Limericks Économiques

Tax iVoidance

2013-05-21T08:57:00.000-04:00

Said Cook, to the Senate's seniority:

"Though gadgets remain our priority,

While profiting scads

From iPhones and -Pads,

We skirt every taxing authority."

Apple's tax avoidance strategies will be on the hot seat when CEO Tim Cook testifies before the Senate Permanent Subcommittee on Investigations today. In a rare show of bipartisanship, senators such as Carl Levin (D - MI) and John McCain (R - AZ) are incensed at the scale of the company's apparently legal machinations. Among other things, reports The New York Times, Apple created - and directed much of its international revenue through - an Irish subsidiary that keeps its books, records and bank accounts in the United States, and holds board meetings in California. "Because the United States bases residency on where companies are incorporated, while Ireland focuses on where they are managed and controlled, Apple Operations International was able to fall neatly between the cracks of the two countries’ jurisdictions." Senator Levin calls it "the holy grail of tax avoidance," while a former staff director at the Congressional Joint Committee on Taxation advises that the "technical term is 'unbelievable chutzpah.'"

For his part, Mr. Cook “welcomes an objective examination of the U.S. corporate tax system, which has not kept pace with the advent of the digital age and the rapidly changing global economy.” One may infer that the Apple endgame is a tax holiday that would allow the low-cost repatriation of their overseas profits.

Doves & Hawks Together

2013-05-17T13:44:00.000-04:00

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.

The hottest debate raging right now among the leading lights of the Federal Reserve System is how soon to end quantitative easing, specifically the latest program under which the Fed buys $85 billion of Treasury and mortgage bonds every month. QE has arguably been a factor in the gradual reduction of unemployment from 8% to the most recent 7.5% figure. However, there seems to be little doubt that, by depressing rates on low-risk bonds, the Fed has encouraged a frothy run-up in prices of equities and junk bonds. Thus, notes the Wall Street Journal: "The presidents of the Dallas, Richmond and Philadelphia Federal Reserve banks, long skeptics of the wisdom of the bond buying, said this week that they would like to see the purchases scaled back immediately."

Others are not convinced. Boston Fed President Eric Rosengren said that recent economic data "could lead one to argue that policy has not been sufficiently accommodative." Over on the West Coast, they're hopeful, but expect labor conditions to improve before scaling back stimulus: "Assuming my economic forecast holds true and various labor-market indicators continue to register appreciable improvement in coming months, we could reduce somewhat the pace of our securities purchases, perhaps as early as this summer," says SFO Fed President John Williams. "Then, if all goes as hoped, we could end the purchase program sometime late this year."

All of this divergence of opinion is layered over a consensus that inflation is hitting the Fed's 2% target. Falling prices could unite the easing and tightening factions in the short-term. Even "hawkish" Fed governors such as Philadelphia's Charles Plosser agree that any appearance of deflation would be a "game-changer". If deflation should rear its ugly head, then even an increase in bond purchases would be called for, says Plosser, to show “our commitment that we are willing to provide money at a pace to keep inflation where we want.”

S&P vs GDP

2013-05-16T16:17:00.000-04:00

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.

My friend Marc Leibowitz, an investment advisor with Oppenheimer & Co., circulated a post yesterday from Zero Hedge, which he says "perfectly expresses a number of concerns I’ve had for some time now." In the post, Lance Roberts of Street Talk Live poses the 5 Questions Every Market Bull Should Answer. To summarize, they are:

Does the current level of employment support the current rise in asset prices?
Does the current weakness in Personal Consumption Expenditures support the current rise in asset prices?
Are very negative net export prices (i.e., falling export prices vs. rising import prices) supportive of the current market?
How long can corporate profits remain diverged from weakening economic growth?
What is the possibility of the divergence between rising margin debt and falling yields on junk bonds being maintained indefinitely?

