The West In Decline

Said a banker of world reputation:
"It's an Age of Reduced Expectation. 

For workers, the answer

Is less social transfer;
The rich face diminished taxation."

HSBC Chief Economist Stephen King, in a New York Times op-ed piece entitled When Wealth Disappears, argues that "We are reaching end times for Western affluence."  While the Post-War generation seemed to live in a world in which rising prosperity and markets guaranteed a comfortable future, now "the numbers no longer add up. Even before the Great Recession, rich countries were seeing their tax revenues weaken, social expenditures rise, government debts accumulate and creditors fret thanks to lower economic growth rates."

What's interesting about this quote, and many others like it, is the degree to which economic forces that the writer wishes to portray as unstoppable waves actually resulted from government policy choices that he himself likely supported, and for which his industry energetically lobbied. 

Over the last generation, US tax revenues have weakened largely because tax rates have fallen. The most important reason that our social expenditures have risen is the cost of healthcare. Years ago, some Republican think tanks, alarmed at runaway medical spending as well as the prospect of a single-payer system to fix it, proposed a "social market" alternative, which was actually successfully implemented in Massachusetts. Why don't any of them acknowledge that now that a similar system is being implemented federally?

I do not mean to denigrate Mr. King's economic forecasting ability or the depth of his social concern. But one has to be skeptical when one hears the representatives of the 1% arguing that the 99% must accept diminished expectations as their destiny.  

Lowdown on the Shutdown

You may think that this poem's on the deficit,
So kindly allow me to preface it
That the shutdown impending
Is not about spending;
There's no one who even professes it.

It's a high-stakes political drama,

Unneeded if heads had been calmer,

A tactical ruse

By those who refuse

Affordable Care from Obama. 

The Tea Party Capitol faction

Appears to take no satisfaction,

Though we're not in the black

In the age of Barack,

That the deficit's cut to a fraction. 

The foregoing limerick is just a reminder that, as the US federal government heads toward a shutdown over the parties' inability to agree on a budget, that the budget itself is not the issue; neither are debts and the deficit. Although the fact is not well publicized, and has more often been deliberately obscured, the federal budget deficit has been cut in half since President Obama took office in 2009. 

The the intractability of the fight over the budget is therefore a strategy by the House Republicans, and especially their Tea Party faction, to throw yet another attempted roadblock in front of the rollout of Obamacare. 

Crowdfunding Gets A Jumpstart

The SEC softened the rules

On investment publicity tools

So that now you're allowed

To pitch to the crowd

And separate money from fools. 

Once your IPO had to be edited

To keep the investors accredited -

No public appeal
For an IPO deal -
But did Congress know better? You bet it did!

No more need for advisors advisin' it,

To prevent any legal surprise in it;

Just poke ev'ry friend

For cash they can send

To your shack with a couple of guys in it.

As the Wall Street Journal put it: Bring on the fundraising billboards!  Yesterday new rules under the JOBS Act went into effect, lifting the longstanding ban on general solicitation of private investments.  For the last 80 years, for an IPO or other securities offering to get exemption from SEC registration requirements necessitated compliance with Regulation D. Under Reg D, a company or fund looking for investors had to avoid any "general solicitation" and ensure that every investor was "accredited;" essentially, wealthy and sophisticated. 

Under the Jumpstart Our Business Startups Act, however, investments can be solicited as generally as you want - through blogs, tweets, TV, radio, Facebook, LinkedIn, YouTube, you name it. Such openness puts the onus on entrepreneurs to take "reasonable steps" to ensure that angel investors are also accredited investors, and puts a higher burden of trust and due diligence on investors, who must be sure that they can place not only their money, but also their private financial data in the hands of up & coming impresarios. 

Let the crowdfunding begin!

Surprisingly Easy

The Fed has decided "No Taper"

Of its purchase of fixed-income paper;

Without the renewal

Of stimulus fuel,

The economy's running on vapor. 

Says Bernanke: "It's certainly bad enough

That employment amounts didn't add enough,

Given all of our pains

To stimulate gains;

Think of what it would be if we hadn't've."

"My economists tell me, statistically,

That it's hard to project optimistically,

When the Capitol sounds -

On political grounds - 

Unlikely to stimulate fiscally."

"QE should never be cut down

With the risk of a government shutdown,

So you'll just have to wait

'Til growth may reflate

And the jobless rate's more than somewhat down."

The Frontrunner

If the smart money can be believed

Dr. Summers' retreat has achieved

That Yellen looks strong

For Fed Chair, as long

As the President isn't too peeved. 

 

Barack wants a servant devoted;

For Larry, his voice was full-throated,

But some would impugn

His trial balloon

As too freighted with bags to be floated.

Who the next Chair will be there's no tellin',

Though the bond market clearly loves Yellen,

And stock market buys

Reacted with highs,

While the dollar was laden with sellin'. 

Janet's a calm, steady hand

When tapering QE is planned,

And it's all to the good

That the Chairmanship would,

With a woman, be ably manned. 

The Wall Street Journal reports that, now that Larry Summers has officially removed himself from consideration for the Fed Chairman's post, current Vice Chair Janet Yellen is the front-runner. This is somewhat surprising in that President Obama and his White House team were said to be very upset at the public resistance to Prof. Summers, their preferred choice, and might have resented the liberal pressure to go with Dr. Yellen instead. The reaction of the markets shows that traders expected a quicker tapering of quantitative easing from him than her, though a close reading of their relevant remarks does not offer clear confirmation of such a distinction. 

What is clear is that Dr. Yellen's career offers a wealth of reassuring experience to indicate a likelihood of consistent leadership on issues of not just monetary policy, but also financial sector regulation, which the country very much needs. 

Economics Takes A Back Seat

As the Congress debated criteria

To punish the leaders of Syria,
They discussed what was planned,
And whether we stand
On a footing that's clearly superior.

It's an issue remarkably grave
Of lives we may take or may save,
And the president's foe
May not "just say no,"
Though to do so they certainly crave. 

