Great Oxford talk economic historians Robert Allen, on why the Industrial Revolution actually occurred in Great Britain, and not France or the Netherlands or China:
Hat tip Paul Kedrosky
Mike Santoli has an interesting perspective on the furious reactions to Goldie’s bonuses in this week’s Barron’s:
“Absent in the rage against people earning impressive pay after their firms got public help is the key question: Do we want the firms that received aid to continue operating as autonomous, profit-seeking businesses, or as quasi-utilities operating under tight government restrictions?”
That is the key disagreement I have had with those folks furious about the bonuses: The firms that paid back the TARP — do we never allow them to resume control of their businesses? Are they now “non profits?” Who is appropriate to determine their pay packages — their owners, board members and senior management — or the Government?
Santoli further suggests we consider the means and implications of explicitly limiting pay:
“Goldman, operating at less than half the leverage of a couple years ago, last quarter produced a return on equity well below what it logged in peak years. It set aside a much smaller portion of its revenue to employees last quarter than it typically has, 43%.
What if Goldman set aside half as much as it did for bonuses, say 20% of revenue. Where does the other half go? To the bottom line, where it builds up book value, which could allow Goldman to leverage a greater capital base and trade more and become even bigger in the markets it plays in, likely with fewer of the better people to oversee the risk as they could go find a new employer willing to pay. Or do we want to legislate away the chance for a Goldman to earn even what it did last quarter? Or require that the government get some percentage of the take? On what legal or practical basis, at this stage?
If Goldman weren’t exploiting the market opportunities it is, those opportunities would still be there, and others would get to them — whether other banks or hedge funds — and would pay their people (maybe some hired from Goldman) the big money.
Let’s get to the true heart of the matter” It is that these folks — many of whom are assholes — make oodles and oodles of money, much more than they would be permitted to if a munificent and just deity were paying closer attention to this little ball of earth and water:
“It has long been true that the “average” employee on Wall Street is overpaid, his or her bonuses dragged higher by those who make huge scores for their firm. The solutions — bonuses based on multi-year, risk-adjusted performance; “clawbacks” if trades go bad after bonuses based on them were paid; more pay in the form of long-vesting company stock — are being implemented by the remaining firms.This isn’t the same as saying “the market will sort it out,” but that any new rules or structural changes need to be considered from all the angles. And remember that the most important consequences of such measures are often the unintended ones.”
Interesting stuff, worth thinking about.
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Previously:
Much Ado About Nothing $23B: Goldman Sachs Bonus (Oct 14, 2009)
http://www.ritholtz.com/blog/2009/10/much-ado-about-nothing-23b-goldman-sachs-bonus/
Goldman Sachs: “A Bunch of Clever Thugs” (Oct 15, 2009)
http://www.ritholtz.com/blog/2009/10/goldman-sachs-%E2%80%9Ca-bunch-of-clever-thugs%E2%80%9D/
Source:
Will This Week’s GDP Validate the Rally?
MICHAEL SANTOLI
Barron’s October 26, 2009
http://online.barrons.com/article/SB125633731314404773.html
The Best of Times
October 23, 2009
By John Mauldin
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What’s a Fed to do? We get talk about tightening and taking away the easy credit, but we got the fourth largest monetization on record last week. This week we examine the elements of deflation, look at some banking statistics that are not optimistic, and then I write a reply to my great friend Bill Bonner about why it’s the best of times to be young. I think you will get a few thought-provoking ideas here and there.
But before we get to the main letter, I want to recommend a book to you. I am on a 17-day, 12-city speaking tour. It is rather brutal, but I did it to myself. However, one of the upsides of traveling is that I get quiet time on airplanes to read books. I am working my way through a very large stack of books on my desk. One that caught my eye – and I’m glad it did – is a book by Tom Hayes called Jump Point: How Network Culture is Revolutionizing Business. Hayes writes about how we are getting ready to experience a cultural change every bit as profound as the Industrial Revolution. He argues that as the 3 billionth person gets online sometime in 2011, it will shift the dynamic of how we interact as businesses and consumers. We get to 5 billion by 2015. The mind boggles.
Clearly, it is already changing things, and I am not sure if I buy Hayes’ thesis that 3 billion is a magical number, though it is great marketing. That being said, I found something on almost every page that I underlined or highlighted. This book made me think about the future in ways that my kids already get but Dad doesn’t.
I like to read books about “important stuff” by people who have done a lot of thinking about their subjects, and who can write easily and fluidly and communicate their thoughts without weighing me down with unnecessary verbiage. Hayes has done that. (I am sure some of you, my patient readers, wish I could be better at that!)
No long review here. Go to Amazon and read the reviews. One writer wrote: “I gave the book 5 stars not because it was perfect — I think Hayes’s enthusiasm sometimes makes him jump to conclusions – but because there are so many ideas and observations here that it would take ages to put something like this together from other sources.”
I agree. If you are in business, any business, you need to read this. As an aside, I will insist that all my partners worldwide get this book and read it. You can go to Amazon.com and buy the book. And Tom, if you get this (and I bet one of your friends will forward it to you), call me.