In other words, although the Fed's QE stimulus has heretofore supported a bull market in equities and junk bonds, the foregoing pertinent questions suggest that the underlying economic strength needed to sustain such prices is lacking. As Guggenheim Partners CIO Scott Minerd tweeted this afternoon:

High yield below 5%? A lot of the economic data out there just doesn't support these lows, which indicates a near-term setback is possible.
— Scott Minerd (@ScottMinerd) May 16, 2013

Nevertheless, the rally continues on the strength of further expectations of QE, weak data notwithstanding. All the stock indices were higher today, while gold continued to slump.

A Misbegotten View

2013-05-08T09:26:00.000-04:00

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.

The historian Niall Ferguson provoked indignation this week while speaking at a conference in California. During the Q&A, he referred to John Maynard Keynes' oft-quoted statement that "in the long run we are all dead." Keynes was blind to the importance of future generations, Mr. Ferguson told the audience, because, though married, he was gay and fathered no children. In the face of a generally outraged reaction that evidently surprised him, Mr. Ferguson offered a full and sincere apology.

But what of his core contention, that Keynes did not care about the future and thus was willing - to paraphrase Corinthians 1 - to "eat, drink & be merry (or at least, stimulate economically) today, for tomorrow we die?" This interpretation misses the point of Keynes' famous quote, writes Matt Yglesias in Slate. In his 1923 Tract on Monetary Reform, Keynes wrote that “this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.” In other words, in the midst of a crisis, economics should have something more to tell us than that, in the long run, things will work themselves out. Says Yglesias: "The fact of the matter is that both Keynes personally and “Keynesian” thinkers about macroeconomics in general care deeply about long-term issues. In fact, Keynes is one of the deepest thinkers about the long-term economic trajectory of all time."

So, regardless of whether his sexual leanings may have been kept on the down low, Keynes as an economist and public figure was strictly on the up & up.

Don't Jump to Conclusions

2013-05-07T09:30:00.001-04:00

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.

It seems as though tout le monde économique is still abuzz over Reinhart, Rogoff and the buggy spreadsheet that powered their argument against national over-indebtedness. As we previously noted in rhyme, Harvard economists Carmen Reinhart and Kenneth Rogoff sold many US and UK fiscal austerity advocates on the idea that public debt levels above 90% of GDP would doom a nation to a no-growth economy. Along came Thomas Herndon, an economics graduate student at the University of Massachusetts in Amherst, who tried to replicate the Harvard professors' results and found that, when their Excel spreadsheet model was corrected, the expected growth rate at 90%+ debt/GDP was more like 2%; not great, but not flat either.

As the shouting and schadenfreude attending Mr. Herndon's discovery is simmering down, economic heavyweight Larry Summers has weighed in with some sober reflections on the meaning of the R&R cause célèbre. First, says Dr. Summers, "authors and journals and commentators need to devote more effort to replicating significant results before broadcasting them widely. More generally, no important policy conclusion should ever be based solely on a single statistical result." Second, those who join in policy debates should remember that, as in the investment world, past performance does not guarantee future results. Just because, for example, housing prices have risen for forty years does not mean they will continue to do so. Lastly:

While there may be no threshold beyond which debt automatically becomes catastrophic, and while the British and American experiences are both suggesting that fiscal contraction in a slack economy where interest rates are near zero is inimical to growth, it is a grave mistake to suppose that the debt can or should be accumulated with abandon.

In other words, while now is not the time for reckless debt reduction, neither is it the time for reckless disregard of our future solvency.

Bear Warning

2013-05-06T09:03:00.001-04:00

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."

On Friday, the S&P 500 closed above 1,600, while the Dow Jones Industrial Average traded above 15,000 for the first time ever. Many stocks are at or near their 52-week highs. With the US stock market showing record-breaking growth, it may be fair to ask: why isn't the US economy doing the same? Oh sure, we are in a recovery, and the unemployment rate is falling, but with GDP growing at only 2.5% per year and the jobless rate still at 7.5%, it's all happening too slowly. As The New York Times Strategies column pointed out this past weekend, American companies have been able to reap handsome profits in spite of the lackluster economy, in part by controlling costs, i.e., not hiring too much. Thanks to the Fed, they can also borrow at record-low rates, which enables some financial profits. But is it all - to use an overused word - "sustainable"?