In the midst of this deliberation

Came a man from the econ vocation
Who said: "I have checked
Its likely effect
On oil, FX and inflation."

Though no-one may doubt the veracity

Of remarks in an econ capacity,

At the juncture we faced

They're seen in bad taste, 

As is gen'rally understood tacitly. 

As Congress and the nation debate the morality, strategy and efficacy of punitive attacks on the Syrian military, economic issues take a back seat. Even the most stridently partisan voices on such issues as fiscal and monetary stimulus or the debt ceiling are muted this week, as those whose forte is defense and foreign policy take center stage. 

One welcome result is that boundaries of Capitol partisanship are at least temporarily redrawn, as Republican leaders such as Senators McCain and Graham side with President Obama (as does the Democratic leadership), while leftists and Tea Partiers may be thrown together in opposition.  Is it too much to hope that, when the Debt Ceiling deadline comes up again in October, the partisans will have less appetite for the usual theatrics?

Is Economics A Science?

Science may help to convey
The world that we live in today,

To predict and construe
And hypothesize, too,
In a rational, testable way.

 

Economists have their devices

To model employment and prices

And cloak their decrees in

The mantle of reason;

The question is: if that suffices. 

The label of "science" may serve

To misname economists' oeuvre,

When considering deeply

Their failure to keep the

Investors ahead of the curve. 

It's been said that the econ profession

Made an unscientific impression 

When the models they picked

Could rarely predict

How soon we will have a recession. 

An incontrovertible fact is 

That theory may falter in practice

When we try to project

And falsely expect

That people are rational actors. 

If we try not to place our reliance

That with logic man stays in compliance,

It might be allowed 

By the PhD crowd:

Economics, though dismal, is science. 

Greetings to all those making the trek back to college or graduate school this weekend, as I am with our college sophomore today (go Greyhounds!). Here is a special shout-out to those of you returning to study the Dismal Science, which has recently come under attack in a New York Times opinion piece for a surplus of the former and a surfeit of the latter.  Though highly regarded economists arose in honorable and forthright defense of the profession, it seemed as though the gates had been opened for Wall Street skeptics to voice long-held doubts. 

Take heart, students, and be not troubled by such thoughts. Remember though, that while the science of economics may labor to measure and model how prices and employment have done and will do, the philosophy of economics may not shrink from the debate over what they should do. While studying social science, consider toward what sort of society you are working, and remember that all of those economic actors are people. 

Advance Draft of Next FOMC Statement

"If employment & prices are strong,

We can give up QE before long,

So we're tapering it,

But just by a bit,
In case we turn out to be wrong."

The drumbeat of tapering talk continues, with various members of the Fed Open Market Committee making public comments that suggest the question isn't "if", or even "when", but "how".  Expectations have begun to coalesce around the next FOMC meeting on September 17-18, in part because it is seen as advisable to remove the uncertainty surrounding the unwinding of QE before the White House announces the President's nominee to succeed Chairman Ben Bernanke. The current Chairman's term ends on January 31. 

Comments yesterday by James Bullard, president of the Federal Reserve Bank of St. Louis, put the spotlight on the tactics the Fed might employ when starting down the long, unwinding road: "A larger move would be interpreted as a faster pace of reduction," he said, while "a smaller move would be considered a more hedged bet, a slower rate of reduction in purchases." In other words, the FOMC could test the waters before making a big commitment to unwinding its extraordinary monetary stimulus. 

Summers vs Yellen

Wall Street is looking for men

For the mantle of leadership when,

As the President knows,

He'll have to propose

A successor to Fed Chairman Ben. 

It's increasingly frequently said

By economists very well read

That Obama may stiff

The recovery if

He picks the wrong head of the Fed. 

Dr. Yellen's CV is the nicest

To manage employment and prices

From the days when she ran

The Fed bank in San

Francisco and warned of the Crisis. 

Dr. Summers has those who would vote 'im

'Cause his "gravitas" serves to promote 'im,

While other folks showed 

That's really a code

For the candidate having a scrotum. 

Whatever your partisan views

On the better of qualified Jews,

It's the President's pick

And we'll know pretty quick

The mensch that Obama may choose. 

Wanted: Higher Prices

The Federal Reserve is awaiting
That prices may start re-inflating,
So they can foresee
Unwinding QE,
Whose tapering they've been debating.

The Fed will not bother to taper

Its purchase of Treasury paper

'Til the jobless rate now

And inflation allow

An end to their stimulus caper. 

Bernanke must act with agility

To avoid causing stock volatility

'Til he can discern

A sustainable turn

To price and employment stability. 

The market's attention to rates of unemployment and inflation, always close under any circumstances, is especially intense now that the Fed has let it be known that the tapering of their quantitative easing program depends on these factors. Chairman Ben Bernanke and his fellow board members have said that they could begin to reduce the Fed's $85 billion-a-month purchases if mortgage and Treasury bonds once the jobless rate - now 7.6% - falls to 6.5%, and inflation has stabilized around the 2% target rate. 

In the last twelve months of tepid economic growth, inflation has been closer to 1%, raising fears of possible deflation, while the fall in the jobless rate has been painfully slow. However, the latest monthly inflation reading, revealed yesterday, shows June prices up 1.8% over the previous June, which some are taking as a hopeful sign. Prices can be volatile though, so one should be careful not to read too much into one month's data. 

Over the next two days, Chairman Bernanke will testify to Congress, who will no doubt press for definitive word on the economic outlook and the Fed's likely actions. 

Fabulous Fab

Ex-Goldmanite Fabulous Fab,

With his gift of remarkable gab,

Is caught in a hitch

By the SEC, which

Will take anyone it can grab.

He told an impeachable tale

In a colorf'ly worded email

Of misgivings and doubt,

Which the Feds have smoked out

Of his rashly electronic trail. 

The lesson, on Wall Street (and Main),

Is most unimpeachably plain:

When engaged in deceit,

Then please be discreet, 

Lest your words come to haunt you again. 

