, and Venezuala. Who wins? Europe, America, and everyone who has to buy oil from the cartel.
The Opec oil cartel no longer exists in any meaningful sense and crude prices will slump to $50 a barrel over the coming months as market forces shake out the weakest producers, Bank of America has warned.
Revolutionary changes sweeping the world's energy industry will drive down the price of liquefied natural gas (LNG), creating a "multi-year" glut and a much cheaper source of gas for Europe.
Francisco Blanch, the bank's commodity chief, said Opec is "effectively dissolved" after it failed to stabilize prices at its last meeting. "The consequences are profound and long-lasting," he said.
The free market will now set the global cost of oil, leading to a new era of wild price swings and disorderly trading that benefits only the Mid-East petro-states with deepest pockets such as Saudi Arabia. If so, the weaker peripheral members such as Venezuela and Nigeria are being thrown to the wolves.
I'm loving the $2 gas.
The best response ever to "sell me this pen"? Well, according to the author anyway! His pitch framework is pretty solid and could be helpful even if you aren't a sales professional:
There are exactly four sales skills the interviewer is looking to see when you answer:
- how you gather information
- how you respond to information
- how you deliver information
- and how you ask for something (closing)
I know I've shared it before, but Glengarry Glen Ross has the best sales motivational ever:
Watch it at least once a year. One type of person will be motivated, and another will scoff at the abuse.
Mark Biller at Sound Mind Investing has an interesting observation about the unending dire predictions for the ongoing bull market (subscription required):
While it's completely anecdotal, it's hard for me to believe this bull market is going to end while so many financial journalists are calling for its demise so loudly and frequently. That's not how long-term bull markets usually end. Rather, it's usually the opposite: when nobody seems to have much bad to say about the stock market, that's the time to be nervously looking over your shoulder.
This bull market has been hated from the day it first started rising over five years ago. Many investors -- both pros and amateurs -- have never gotten over their fear from the 2008-2009 financial crisis and never got reinvested. For an individual, that's terribly disappointing. For a pro, it's potentially devastating. Some of those pros have been writing why the bull market is about to keel over ever since. They've got so much invested in their calls that the bull market can't last, it definitely does make one wonder if they can be objective at this point.
The fascinating thing that most people forget about the stock market is that in every transaction there are two participants: a buyer and a seller. The buyer thinks the price is going up, and the seller thinks that price is going down. No matter what you read or see on television, half the money in the market is betting on it going up, and half the money is betting on it going down.
So why have so many talking heads been predicting the end of the bull market for so long, while other investors continue to drive it up? Are the talking heads, as a class, smarter than everyone else? I think it's more likely that their incentives to not align with those of other investors.
The primary reason that teenagers should work is because it puts them in a position of having to win approval from adults rather than from other teenagers. The "real world" and the "school world" are completely different. The behaviors and attributes that win acclaim in the school world won't get you far in the real world, and most kids aren't wise enough to learn this just by hearing their parents repeat it. Teenagers who work at a real job earn far more than a few dollars per hour -- the experience they get will pay huge dividends for their whole lives.
A brilliant new double-decker armrest design may be able to reduce arm contention between seat neighbors!
And airlines will be able to squeeze more people into the same space, which could save passengers money.
If airlines make our lives truly terrible, they may give us the Paperclip as consolation. Some are thinking about putting 10 seats in each row of the Boeing 777 where today there are nine, Robert Mann, an airline industry analyst said, which would bring in huge economic benefits. "If this sort of feature were to facilitate that without detracting from the customer experience," it would be worthwhile.
In an effort to spur lending the European Central Bank has introduced negative interest rates for bank deposits. Although it sounds strange, there's no reason that interest rates can't go negative -- in fact, negative interest rates are basically the same thing as traditional inflation. Spend (or lend) the money now because you'll have less in the future.
It cut its deposit rate for banks from zero to -0.1%, to encourage banks to lend to businesses rather than hold on to money.
The ECB is the first major central bank to introduce negative interest rates.
Howard Archer, chief UK and European economist at IHS Global Insight said: "Despite being widely anticipated and in some quarters criticised for occurring too late, it is still a bold and unusual move by the ECB to take its deposit rate into negative territory."
"There has to be considerable uncertainty as to how effective negative deposit rates will turn out to be," he added.
It has been tried before in smaller economies. Sweden and Denmark, who are both outside the Single Currency, attempted to use negative rates in recent years with mixed results.
Analysts said in Sweden it had little discernible impact; in Denmark it did have the effect of lowering the value of the currency, the Krone, but according to the Danish Banking Association it also hit the banks' bottom line profits.
Here's some more about what a negative interest rate even means.
US GPD contracted in 2014Q1, but is that significant? In my opinion, GDP is a pretty stupid metric. Why?
- If you and I each mow our own laws, GDP = $0.
- If you and I pay each other $50 to mow each others' lawns, GDP = $100.