At least one market strategist quoted in the Times column is concerned about a lack of meaningful sales growth: "Weak sales could presage a drop in profit margins, he said. And if profit margins decline sharply — by about 10 percent or so — history suggests that it’s time to say goodbye to the bull market."

Market Correlation

2013-05-01T09:11:00.000-04:00

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.

Of course, there is a lot more to the movement of equity prices than quantitative easing, but the correlations between rising stock and bond markets in the recent past are striking and, as far as I know, unprecedented (at least, when they are both rising). The "missing link" appears to be the massive, monthly $85 billion purchases by the Fed of Treasury and mortgage bonds, which has had the effect of bidding up both the price of bonds (directly) and stocks (indirectly, by lowering the yields on "safe" assets and inducing investors to get riskier in search of returns). I was reminded of this when my friend and one-time mentor Sam Costanzo posed the question on his Facebook page. Sam, whose Facebook wall is a trenchant financial and economic blog for his lucky friends, also threw in commodities and currencies for good measure, and concluded: "Either the economy and global growth begin to look up, supporting commodities and putting downward pressure on Treasuries and the dollar (lifting the Euro and halting the decline of the yen) or equities could be dragged down into a significant correction."

Soros' Penney Shares

2013-04-26T08:59:00.004-04:00

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?"

Legendary hedge fund manager George Soros surprised the Street with the disclosure of an 8% holding in JCPenney Thursday evening. $JCP shares rose 7% in after-hours trading. In light of the retailer's well-publicized troubles, and the recent, premature release of Mr. Soros' obituary by Reuters, his purchase inspired such headlines as "Reportedly Dead Man Buys Reportedly Dying Company."

Of course, investors want to know why such a famously savvy trader would buy into a situation so fraught with problems. Penney has endured failed strategies and management upheaval, and has been losing cash. The key to Soros' intentions will be grounded in the knowledge that Mr. Soros is a trader, and therefore primarily concerned with whether the price of something is headed up or down, and by how much. $JCP may have problems, but it may also have possibilities. As Mr. Soros may attest on his own behalf, rumors of the company's death may be premature.

Season of Easin'

2013-04-25T08:56:00.000-04:00

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.

"The majority of recent economic data has come in below expectations, which has opened the door for discussions about the possibility of more quantitative easing (QE)," says Guggenheim Partners CIO Scott Minerd, in a market commentary yesterday. As Minerd points out, only three weeks ago investors were expecting the Fed to start winding the QE programs down this year, and the release of Fed Open Market Committee meeting minutes bore out this expectation. Some Fed skeptics have recently decried this seeming inconstancy as proof that the central bankers "have no idea what they're doing." However, the economy ebbs and flows, and corrective measures must necessarily adapt.

The chart pictured here shows that, over the last three years, the Fed's QE initiatives have coincided with low points in cyclical indicators such as inflation expectations and commodity prices. Both are currently headed lower, according to the chart. In response, both the Fed and investors are "moving from fear over the reduction of QE to prognostications over the extension or expansion of it." Concludes CIO Minerd: "All of this largely amounts to noise and the more important takeaway is that QE will last through the end of this year, and possibly into next year."

A Short-Lived Hoax

2013-04-24T08:45:00.000-04:00

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.