Former Goldman Sachs banker Fabrice Tourre finds himself on trial in a Manhattan federal court this week, six years after he helped to put together a synthetic CDO that yielded big losses for the institutions that bought it. Investors in Abacus 2007-AC1, as the Goldman CDO was officially called, were not informed that the deal had actually been structured as a vehicle to allow hedge fund manager John Paulson to go short on the subprime mortgage market, which he correctly believed would fall. Mr. Tourre harbored similar doubts, which he confessed only in an email to his girlfriend: "The whole building is about to collapse anytime now... The only potential survivor, the fabulous Fab," adding that, in truth, he did not feel so fabulous. Mr. Tourre's former employer has paid a half-billion dollar fine without admitting wrongdoing, leaving only one indiscreet foot soldier to bear the personal responsibility for its role in the mortgage crisis. 

Please, Sir: Ease, Sir!

The market's resounding with pleas
From New York to the Brits and Chinese
For a positive trend,

By which they depend

On the Fed to continue to ease. 

For the Index to keep hitting highs,

It's important to all of those guys

In the trading salons,

As they're dealing in bonds, 

That the Fed Open Market Desk buys. 

Investors have reason to sob less

And fear for their balance at Schwab less

If the Fed will agree

To stick with QE

'Til there's 6 1/2% jobless. 

Around the world, stocks have surged to new highs following Federal Reserve Chairman Ben Bernanke's assurances of further monetary stimulus. On Wednesday, speaking at a conference organized by the National Bureau of Economic Research, Bernanke observed that "you can only conclude that highly accommodative monetary policy for the foreseeable future is what's needed in the US economy." These words gave a shot of comfort to global markets that, for the last two months, had been obsessed with the timing of eventual "tapering". 

The resulting Wednesday afternoon rally in US equities carried through to Thursday morning in Frankfurt, Paris and London, before caroming back to New York for a second day. The S&P 500 has now reached a new record, and the Dow Jones Industrial Average may soon follow suit. 

* * *

On a side note, I am happy to resume this little hobby of economic verses, following a two-month hiatus in which I found and adjusted to a demanding new job. Thanks to all those who enquired after my welfare during that time, and who expressed their desire for the return of Limericks Économiques. I hope they don't disappoint. 

Tax iVoidance

Said Cook, to the Senate's seniority:

"Though gadgets remain our priority,

While profiting scads

From iPhones and -Pads,  

We skirt every taxing authority."

Doves & Hawks Together

Thoughts diverge in the FOMC
On how long to hold on to QE,
But in case of deflation,
Without hesitation,
They'll ease up unanimously.

S&P vs GDP

An analyst pointed out that -

At the risk of provoking a spat - 

There's a gap in demand

Between equities and

The economy, which is still flat. 

A Misbegotten View

Some conservatives want to find meaning

In professed homosexual leaning,

Which some think explains

The penchant of Keynes
For cyclical, state intervening.

We know the economist said

In the long run, that we are all dead, 

But the meaning was not

That he hadn't begot,

Or who he preferred in his bed. 

Don't Jump to Conclusions

Though economists often expect
Their proposals be put in effect,
It's best if one will
Just hold off until
The model's been triply checked.

Bear Warning

Said one of those skeptical guys,
As the market was hitting new highs:
"The bulls may suppose
The economy grows,
But I doubt that the latter complies."

Market Correlation

Some analysts set about crunchin'
A proven statistical function
For why stocks and debt,
Which used to offset,
More recently move in conjunction.

At the end of it all they succeeded,
Having crunched all the data they needed,
Finding no other fact
So truthfully tracked
As expected expanse of QE did.

Soros' Penney Shares

Said a billionaire octogenarian
Of a much-unloved stock he was carryin':
"What's the use of my hoard
If I cannot afford
To indulge in a bet that's contrarian?"

Season of Easin'

S&P GSCI GLOBAL COMMODITY INDEX 
VS. U.S. 5-YEAR INFLATION EXPECTATION

The Fed has a great flexibility
To promote economic stability;
They may finish QE
If it's growth they foresee,
Or extend if they sense more fragility.

In the weakening outlook of Spring,
It appears to QE they must cling,
While back in the Winter,
We thought they'd begin ter
Discreetly unwind the whole thing.

A Short-Lived Hoax

A group of young hackers from Syria,
Who set off a market hysteria,
Confounded the Street
With a single, fake tweet;
One may ask: were their motives ulteriah?

If their hoax has turned out to conceal
An elaborate insider deal,
They'll have done an offense
For which there's a sense
Of prosecutorial zeal.

They'd have carried it out with impunity
If they'd sunk the financial community,
As there's many a name
That's committed the same
And seems to get off with immunity.

Error Checking

Two economists, feeling audacious,
Said that GDP's headed for stasis,
But the flaws that befell
Their work in Excel
Put their claims on an incorrect basis.

Economists Kenneth Rogoff and Carmen Reinhart were embarrassed this week when it turned out that their advocacy for federal debt reduction was based on error-laden Excel spreadsheets. As Heidi Moore reminds us in The Guardian: "The fact that economics spits out cold, hard numbers should not fool us that it produces the cold, hard truth." There is another cold, hard truth we should be concerned about, though: business relies on Excel spreadsheets to a great degree, and many of them contain material errors. You may be reaching ill-founded conclusions based on failed formulas right now.

If you would heed my sage advice,
Then check your work, not once, but twice.

Admission Control

Said a girl at the school where she prepped:
"As of late, it is hard to have slept,
When my counselors relate
The diminishing rate
At which colleges lately accept."

"I must temper my high expectation
For my 20th school application,
As it may be perhaps
My profusion of apps
Will worsen a bad situation."

No Run on the Bank

Said a Cypriot lady, Maria,
At a bank branch in old Nicosia:
"With the caps they impose
On capital flows,
Withdrawal's a useless idea."

Quantitative Ending?