One of the advantages of travel is that it gives you time away from the tyranny of the computer to think. (Am I the only one who feels like I am drinking information through a fire hose?) But getting the information is important too, as it gives you something to think about. And I have been thinking a lot lately about deflation.
I get asked at almost every venue where I stop, whether I think we will see inflation, or deflation. And I answer, “Yes.” And I am not trying to be funny. I think the primary forces in the developed world now are deflationary. When asked if I don’t think that the Fed monetizing debt of all kinds won’t eventually be inflationary, I answer, “We better hope so!”
Let’s quickly summarize some of the ideas from the last few months of this letter. Just as water is made up of two parts hydrogen to one part oxygen, so deflation has its own elemental structure.
The first element is Rising Unemployment. There has never been a sustained inflationary period without wage inflation. Wages are basically flat and falling. With 9.8% unemployment, 7% underemployed (temporary), and another 3-4% off the radar screen because they are so discouraged they are not even looking for jobs, and thus are not counted as unemployed (who made up these rules?), it is hard to see how wage inflation is in our near future.
Think about this. Only a few years ago, less than 1 in 16 Americans was unemployed or underemployed. Today it is 1 in 5. That is a staggering, overwhelming statistic. Mind-numbing.
Keynes said that you should stimulate the economy in recessions in order to bring back consumer spending. That is not going to happen this time. As my friends at GaveKal point out, this time we will have to have an Austrian (economic) recovery, or a business-spending recovery. My argument will be, when I am with them in Dallas in December at their conference, “Where are we going to get business-investment spending when banks aren’t lending and capacity utilization is at an all-time low?” This, of course, leads the Keynesians to jump in and say, “The government has to step up and jump-start consumption!” Which means more debt. Wash. Rinse. Repeat.
The next element of deflation is massive Wealth Destruction. Two bear markets and a housing market collapse have put the American consumer on the ropes. And the next bear market will bring him to the canvas.
Then we have Reduced Borrowing and Lending, as consumers are paying down debt and banks are reducing their lending. Both are necessary in a credit crisis-caused recession. Bank lending is basically back to where it was two years ago, and shows no sign off rebounding. Banks, as I have written, are buying US government debt in an effort to shore up their balance sheets. Lending to small business, the real engine of job creation, is sadly decreasing each month. (See graph below.)
Next up in our elemental list we have Decreased Final Demand and its counterpart Increased Savings. Although the savings rate has come back down to 3% from 6% a few months ago, almost every expectation is that it will rise over the next 3-5 years back up to the 9% level where it was only 20 years ago. The psyche of the American consumer has been permanently seared. Consumption and savings habits are being changed as I write.
Following my rant about the putzes at the NAR, a few people asked me to better explain the Seasonality Adjustment issues.
Here goes nuthin:
I certainly understand that we have to do seasonal adjustments. One cannot report that Retail Sales fell 80% in January (for obvious reasons) but most of all, because to do so would be misleading. The sources of data report information to inform the public, media repeats what is said, and we pass along interpretations to make things clearer, to get at an objective truth.
The NAR does the opposite.
Let’s look at the specifics of the adjustments this year and see where they went awry.
Whenever we have an outlier year — like Sept 2009 — then we know that seasonally adjusted results will be utterly misleading. That is an issue when we seasonally adjust, as every statistician, economist and number cruncher is well aware. An honest broker of information recognizes that, and reports it the data in a way that is not misleading.
The NAR is no such honest broker (pun intended).
Most people are unfamiliar with what goes into the methodology of Seasonal adjustments, and how they are performed. When people misunderstand statistical methods, it allows folks like the NAR to make major misrepresentations, and get away with their misrepresentations. It is incumbent on the people who are “numerate” — who understand mathematics — to explain it.
There is a mathematical assumption in SA that the annual seasonal changes will occur around the same time each year. There is also a presumption that the month-to-month changes will be approximately equal, or at least of similar magnitude, from season to season. This forms the baseline for the seasonal adjustment.
Hence, when we are discussing EHS, the prior years’ monthly August-to-September drops are the basis for making the newest seasonality adjustment.
As Rex pointed out, the past decade of August to September EHS changes were:
1999: -19%
2000 -17.7%
2001 -26%
2002 -17.1%
2003 -12.5%
2004 -15.5%
2005 -15.2%
2006 -19.2
2007 -28.9%
2008 -10%
This range was 10% to 28.9%. That averages to 17.2% in the typical September. This is the key element in impacting any subsequent seasonal adjustment (different SA methodologies may use differing time periods).
This year, the fall was 5.3%. Hmmm, that was highly aberrational — I wonder why? We (and the NAR) know the reason: Due to ZIRP and the soon to be expiring 1st time home buyers $8,000 Tax credit, the drop was minor – much smaller than it usually is when we go from August to September in EHS.
The tax credit very likely extended the selling season by at least a month. It pulled some sales forward, and perhaps created other sales where there might not have been.
But the seasonal adjustment does not know that; The math PRESUMES THE AUGUST/SEPTEMBER DECLINE IS OF TYPICAL MAGNITUDE OF THE PRIOR 10 YEARS.
