The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

The Tuesday Podcast: Money Buys Happiness

Perfect for a Friday night before Armageddon!

Source:
(When The What)

Here are today’s favorite reads:

• How optimistic is the stock market really? (Market Watch)
• Capitalists Who Fear Free Markets (NYT) If they fear the free markets, are they really capitalists?
• The extend and pretend exposé – coming to a bank near you (FT.com)
• Goldman Braces for Federal Subpoenas (WSJ)
• America Is Bankrupt (But Not the Way You Think) (HBR)
• Las Vegas looks a lot like the new Detroit (Market Watch)
• Why the GOP wants to weaken the Consumer Financial Protection Bureau (LA Times)
• Tim Harford on Unexpected Economics (The Browser)
• Study Sees Way to Win Spam Fight (NYT)
• Ron Artest: Citizen (Negative Dunkalectics)

What are you reading?

Bob Lefsetz is a music industry observer, and publisher of the Lefsetz letter:

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A company mired in the past that is unable to develop new products within that constantly misfires in the future. A major label or Google?

This is a Google failure. If it weren’t for search/AdWords, Google would be on suicide watch. The vaunted Android? They bought it. Maybe if they bought Google Music, it would work better.

But not everything is technology. Business always comes down to people. And we can speak of the intransigence of the record companies, but somehow Apple manages to get deals done. Google and Amazon do not. Not that I want to excoriate Amazon. The retailer is always looking to the future, always investing proceeds, building infrastructure, knowing that if you sleep, your lunch will be eaten by someone you didn’t even recognize in the rearview mirror.

The record industry is losing this battle too.

Having lost its distribution stranglehold, major labels needed to reinvent themselves. Only selling Top Forty wonders is not the future, for Top Forty radio is not the future. Having ceded almost the entire landscape to indies, the major label future is bleak. Instead of starting with a clean piece of paper, they insist on holding on to the old crumpled one.

Clayton Christensen got this right almost fifteen years ago, with his book “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail”. When confronted with a disruptive technology, you’ve got to build your new business across the street and when the time is right, close the old building and move into the new. This is what Netflix has done. They were renting DVDs by mail and one day they announced they were a streaming company and subscriptions are over twenty million and arguments are now about rights and bandwidth as opposed to postage rates. With DVD sales tanking, the movie industry must do business with Netflix or its competitor. With CD sales tanking, what is the major labels’ plan?

We’ve got to go to subscription. It’s the only model that works. Getting a little from a lot. Hell, people don’t have a problem with buying Netflix subscriptions now, even though so much is unavailable for streaming. Which is why Spotify is making a mistake thinking it needs all four label groups to launch. That’s no longer true. Lead, and the rights holders will follow you.

Netflix proved that people will not only embrace the rental model, but new technology.

Hell, if you’ve got a RAZR you’re laughable. Everyone wants a smartphone. But the labels are still selling CDs?

And wireless companies keep coming up with new price points, to entice customers, lowering the price to get them hooked and then raising them when they get addicted.

You can pay per text. But eventually you get a subscription.

When is the music industry going to hook the public on subscriptions? You can always raise the price, isn’t that the American way?

We’re selling a drug here. And the problem is the public has never taken the first hit. That’s the magic of Spotify. Give it to people free and they’ll become addicted.

And it’s all about the hand-set. With today’s subscription services, not only Spotify, 2,000 plus tracks live on the hand-set, so there’s no streaming/bandwidth charges at all!

But no one knows this because no one uses them.

This is the Apple paradigm. Get people to use iPods and iPhones and then they’ll buy Macs and iPads, everything you sell. But before the iPod and iPhone, most people had never tried an Apple product, they had no idea how good they were.

No one’s gonna try Google Music. It’s just about incomprehensible. Kinda like Google Wave. Huh?

Apple will get the deals done. Like a great A&R man, they know how to close talent.

But cloud access is not the future, subscription is.

You just don’t know it yet

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Visit the archive: http://lefsetz.com/wordpress/

http://www.twitter.com/lefsetz

Earlier this week, we looked at the impact the financials had on the S&P. Today, I want to bring two charts to your attention that might give you some pause.