Said Bernanke: "I think we will phase out
QE as recovery plays out,
And joblessness wanes
(Though the latter remains,
Admittedly, still quite a ways out)."

A Peripheral Question

When the banks on the euro zone's fringes
Must be rescued from too many binges,
There's something to lose
And the rescuers choose
The party on whom it impinges.

When the eurozone finally begins
To determine who loses and wins,
Will the outcome be fair
To depositors there
Or the wishes of Germans and Finns?

Stress Test

Said the Fed to the banks in its purview:
"Sorry chaps, we don't mean to unnerve you,
But if panic should surge,
Our views would diverge
On the capital that would best serve you."

Things Are Looking Up

Said a job-seeker, not so dejected:
"In the past I was feeling neglected.
But things may rebound,
As of late I have found
That at least I am being rejected."

"I'm sensing revitalization
In every failed application.
My hopes may be fond,
But once they respond,
It's proof of their consideration."

Update on Helping the Long-Term Unemployed

Yesterday I wrote of the need to "conquer [long-term unemployment] ills / By developing skills," and today I learned of a program doing just that. Jane Polin, a reader who advises charitable foundations, introduced me to the National Fund for Workforce Solutions, an award-winning, 32-site public-private collaboration. The NFWS (as distinct from the NSFW) is "an unprecedented initiative of national and local funders whose goal is the career advancement of low-wage workers using a model of substantial employer engagement to increase the potential for successful outcomes." Over the next three years, the Fund looks to elevate 23,000 workers into high-growth industries. It's a small step, but a big example.

Down on the Farm

Said a weathered old farmer named Weiss
At his acres of oats, wheat and rice:
"There's nothing I grow,
As far as I know,
That is subject to free-market price."

Help the Long-Term Unemployed

The news has been better concerning
A rise in the ranks of the earning,
But many confirm
They've been out longer-term
Without showing signs of returning.

In order to bring employees in,
We need programs to put more trainees in,
To conquer more ills
By developing skills
Than the Fed's quantitatively easin'.

High? What High?

Said a really curmudgeonly guy
On the Dow Jones Industrial high:
"It's still quite a ways
From the Internet craze,
When adjusted for core CPI."

Dow Jones Record High

Despite the new highs in the Dow,
Economists still disavow
The hope that those wishin'
To find a position
Will likely be getting one now.

The stock market's rate of return
Is based on what companies earn.
As long as it's more,
On the stock exchange floor,
Employment's of little concern.

Safe Investments?

Said a strategist, airing his views
On central bank rumors and news:
"You've booked every gain
And best not retain
Your bonds, which are certain to lose."

Bernanke's Records

Said Bernanke, in argumentation
To the makers of Fed legislation:
"You may think me a dove,
But take notice of
My record-low rate of inflation."

Those Congressmen failed to point out
That, for all of his monet'ry clout,
He couldn't deflate
The very high rate
Of laborers laying about.

Along came an eminence grise
Saying: "High or low rates such as these
Are attributed less
To your skill or success,
And more to the global unease."

The Difference 2% Makes

When she opened her statement from Payroll,
Unaware of how Washington may roll,
She had to recount
The take-home amount:
"My disposable income's gone AWOL!"

Turning Japanese

Said Krugman: "It boggles me how
Any long-term concerns may allow
Our political corps
To mostly ignore
The depression we're living in now."

Ev'ryone calls for a plan
On inflation, which isn't at han'.
If we tighten too soon,
We won't be immune
To a Lost Decade à la Japan."

Good As Gold?

Said a fellow who looked into gold
For the hedging effects it may hold:
"After testing with rigor,
I really can't figgur
The typical tales that are told."

"It's hard to explain how this thing got
The following no other bling got,
But immunization
From rampant inflation
Is more than you get from an ingot."

State of the Union Econ Highlights

"The state of the union is iffy,
As I stand here tonight looking spiffy.
The economy's slow
To get up and go,
And Congress is fiscally cliffy."

"The minimum wage in the nation
Should be tied to the rate of inflation,
So that all may enjoy,
While in private employ,
Relief from the grip of privation."

"America, please hear my sermon:
The Yank should be more like the German,
With apprenticeship skills
That fix our job ills,
As numerous studies determine."

"The number-one US priority
Is the growth of the fact'ry sorority,
So we can bring back
The fam'ly of Mac,
If not all, then at least a minority."

"Of course, I must certainly preface it
As a President these days professes it:
These are policies which,
By taxing the rich,
Will not add a dime to the deficit."

President Barack Obama's latest State of the Union address, the first of his second term, was mostly prosaic, at least in its economic prescriptions.  The poetry came at the end, when the President invoked the victims of gun violence in the House chamber, repeatedly intoning: "They deserve a vote!"  Also, the sight of 102-year-old Desiline Victor, who Mr. Obama cited for her waiting six hours to vote (presumably for him), was enough to make one verklemmt.

Here is the full prepared text of the speech.

The $137 Billion Question

There's a question for Cook and his board
Arising from Apple's cash horde:
At exactly what height
Of liquidity might
Alternatives best be explored?

Said Einhorn: "I'm finding absurd
All the dividend plans that I've heard.
If shareholder value
Is your rationale, you'll
Agree that my way is preferred."

Inflated Expectations

The specter of higher inflation
Makes investors want more compensation,
Thus driving up yields,
While prices of deals
Will fall, in an inverse relation.

The longer the stated maturity
Of a given fixed-income security,
Then all the more great
The effect of the rate,
As the market may show us with surety.

Bond prices tend to be countercyclical with stock prices and the economy as a whole.  In good times, or when inflation is elevated (or when both happen at once), bond prices tend to fall because rates are rising.  In bad times, or when investors show aversion to risk, there is a "flight to safety" that pushes them into bonds, driving up the price - and thus lowering the yield.  As The Wall Street Journal never fails to remind us: "Bond yields fall when prices rise." These dynamics were prominently on display in January, when 10-year bond prices fell 2.6% while the S&P 500 gained 5%.  In part, the bond selloff reflected more economic optimism and relief over the (partial) resolution of the fiscal cliff.  The higher yields also responded to awakening inflation anxiety, as the Fed's long-term inflation projection crossed over 3% for the first time in many moons.  Going forward, there is plenty for bond investors to feel anxious about - from the US debt ceiling to the eurozone - and little prospect for rapid economic growth, so inflation fears may not be driving rates any higher (and prices lower).