That creates a misleading — lets even say false — appearance when the seasonally adjustments are performed.
Again, someone trying NOT to mislead will inform the reader of that directly. But calling it a SURGE? Only if you are innumerate — or a liar. Any honest statistician who worked on these numbers KNOWS that the seasonal adjustment was going to create a big bump, a misleading number, based on the historical data.
And thats the whole point. The NAR knows that calling this a surge will mislead readers, but they report the data — DOWN 5.3% — as a “SURGE.” What else might their goal be BUT TO MISLEAD THE PUBLIC?
I refuse to facilitate that. And I will call anyone an unprofessional liar, a distorter of the data who claims this was surge. THIS MEANS YOU, NAR !
The folks who are unfamiliar with seasonal adjustments will get caught in the scam. This was not an ordinary seasonal adjustment — it was highly misrepresentative.
I know better. And now, you know better. Unfortunately, most folks do not.
I’ve only come across a handful of compelling discs this year. Mo’ Horizons …And the New Bohemian Freedom is one of them.
It is hard to describe this bizarrely compelling mix of acid jazz, bossa nova, soul, and electronica. Yeah, there is also some Brazilian funk in the mix as well. But the songs, while somehow seeming musically related, are all very different.
No two songs are very much alike.
The first track that caught my attention was the ethereal Shake It Loose. I heard it somewhere (Starbucks?) and it was an ear worm — a musical virus. A base riff repeats over and over, followed by bongos and then an organ riff, and lastly, a drum pattern. It builds up in layers and is coolly hypnotic. A few chords later, you almost have a melody.
Couldn’t get it out of my head.
Starting from that cut, the least latin influenced on the whole CD — the music careens all over the map. Drum’n Boogaloo is a piano driven mexican riff, complete with horns and Ayiiis!
So Ma Guisee uses a Spanish guitar riff as its backbeat, and then turns into straight up soul. African Sunset goes 1970s retro. And so on.
This is going to be a polarizing musical pick — I suspect some people will love it, others hate it. I have been enjoying it since early this summer.
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At the Federal Reserve Bank of Boston 54th Economic Conference, Chatham, Massachusetts
October 23, 2009
I am pleased to participate in the conference discussion of the international dimensions of the recent financial crisis.1 A striking feature of the crisis was its global character. With markets for financial assets increasingly integrated, often by the activities of globally active banks, no country escaped completely unaffected.
The way the problems in the U.S. subprime mortgage market spread illustrated the interconnections. Underwriting standards for U.S. subprime mortgages had weakened at the same time that non-U.S. investors, including many non-U.S. financial institutions, had eagerly invested in the subprime mortgage market by purchasing subprime-backed securities. When house prices leveled out and then began to decline, default rates on subprime mortgages started to rise rapidly. Both U.S. and foreign banks suffered losses, along with other investors.
At the Federal Reserve Bank of Boston 54th Economic Conference, Chatham, Massachusetts
October 23, 2009
The theme of the Federal Reserve Bank of Boston’s Economic Conference this year–reevaluating regulatory, supervisory, and central banking policies in the wake of the crisis–is certainly timely. Not much more than a year ago, we and our international counterparts faced the most severe financial crisis since the Great Depression. Fortunately, forceful and coordinated policy actions averted a global financial collapse, and since then, aided by a range of government programs, financial conditions have improved considerably. However, even though we avoided the worst financial and economic outcomes, the fallout from the crisis has nonetheless been very severe, as reflected in the depth of the global recession and the deep declines in employment both here and abroad. With the financial turmoil abating, now is the time for policymakers to take action to reduce the probability and severity of any future crises.
Although the crisis was an extraordinarily complex event with multiple causes, weaknesses in the risk-management practices of many financial firms, together with insufficient buffers of capital and liquidity, were clearly an important factor. Unfortunately, regulators and supervisors did not identify and remedy many of those weaknesses in a timely way.1 Accordingly, all financial regulators, including of course the Federal Reserve, must take a hard look at the experience of the past two years, correct identified shortcomings, and improve future performance.
A few interesting items
• Elizabeth Warren for President (True Slant)
• Fed weighs its words on ending near-zero interest rate (FT)
• The New $1 Million Bill (Bloomberg)
• Uh-oh: Taking It To The Street(.com) (Zerohedge)
• Systemic Risk in the Financial System: Insights from Network Science (PEW)
• Mona Lisa’s smile a mystery no more (New Scientist)
Anything catch your collective eye?
Another classic annotation from David Singer:
"I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." -Thomas Jefferson (letter to John Taylor in 1816)
After 3 quarters in a row that averaged just 1.2%, Q4 GDP grew 2.8%, a touch below expectations of 3.0% BUT Nominal GDP grew well below forecasts. Because the price deflator was up just .4% vs the estimate of 1.9%, Nominal GDP was up 3.2% vs the estimate of 4.9%. Personal Consumption rose 2.0% vs the forecast of 2.4%. Fixed Investment rose 3.3% helped by a 5.2% increase in equipment and software spending and residential construction rose by 10.9%. Trade was a slight drag on GDP growth and government spending was as well led by a 12.5% decline on national...
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