The first is from Ron Griess (The Chart Store), showing NYSE market cap as a percentage of GDP. It indirectly relates  stock prices and valuation to 0verall US economic activity. This acts as a ratio: How active are bankers, speculators, traders, etc. relative to other activity?

A more direct version comes from John Roque of WJB Capital. John took the market capitalization of the Financials versus the SPX cap. You can readily see how far above the median we have been since the mid-1990s. (I can only partially blame Alan Greenspan’s easy money for this).

Combine these two charts, and you get a sense of what happens  when Finance is dominant versus other sectors.

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NYSE Market Cap vs Nominal GDP

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Financial market cap as a Percentage of S&P500

There is an Evangelist named Harold Camping, who claims the world will end tomorrow.

He has violated the first rule of forecasting: You can give a price target ($0) or a date (tomorrow) but never both at once.

Besides, the end of world forecast carries additional risks. People have been making Armageddon forecasts for, like, forever. So far, not one has paid off. Oh-fer-∞.  (Perhaps the long  shot odds are attractive to risk takers).

But its a stupid bet for the simple reason that there is no upside:

a) If you are right, your counter-parties will be dead and unable to pay off the wager.

b) If you are wrong, you look a fool AND have to pay out your obligations (Hey Moose, Rocco, help the judge find his wallet …)

The Mayan predictions of the end of the world holds no sting for them — their world ended a long time ago.

Harvard historian Niall Ferguson knows this lesson well — in Colossus: The Rise and Fall of the American Empire, he describes the inevitable decline of the United States, but neglects to give a “Sell By” date

John Lithgow Performs Dramatic Reading of Gingrich Spokesman’s Epic Poem Hilarious!

TPM via David Wessel

The Muni War of Words Continues
May 19, 2011
David Kotok

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The Muni war of words continues. Meredith Whitney dug in her heels in a Bloomberg interview with Tom Keene and Ken Prewitt. Ms. Whitney has forecast $100 billion of defaults in Muniland for 2011. We have argued the other side and written on this subject many times.

The data flow seems to suggest that Whitney’s forecast will fall far short of her estimate. To date the 2011 defaults in Muniland are measured in the millions, not billions. Most of the bonds that have defaulted are project-oriented and fall in the junk credit category.

In addition, more and more state and local government budgets are improving from a combination of spending cuts and revenue increases. Q1 state tax revenues rose 9.1%, year-over-year according to the Rockefeller Institute for Government. This the fifth consecutive quarter of improvement. (Source: Bloomberg) In a coincidence of timing the Whitney interview and the Rockefeller Institute press release came on the same day.

We believe that the impact of budget restraint originating from the political pressure on state and local officials is intense. The US economic recovery is tepid. However, it is a recovery and not a recession. In addition, there is no letup in sight regarding pressure to cut spending. This combination portends better economic outlooks for various state and local government units. We hold to our forecast that defaults in 2011 will be much, much lower than the Whitney $100 billion estimate.

Furthermore, muni buyers who do their research and select specific bonds after careful scrutiny are able to find some terrific values. The key there is to do the homework.

Even the worst culprits in Muniland are curing their deficiencies and trying to avoid the dumbness of municipal bankruptcy or default. The Vallejo CA bankruptcy is an example of dumbness. So far, it has wasted $10 million and has nothing to show for it.

On the other side consider Harrisburg PA. It made national news with the mess arising out of its incinerator finance. Now it is actively pursuing a plan to alter the incinerator ownership and the waste flow. At the same time, Harrisburg is engaged in financial restructuring of its parking garages. The combination of the two transactions may alleviate the pressure of the original incinerator financial structure and put Harrisburg on a track to balance its debt-service pressures and its budgets. There is still much work ahead for Harrisburg to complete these transactions. The key thing to take away is that there are very substantial assets in the state and local government space and they are not being considered when these dire forecasts of massive defaults are made.