S&P's To Blame

A debt crisis once was created
By avarice run unabated,
As the market was flawed
By schemes to defraud
In bonds that were triple-A rated.

Now Justice may fin'lly report
That they're taking the raters to court
For the role of those chaps
In the housing collapse,
In which they provided support.

Dow 14,000

The last time around that the Dow
Hit the level it's gotten to now,
The market was brisk
By taking on risk
As much as the law would allow.

In one sense, 14,000 has no significant meaning. You should not buy or sell based on the Dow Jones Industrial Average reaching this level on the way up, or down. It ain't nothin' but a number. In another sense, any sort of round-numbered market milestone affords the opportunity to reflect on how far we've come, or in this case, come back. At the time of the Dow's previous 14,000 milestone in October 2007, the US market and economy were full of financial hubris, if not outright fraud (at least in the mortgage sector), and headed for a great fall.

This time around, the market's climb reflects the slow receding of fear and building of growth, helped along by the Fed's generous monetary stimulus and shunting of savers into riskier asset classes. While it's not a completely beautiful picture, on balance, things seem less likely headed for a fall than last time around.

Heeling Brews

Said Justice: "We doubt the propriety
Of imposing on US society
The burden to choose
From costlier brews
When opting for lower sobriety."

There's trouble brewing in the global beverage industry: the US Department of Justice has filed a lawsuit to stop the planned combination of Belgian-based behemoth Anheuser-Busch InBev SA ($ABI.BR) with Mexican giant Grupo Modelo ($GMODELOC.MX).  In what appears to be a classic anti-trust case, talks to avert the lawsuit broke down when the Justice Department decided the parties were too far apart.  AB InBev, whose 200 brands include the globally dominant Budweiser, Beck's and Stella Artois, already has 47% of the US market.  The number 2 US competitor, MillerCoors, controls much of the rest.  Grupo Modelo is a smaller US competitor; its 7% share largely rests on the popular Corona brand.  Although AB InBev already owns about half of Modelo, the Mexican brewer has been "eating Budweiser's lunch" in certain US regional markets, according to internal company memos obtained by the Feds.  For example, when Budweiser and Miller raised prices in California in 2010, Corona declined to follow suit, and took market share.

AB InBev hotly disputes the government's contention that the merger is intended to control prices, and the legal battle is expected to be long and costly.  As they say: "Here we go."

GDP Shrinkage

GDP's negative trending
Is not the economy's ending;
We're having a boom
In the stuff we consume,
Offset by less government spending.

It was a shock to read yesterday that the US economy actually shrank by -0.1% in the fourth quarter of 2012, but the markets reacted steadily.  It appears that, beneath the negative headline number, the private economy is actually doing pretty well.  Here's the Washington Post on the breakdown of the numbers (see chart at right):

The GDP report for the fourth quarter of 2012 is, on its face, disappointing. The economy shrunk, at an 0.1 percent annual rate, the first such contraction since the recession’s nadir in 2009. But commentators are surprisingly upbeat about it. Spending and investment are still looking good, but sharp contractions in business inventory and federal defense spending sunk the overall number. Paul Ashworth at Capital Economics called it “The best-looking contraction in U.S. GDP you’ll ever see.”

Small Investors Jump In

At times, when the stock market rises,
The basis for all the new highs is:
Investors who yearn
For a better return
Than the interest-rate outlook advises.

The billions investors have shifted
To stock funds effectively lifted
The market's appeal
(And also, the deal
That avoided the big Fiscal Cliff did.)

There's a saying that's really akin to it,
From traders who've commonly been to it:
On the stock market floor,
According to lore,
You get out of it what you put into it.

I guess by now almost everybody is aware that we are in a bull market for US stocks, and one would expect a surge of small investor interest to follow this realization.  However, according to the Wall Street Journal, a massive inflow of retail cash into equity mutual funds also preceded and contributed to the market surge.  On Tuesday, the Dow Jones Industrial Average rose 72 points to close at 13,954, its highest level since October 2007.  The Dow has risen 850 points - or 6.5% - in January, a New Year's achievement not seen since 1989.  As shown by the graphic, this strong performance was helped by $6.8 billion of investor cash flowing into equity funds in the first three weeks of the year, after years of massive outflows.  No doubt some of the recent inflow manifests the public's relief that the federal government did not take the economy over the Fiscal Cliff in January, and is thus a rebound from the fearful, exaggerated December outflow.  However, in the market, optimism may create its own reward by boosting demand for assets (stocks) and hence, their prices; proving, once again, that you get out of life what you put into it.

Fertile Ground

A politico trained in agronomy
Was convinced he could grow the economy:
"To start with manure
'S the best way for sure,
So bullsh*t's incumbent upon-a me."

If there's one phrase that unites Washington these days, it's "to grow the economy."  Passions may boil over whether it's better to direct such growth from "the middle out" or "from the top down;" whether "the job creators" or "America's working families" comprise the more fertile soil in which to germinate the economy's roots; but there is no doubt as to the choice of metaphor.  In the newly redesigned New Republic's Jargonist column, Noreen Malone finds that "growing the economy" is a relative neologism in our old republic, first popularized by Bill Clinton in 1992.  Prior to that, the preferred metaphor imagined the economy as "an engine," on the basis of which the partisans could dispute how many cylinders it had, or whether it was firing on all of them.  Perhaps it is time to bring back Adam Smith's "invisible hand," although, in our hypersexualized era, we may not yet be ready for its inappropriate touch.

Core Cash Flow Multiple

Said a notable stock-pickin' man:
"Of $AAPL I'm not such a fan,
But the price is so low
Compared to cash flow,
I'm buying as much as I can."