The U.S. economy contracted in the first quarter for the first time in three years as it buckled under the weight of a severe winter, but there are signs activity has since rebounded.
The Commerce Department on Thursday revised down its growth estimate to show gross domestic product shrinking at a 1.0 annual rate.
It was the worst performance since the first quarter of 2011 and reflected a far slower pace of inventory accumulation and a bigger than previously estimated trade deficit.
Everyone has heard about BitCoin by now, but did you know that crypto-currencies are just a subset of Distributed Autonomous Corporations?
Distributed Autonomous Corporations (DAC) run without any human involvement under the control of an incorruptible set of business rules. (That's why they must be distributed and autonomous.) These rules are implemented as publicly auditable open source software distributed across the computers of their stakeholders. You become a stakeholder by buying "stock" in the company or being paid in that stock to provide services for the company. This stock may entitle you to a share of its "profits", participation in its growth, and/or a say in how it is run.
Bloomberg has an infographic about how automation threatens various jobs. I think it captures some interesting categories, but I don't agree with the bottom line.
For "Manipulation"-type jobs, it is only a matter of time before automation miniaturizes and catches up to humans.
For "Creativity", internet distribution makes it possible for elite creative workers to share their products very widely and cheaply, thereby pricing middling/poor creative workers out of the market. Non-elite creative workers will only get paid for making unique creations, and the pay will be poor. Example: quilt-making.
The "Social/Perception" field is likely safe for the foreseeable future... but what does that mean? Humans will be better than automation at social interactions with other humans... but will there be any money in that when no one has any other jobs?
Obviously I don't think the future is that bleak. I believe that humans and machines will continue to cooperate in voluntary collaborations and we'll all be better off for it. The modern corporation is basically a massive human/machine hybrid.
This piece by Aswath Damodaran is a great explanation of why Facebook paid $19 billion for Whatsapp. There's a lot there, but it's an elegant read.
Returning to the Facebook/Whatsapp deal, it seems to me that Facebook is playing the pricing game, and that recognizing that this is a market that rewards you for having a greater number of more involved users, they have gone after a company (Whatsapp) that delivers on both dimensions. Here is a very simplistic way to see how the deal can play out. Facebook is currently being valued at $170 billion, at about $130/user, given their existing user base of 1.25 billion. If the Whatsapp acquisition increases that user base by 160 million (I know that Whatsapp has 450 million users, but since its revenue options are limited as a standalone app, the value proposition here is in incremental Facebook users), and the market continues to price each user at $130, you will generate an increase in market value of $20.8 billion, higher than the price paid. Are there lots of "ifs" in this deal? Sure, but it does simplify the explanation.
Bonus content: an explanation of the difference between how traders and investors see the world.
This week, I was at the Tuck School of Business at Dartmouth, talking about the difference between price and value. I built the presentation around two points that I have made in my posts before. The first is that there are two different processes at work in markets. There is the pricing process, where the price of an asset (stock, bond or real estate) is set by demand and supply, with all the factors (rational, irrational or just behavioral) that go with this process. The other is the value process where we attempt to attach a value to an asset based upon its fundamentals: cash flows, growth and risk. For shorthand, I will call those who play the pricing game "traders" and those who play the value game "investors", with no moral judgments attached to either. The second is that while there is absolutely nothing wrong or shameful about being either an investor (No, you are not a stodgy, boring, stuck-in-the-mud old fogey!!) or a trader (No, you are not a shallow, short term speculator!!), it can be dangerous to think that you can control or even explain how the other side works. When you are wearing your investor cape, you can be mystified by what traders do and react to, and if you are in your trader mode, you are just as likely to be bamboozled by the thought processes of investors. So, at the risk of ending up with a split personality, let me try looking at Facebook's acquisition of Whatsapp for $19 billion, with $15 billion coming from Facebook stock and $4 billion from cash, using both perspectives.
Security and Exchange Commission employees are required to sell any stock they own in a company when beginning an investigation into that company. Since such an investigation can only lead to bad or neutral results for the company in question, the requirement to sell naturally leads to employees making a boatload of money.
Here is an investment strategy for you:
Buy all the stocks in the S&P 500 index, weighted by market cap.
Any time the Securities and Exchange Commission opens an investigation into one of those companies, sell its stock.1
That's it! I feel like that would be a good strategy, right? All the benefits of indexing, plus you get to occasionally trade on inside information. Oh, right, for this strategy to work, obviously, you'd need to know about SEC investigations as soon as they start; you can't just wait until the investigations are public.
So I guess the downside of this strategy is that, to use it, you need to work at the SEC. The upside, though, is that if you work at the SEC, this strategy is totally fine!
More than "totally fine", this investment strategy is basically required.
It's obvious that SEC employees should not be allowed to own individual stocks, and I'm quite surprised to find out that isn't the case. Government regulators should in general be prohibited from benefiting from their insider knowledge.
A great run-down of how app stores have changed software, and mostly for the better. I agree with the author's conclusions as well.