Markets are realizing that the panic selling of Munis was a mistake. The most recent week was the first time in 6 months where the flows into tax-free mutual funds were actually positive. That’s right: investors stopped being net sellers of Muni funds and became net buyers. The rally in Muni prices shows this flow reversal. Those who sold in panic when Ms. Whitney made her infamous pronouncement in December have experienced losses or opportunity costs. Those who were buyers during the falling market have done well.

We are still on the long side of Munis and see many opportunities. Again, the key is to do the homework. The cheapest area is in the longest duration where one can find very good grade tax-free Munis at yields above the nominal taxable treasury yield. Cumberland continues to be a buyer after the individual selection of each bond is completed.

Let’s segue to another type of bargain. Readers have a chance to participate in a conference call on the importance of growth as a way to repair sovereign debt financial imbalances. The notice is below. Steve Sexauer is a GIC colleague. He and Bart van Ark are both involved in organizations of which we are members. This series is free. The notice of the conference call follows.

Please join The Conference Board’s Senior Vice President and Chief Economist, Bart van Ark, as he engages a distinguished group of guests in a serious, in-depth discussion of how countries can align their policies with growth principles that will allow them to escape the seemingly insurmountable debt they have accumulated.

Guests include Nobel Prize economist Gary S. Becker, distinguished economist and MacArthur Fellow Kevin M. Murphy, and Jean Pisani-Ferry, Director of BRUEGEL (Brussels European and Global Economic Laboratory). The three-part series will be co-hosted by Stephen Sexauer, Chief Investment Officer of Allianz Global Investors Solutions, who, with Bart van Ark, has developed a productivity and spending framework that offers the promise of returning debt-to-GDP levels to a sustainable point over time.

The first webcast, with guests Gary S. Becker and Kevin M. Murphy, will be held on Wednesday, May 25^th at 11 AM EST.  Please click on this link:  Escaping the Sovereign-Debt Crisis: Is There a Way Out? Scroll to the bottom of the screen for the short registration form.  You will receive a confirmation with the log-in instructions for the 3-part series.  If you have trouble with the link, type   http://conferenceboard.org/subsites/index.cfm?id=2558.

At 5am, both the euro and European stock markets started to roll over and the S&P futures steadily followed over the past few hours. We now have the ECB threatening to pull funding to Greek banks if there is any debt restructuring as they would no longer want to accept their paper as collateral for a loan. The Greek 10 yr yield is rising to a record high and its spread to the 10 yr German bund is at 1343 bps. The spread was 20 bps when all was calm in early 2007 when subprime was just about to implode. With the WSJ reporting that regions in Spain have understated their debt obligations, the Spanish 2 yr yield is rising to a 5 month high and their 10 yr is approaching 5.5% again. On the inflation argument, many economists and specifically Fed members believe that as long as we don’t have upward wage pressures, there is nothing to worry about with inflation. They should tell that to the Gap who announced that product costs per unit will be up 20% in the 2nd half of ’11 which will not be all passed through as cotton prices near 150 yr highs offsets little labor cost pressure. Whether commodity inflation is reflected in wholesale prices or consumer prices or both, someone has to eat it to the detriment of the economy.

A bizarre meme seems to have popped up recently regarding prosecuting banks for fraud and other crimes. What makes it weird is that its not exclusively coming from the usual collection of asshats and idealogues. Very little that tumbles out of the piehole of Megan McArdle suprises me — her record precedes her. But a few others have surprisingly been picking up on this theme. Even Roger Lowenstein had a Bloomberg column with the unfortunate headline No Jail for Economic Crisis May Mean No Crime. [Update: Original BW title was Wall Street: Not Guilty]

By that logic, O.J. didn’t kill Nicole Simpson and Ronald Goldman.

Thus, we are forced to interrupt our usual cheery blather for a little schooling about what the rule of law is, why it needs to be protected.

Let’s start by noting that there is a major conflict between Treasury/Justice Department and the banks, all of whom received major bailout dollars. You tend not to want to prosecute companies you just showered with 100s of billions in cash and now own a substantial stake in. This is yet another reason why Uncle Sam should not be in the bailout business: It prevents the DOJ from doing its job.