Hedge fund manager and blogger James Altucher posted an amusing take-down of the bearish Apple sentiment in Seeking Alpha yesterday. The gist of it is that six times cash flow is too little to pay for the shares of a company whose revenue is still growing at 20%, so the recent fall to $440 from $600 a share is just noise.

Says Altucher: "I own Apple since my initial $1000 call and anyone who did is well in the money. Meanwhile, I also own Google and Amazon. These companies are going to keep innovating past each other and by the time they are through one of them is going to make a time machine, the other is going to put a phone into our neurons, and the third is going to let us spend the rest of our lives in drugged out virtual realities while we fly around in pilotless spaceships. So I'm staying long."

N.B. Altucher's investment horizon is five years, so this is not exactly a day-trading recommendation.

Regulatory Oversight

If the SEC chairwoman-candidate
Has both tried the Street and defended it,
One may sensibly ask
If she'll make of her task
To have reined in the Street or befriended it.

According to the New York Times' Dealbook, there's a "signal to Wall Street in Obama's pick for regulators."  So, one may ask, what is the signal?  In announcing his nomination of Mary Jo White to run the Securities & Exchange Commission, President Obama said: "It’s not enough to change the law; we also need cops on the beat to enforce the law," adding: "You don’t want to mess with Mary Jo." Indeed, Ms. White made a name for herself as the United States Attorney in Manhattan in the '90s, prosecuting the 1993 World Trade Center bombers and John Gotti, among others. The current US Attorney in Manhattan, Preet Bharara, who put inside trader Raj Rajaratnam in jail, is among the generation of prosecutors trained by Ms. White.

This is all well and good, but her appointment sends other signals as well.  As a recent, must-watch PBS Frontline documentary points out, no Wall Street or financial industry figures have been prosecuted for the frauds that contributed to the financial crisis.  As chair of the litigation department at Debevoise & Plimpton for the last ten years, Ms. White made it her business to keep the industry's leaders "untouchable".  The "revolving door" between Wall Street and Washington has long served to take the teeth out of regulation; it remains to be seen which way the door is turning in the case of Mary Jo White.

Davos

There's a conf'rence of world VIPs
Taking meetings in spas and on skis;
By Switzerland's hills
They solve the world's ills,
Or at least decide who's the big cheese.

Every year at this time, the gloom of January is brightened (or deepened, depending on your viewpoint) when central bankers and business leaders from around the world gather in Davos, Switzerland to discuss the world economic outlook.  The World Economic Forum is "committed to improving the state of the world" and, according to the organizers of the annual meeting, it "remains the foremost creative force for engaging leaders in collaborative activities focused on shaping the global, regional and industry agendas." Others take a more cynical view, including Bloomberg radio commentator and former SEC chairman Arthur Levitt, who has given up going to Davos, remembering it as a social competition in which the object was to collect the greatest number of prestigious names on one's "dance card."

Those prestigious names are now concerned over the possibility of systemic financial failure, according to a report by Reuters.  Over 1,000 central bankers and business leaders were surveyed ahead of the annual meeting, and it turns out that they are worried about all the excess liquidity that the former have pumped into the system for the benefit of the latter.  Recurring asset bubbles and "currency wars" of internationally competitive devaluations are some of the other concerns that keep the power elite uneasily awake through those snowy Alpine nights.

2nd Term Priorities

Obama's prioritization
In his 2nd-term administration
Should be making some dents
In the rising expense
Of medicine and education.

This priority shouldn't give pause
To government skeptics because
There's much to be gained
By undoing the pain
From ongoing federal laws.

President Barack Obama kicked off his second inauguration yesterday with a rousing speech of liberal policy prescriptions that he intends to pursue in his new term.  Underlying much of the rhetoric was the goal of using the social fabric and safety net to support and strengthen the American middle class.  Among the many factors that have led to the hollowing-out of the middle are the rapidly rising costs of education and healthcare.  It is education that is increasingly necessary to enter the world of steady, well-paid work, while affordable healthcare would prevent much of the undoing of employer-provided benefits that we have seen in the last generation, as well as the great number of personal bankruptcies.

To those who ask: what could the federal government possibly do to arrest these cost increases, I would say: what is it currently doing to contribute to them?  Two examples come to mind.  In education, the federal government contributes to the price spiral by providing a seemingly limitless supply of student loan funding for it.  A more discriminating, less misguidedly generous posture might be in order.  In medicine, the Medicare and Medicaid programs are the biggest contributors to the "fee for service" model that is one of the roots of healthcare inflation identified by the President.  These are just two thoughts off the top of my head; I'm sure that thoughtful policymakers could find more.

Punitive Measures

A six-billion loss dealt a blow
To the name of a bank's CEO.
To atone for this trade,
He merely was paid
A paltry ten million or so.

What do you take from the man who has everything?  That was the question faced by the board of JPMorgan Chase, which had to determine the consequences for CEO Jamie Dimon of the $6.2 billion loss from the "London Whale" trades.  The answer was a 50% reduction in Mr. Dimon's total compensation, from $23 million in 2011 to "only" $11.5 million for 2012.  (To be fair, the compensation package reflects a record year for the bank's profits, in spite of the outsized trading losses.)  The New York Times' Dealbook page, no doubt attempting to wrap its head around the fact that $11.5 million is only half of someone's compensation, believes that, in the face of such a striking management lapse, more radical changes are called for.  Suggests columnist Agnes Crane:

One could be to split the roles of chairman and chief executive. A well-chosen chairman provides a check on a chief executive’s powers. In one indication that this can work, GMI Ratings last year concluded that an executive pulling double duty can earn 50 percent more than the total pay of two people performing the top jobs separately.

It sounds as though, if governance is strong, compensation finds a more appropriate level as a matter of course.

Post-Holiday Blues

The December performance of retail
Was bullish in ever-y detail;
All the gifts that were sold
Decisively told
A surprisingly good Christmas tree tale.

But the 1st quarter figures & facts
Describe a consumer that lacks
A spending position,
Since broad imposition
Of 2% more payroll tax.

The US retail sales numbers for December were announced on Tuesday, and painted a picture of robust holiday consumption.  The 0.5% quarterly increase was much better than expected, and much faster than the rate for the previous two quarters.  However, it looks as though the momentum may not carry through to the 1st quarter of the new year.  Weekly retail reports in January have already fallen below expectations, and the reason seems clear: most US workers now have less take-home pay, thanks to the increase in the payroll tax by two percentage points to 6.2%, from the temporary, "stimulus" rate of 4.2%.  Other indicators appear less than bullish, as well: the Federal Reserve Bank of New York reports that manufacturers in its district (which is also my district) continue to reduce their activity.  The ongoing drama of the fiscal cliff and debt ceiling doesn't help, either.

Non-Negotiable

Said Obama: "I think that it's lowdown
To set up a Debt Ceiling showdown.
Though the House GOP
May well disagree,
It's a road I intend not to go down."

Battle lines have been drawn over the increase in the federal debt limit, which must happen by March to avoid a government shutdown and likely default.  President Barack Obama gave a press conference yesterday in which he pledged not to negotiate with the House GOP over the debt ceiling increase, saying that such crisis-fueled, eleventh-hour bargaining is no way to run the government.  The crux of the President's argument is that the Congress cannot refuse to incur the debts for the spending it has already approved; he likened it to beginning a diet by walking out on the rich meal you've just had, without paying the check. 

For their part, Republicans clearly intend to use any available leverage to force a reduction in federal outlays, regardless of default risk: House Speaker John Boehner, while acknowledging the economic harm that would come from a default, said: "The American people do not support raising the debt ceiling without reducing government spending at the same time."

However, the Washington Post's Greg Sargent thinks the Senate Democrats may hold the trump card: if the House passes a bill with both a debt ceiling increase along with big Medicare and Social Security cuts, the Senate could simply amend the bill by stripping out the cuts, and send it back.  Sargent believes that the Senate GOP is more politically realistic, and would not filibuster the amendment.

Bottom line: at this point, it's too soon to say that America has passed the era of banana republic politics.

Free Markets

The market's a clever creation
And a hallmark of civilization.
Though it's good to be free,
I-ron-i-cal-ly,
It isn't, without regulation.

This past weekend I discovered the Unlearning Economics blog, thanks to my new Twitter friend Frances Coppola (There once was a lady from Kent...), who linked to a post on The Fantasy of a Pure Market.  The anonymous economics student/blogger complains of a certain shallowness in libertarian thought, specifically, that it posits

some sort of neutral laissez-faire state, beyond which any ‘intervention’ is deemed unnatural. The ideal minarchist libertarian state would enforce property rights and contracts, and prevent force, fraud and theft. People could own what they acquired through ‘voluntary’ exchange; they would be free to do what they wanted with their property. I find libertarians rarely explore their preferred institutions much deeper than this, and build many of their arguments on the distinction between ‘markets’ and ‘government.’ However, on close inspection, the boundary between the two becomes blurred.

The crux of "Unlearning's" argument is that the things that libertarians hold out as "natural", fundamental underpinnings of free markets - such as property and contracts - are in fact social constructs designed to achieve socially optimal ends.  It is therefore illogical to argue against "government intervention in the markets" when markets such as we know them would not exist but for government intervention.  It's only a question of degree.

Back To Work

The ranks of the long-unemployed
(A status you'd like to avoid)
Have started to thin
From the slow growth we're in;
Is it reason to be overjoyed?

The jobless in longer-term stages
Are fewer than they've been in ages,
Though many returning
To rolls of the earning
May settle for minimum wages.

There's a glimmer of good news for the long-term unemployed: your chances of finding employment are growing.  The proportion of job-seekers unemployed six months or longer was 39.1% in December, the first time this ratio has fallen under 40% in more than three years, according to the Wall Street Journal.  Although that still leaves 4.8 million long-term jobless, it's a considerable reduction from the peak of 6.5 million in 2010.  But, you say, haven't most long-term unemployment reductions come from discouraged job-seekers dropping out of the labor force?  The answer appears to be: not so much.  The number of jobless who report they've given up looking is estimated at 400,000 over the last year, while the number of Americans with jobs rose by 2.4 million over the same period.

Now for the bad news: wages of returning workers fall by 11% for every year they are out of the workforce, and unemployment benefits no longer last 99 weeks - it's now 73 weeks at most, depending on your state of residency.  Some of the long-term unemployed may have been motivated by their expiring benefits to take lower-paying jobs.  Finally, those poor souls who have gone three or more years without work had no holiday cheer in December, as their numbers have not yet reduced.

In Lieu of Geithner

Said Obama: "In term number two,
For Treas'ry I want Mr. Lew.
I'll rely on his talents
To find fiscal balance,
And fight with Republicans, too."

It's reported that President Barack Obama will nominate Jacob ("Jack") Lew, his former budget director and current chief of staff, to succeed Timothy Geithner as Treasury Secretary.  As the mainstream media will tell you, this signals a change in focus from the global financial crisis that dominated the President's first term, toward budget fights with Congress, and long-term fiscal sustainability.  The Wall Street Journal characterizes Mr. Lew as "a veteran of numerous Washington budget battles, stretching back to his work as a senior congressional aide in the 1980s." Oddly, there is little initial signaling of congressional opposition to this proposed nomination, despite Mr. Lew's inflexible reputation and angry clashes with Republican aides during the 2011 debt ceiling fight. Former Senator Judd Gregg, a New Hampshire Republican, may have summed it up best: "He's a tough guy to negotiate with. He has his positions and he doesn't give much ground, though he's really a nice person."

Mint the Coin

With the Debt Ceiling coming up soon, it
Is time (although some may impugn it)
For coining a halt
To a US default
With a really big monet'ry unit.