Next, lets note the difference between a high profile CEO perp walk and busting a minor bank criminal. While lots of people are calling for Angelo Mozilo’s head, I believe the more productive path to law enforcement is starting with the known law breakers and proceeding from there.

This is not a glamorous approach to law enforcement, It is a slow laborious grind. As I presented to the National Association of Attorneys General, there are 10 major areas of bank and mortgage fraud:

1. MERS
2. Mortgage Pools (Warranties & Reps)
3. Bad Securitization (Quality)
4. “Misplaced” Mortgage Notes
5. Force-Placed Insurance
6. Illegal “Pyramid” Servicing Fees
7. Document Fraud for Sale
8. False Affidavits, Perjury (Robo-Signing)
9. Foreclosure Mills, Process servers exacerbate problem
10. Active Servicemen losing homes while on tour of duty

Of this list, five issues are prosecution-ready, where individual states have jurisdiction. These include: 1) Force-Placed Insurance; 2) Illegal “Pyramid” Servicing Fees; 3) Fraud Documents for Sale; 4) False Affidavits, Perjury (Robo-Signing) and 5) Foreclosure Mills, Process servers.

There is an immense paper trial for the first two. The issue of Force-Placed Insurance represents such an egregious, embarrassing conflict of interest, that its hard to imagine any publicly traded bank is going to want to defend that in open court. Bring a few actions against the majors,get an agreement to permanently stop the practice, and a big fat fine, then move on to the next item on the list. Do the same for the illegal “Pyramid” Servicing Fees wrongfully charged by a few loan servicers.

As an aside, Lender Processing Services (LPS) is a monopoly, handling — or should I say mishandling? — more than 50% of all mortgages for the major banks. The Justice department should be doing an Anti-Trust prosecution, perhaps forcing a break up. Maybe some competition in this space will yield some competence as well.

Back to the our list: Fraud Documents for Sale and the Foreclosure Mills / illegal process servers can be pursued on a case by case basis. work with the foreclosure defense bar to track down many examples of egregious criminality here.

In my opinion, the area that is most ripe for criminal prosecution are the False Affidavits/Perjury aka Robo-Signing. Treat this more like a drug kingpin than a bank fraud crime. Bust the low level eejits who did this, granting immunity for cooperation. Find  who ordered them to perform the fraud, and then their boss and so on. Somewhere in between the $8 per hour, former burger-flippers hired as robo-signers and the CEO is a mid-level bank executive who decided to systemically break the law. This is the person who turned what used to be a simple process of filing legal paperwork into a criminal enterprise. THAT motherfucker needs to go to jail.

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Just because Angelo Mozilo is not in jail does not mean no crime was committed. Prosecutors need to focus on the low-level criminality within banks, and work their way up.

Do that, and we restore confidence in nor only our financial institutions, but our society and constitutional principles as well. Fail at that and Japan’s decade long recession looks more and more like our future.

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Previously:
Foreclosure Fraud Reveals Structural & Legal Crisis (October 5th, 2010)

Why Foreclosure Fraud Is So Dangerous to Property Rights (October 12th, 2010)

Time for Criminal Charges To Be Filed . . . (October 14th, 2010)

Why Is Due Process a Big Problem for Banks? (October 23rd, 2010)

Follow the Money: How Systemic Bank Fraud Contributed to the Financial Crisis (NAAG presentation, April 2011)

Dodo Bird Bankers (May 9th, 2011)

Sources:
No Jail for Economic Crisis May Mean No Crime
Roger Lowenstein
Bloomberg, May 12, 2011
http://www.bloomberg.com/news/2011-05-12/no-jail-for-economic-crisis-may-mean-no-crime-roger-lowenstein.html

Is Another Major Mortgage Investigation Really Necessary?
Halah Touryalai
Forbes, May. 17 2011
http://blogs.forbes.com/halahtouryalai/2011/05/17/is-another-major-mortgage-investigation-really-necessary/

Video: Taibbi vs. McArdle on Goldman
Matt Taibbi
Rolling Stone, May 16, 2011
http://www.rollingstone.com/politics/blogs/taibblog/video-taibbi-vs-mcardle-on-goldmans-responsibility-to-its-clients-20110516