A one-trillion coin, it is said,
Could be minted and shipped to the Fed,
In order to pay
What the US of A
Might be forced to renege on instead.

This sizeable denomination
Would be kept out of mass circulation,
The better to sidestep
That such an untried step
Precipitates hyperinflation.

When Republicans finally come round
From running bond issuance aground,
It's back to the Mint
For the Coin, where its stint
Will be wound up with melting it down.

So let's mint The Coin out of platinum!
Though objections there be, we may flatten 'em.
There are ways besides cash
'Round the Debt Ceiling clash,
But there's nothing as clever as that in 'em.

It's an idea so crazy, it just might work: the US Treasury could circumvent the looming debt ceiling showdown by minting a very large denomination platinum coin of, say, $1 trillion. The coin could be deposited in Treasury's account at the New York Fed, where the new funds could be used to pay any of the Federal government's many obligations. First proposed in a comment on an economic blog in 2010, the Coin is within the legal powers of Treasury, which "may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time." Never mind the fact that this law was intended to facilitate minting bullion coins for numismatists - it's on the books. Of course it's absurd to speak of minting a $1 trillion coin to keep the government out of default, but the debt ceiling itself is absurd, as is the threat to throw the nation into default for political purposes. So, it's a case of fighting crazy with crazier.

The "Mint The Coin" movement has been gaining steam thanks to the (only slightly tongue-in-cheek) advocacy of such leading economic writers as Bloomberg's Josh Barro and Business Insider's Joe Weisenthal. For those who fret that the issuance of a $1 trillion coin would ignite inflation of Zimbabwean proportions, a former head of the US Mint (who wrote the 1996 platinum coin law) has weighed in with a cogent explanation of why that would not happen. It all comes down to a choice: would we rather the US Treasury default, or do something absurd?

Economics and Ideology

As opposed to the world's great religions,
Economics is free from divisions
(Except for the few
Applicable to
The really important decisions).

Economists from around the country and the world converged on San Diego this past weekend for the American Economics Association annual meeting.  Among them was Paul Krugman, who would take part in a panel discussion of "What Do Economists Think About Major Public Policy Issues?"  The discussion centered on a paper by UC San Diego economists Roger Gordon and Gordon Dahl, which subjected the question of "Professional Consensus or Point-Counterpoint" among their peers to statistical analysis.  Gordon and Dahl concluded that professional consensus does indeed exist, and that much of the disagreement is not ideologically driven. As preparation for his part in the discussion, Prof. Krugman published a New York Times blog post in which he concluded that, while consensus may generally reign in the Dismal Science, a statistical approach may overlook the at-times virulently ideological disputes that arise in the biggest and most consequential matters.  These include questions such as whether "the benefits of the American Recovery & Reinvestment Act exceeded its costs."  (I.e., was the stimulus worth it?)

The panel also included the University of Michigan's Justin Wolfers, who offered a milder interpretation.  Although Prof. Wolfers' analysis also showed an ideological basis for economists' opinions on the stimulus bill, he nevertheless could not conclude that, on the whole, responses to a broad range of policy questions are statistically correlated to ideology.  May there yet be hope for rationally based policy?

The Bonds That Divide Us

At the Fed, there are three schools of thought
On the bonds that Bernanke has bought:
A) keep on going,
B) begin slowing,
Or C) we would rather have not.

Minutes of the Federal Open Market Committee's December meeting were released on Thursday, and they reveal the divisions among the members on the Fed's policy of buying mortgage and Treasury bonds to stimulate the economy. Following that meeting, on December 12, the Fed announced that it would continue with the bond purchases until the pace of job creation improved. Yet, the minutes show that the "hawks" on the committee fundamentally disagreed with the entire program and, even among those who supported it, there was disagreement over its timeline. Those who wanted an open-ended monthly commitment to add $85 billion to the Fed's balance sheet were most concerned with allowing the stimulus to have its intended effect, while those who worried about the risk of adding so much to the Fed's own investment portfolio wanted to bring the program to a mid-2013 close.

However, Diane Swonk of Mesirow Financial tells the New York Times that "there’s still a huge bias toward buying." Any appearance of dissension, according to Ms. Swonk, reflects merely "modest misgivings in the middle of the most aggressive effort the Fed has ever undertaken to stimulate the economy."

Kicking The Can Down The Cliff

Under watchful regard of a nation
In Twenty-Thirteen celebration,
Congressional members
Took leave of December
By rigging the rules of taxation.

With many a jubilant *clink*,
The deficit promised to shrink,
But much is depending
On questions of spending,
And soon we'll be back at the brink.

The prospects are less than appealing
For the next round of Washington dealing,
Especially if
There's a new Fiscal Cliff
When Treasury hits the Debt Ceiling.

As everyone knows, the US Congress passed an emergency measure on New Year's Day to avert the worst of the automatic tax hikes that were to take effect under the "Fiscal Cliff" provisions that it enacted after last year's debt ceiling fight. For those who want to know what the latest tax deal means for them personally, Matthew O'Brien has a couple of helpful charts in The Atlantic. The bottom line is that, while everyone's tax rates and payments are now less than they would have been under the full Fiscal Cliff, most Americans will see another 1.5% of their income going to taxes, and the well-to-do will feel 3-8% poorer. Ironically, some of the most fortunate taxpayers are those whose income is between $200-500 thousand. They have mostly avoided marginal tax rate increases, which apply to income above $400,000 ($450,000 for joint filers) and will not pay more in alternative minimum tax, which has been permanently "patched".

Those who may have worried that a bipartisan agreement on taxation signals a change in the ways of Washington will be reassured to know that the deal has preserved an impressive array of obscure tax breaks for special interests, as the New York Times reports.

However... the thornier questions of cutting expenditurses (or at least, reducing their long-term growth) have been pushed off by a month, as has the always-explosive question of raising the Federal debt ceiling. Another high-stakes political standoff is therefore guaranteed, which means that the celebrated tax deal is actually not much to celebrate.