Shortly before 1:08 pm yesterday, a tweet from the @AP account reported: "Breaking: Two explosions at the White House and Barack Obama is injured." Two minutes later, the AP issued a denial, explaining that their account had been hacked. There was no harm from this malicious and tasteless hoax, except that the US stock markets experienced an instant, $200 billion loss in value, which was quickly recovered after the official denial. The Wall Street Journal reports that "a group identifying itself as the Syrian Electronic Army took responsibility for the fake AP message. The group, which describes itself as 'a group of enthusiastic Syrian youths' who support Syrian President Bashar al-Assad, recently has targeted other media organizations." So much for youthful enthusiasm, but what are the legal consequences of this prank, especially unnerving in the light of the Boston Marathon bombing?

Well, reports the Journal,"Securities and Exchange Commission officials are looking into trading activity that took place in response to the AP tweet," since the hackers or their accomplices could have planned the market-moving news in order to buy on the dip and sell for a quick profit. It's a reminder that insider trading remains one of the few financial crimes for which the accused can expect to have the book thrown at them. If they are caught and prosecuted, those enthusiastic, electronic Syrian youths have only themselves to blame for aiming too low. In the much larger crime of widespread mortgage fraud which precipitated a global financial meltdown, there will apparently never be any prosecutions of top figures.

Error Checking

2013-04-19T09:04:00.002-04:00

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

2013-04-10T16:07:00.001-04:00

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."

Every year at this time, a million high school juniors and their parents travel the country visiting colleges, as I myself did with my niece and her dad last week. Right now, those would-be college applicants are feeling anxious about the diminishing rates of acceptance at the schools of their choice.

Accordingly, they will line up the best teacher recommendations, fill out their resume with many impressive-sounding activities and accomplishments, study hard, get good grades, and take the national aptitude tests after many hours of preparation. They will also, thanks to the Common Application, apply to as many as two dozen schools each, in hopes of boosting their chances of acceptance. This last tactic, while logical in the individual case, is self-defeating in the aggregate, as the proliferation of applications lowers acceptance rates still further, exacerbating the very problem that led to the proliferation in the first place.

The following spring, the problem is reversed, as schools must contend with diminishing yield rates from applicants whose many applications resulted in a fistful of acceptance letters. (The yield rate is the percentage of admitted students who actually commit to attend.)

What can break this vicious cycle of diminishing acceptance rates causing greater numbers of applications, leading to ever more diminishing acceptance rates?

I propose that American colleges and universities come together to create a college application currency system. Each applicant could be virtually issued, say, 100 Franklins (in honor of America's founding father of practical wisdom) to use in applying to colleges. The purpose would be to constrain the number of applications and to signal one's interest in attending a particular institution.

For each Common Application, in addition to whatever fees are payable in real-world cash, the applicant would have to expend between 1 and 100 of their virtual Franklins. Once they have expended the entire 100 Franklins, they may not make any further applications.

The Franklin system would limit the number of college applications, and provide a means of signaling one's interest in each school. While one could choose to make up to a hundred applications, the admissions team at Wassamata U is free to infer more interest from an applicant who sent in 42 Franklins along with their Common App. There would thus be a penalty for spreading one's applications too thinly, and applicants would have to balance the quantity of applications against the quality of interest in each college.

Certainly the current application system functioned well for many years, but there is no denying that it has gone awry. As Mr. Franklin said: "For having lived long, I have experienced many instances of being obliged, by better information or fuller consideration, to change opinions, even on important subjects, which I once thought right but found to be otherwise."

No Run on the Bank

2013-03-28T10:57:00.001-04:00

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."

After a two-week bank holiday in Cyprus, during which the fate of the country's banks and depositors (big and small) hung in the balance, the island's financial institutions reopened at noon today, local time. The international news media showed up in force, expecting panicky scenes of massive bank runs. In fact, this did not occur, to the evident surprise of many commentators. Was the surprise warranted?

It has been widely reported, and Cypriot savers were certainly aware, that the end of the bank holiday would bring sharp restrictions on their access to and use of their cash. With the blessing of the European Commission, the government of Cyprus imposed capital controls, "temporarily" restricting the movement of euros out of the country. At branches of the Bank of Cyprus, withdrawals were limited to €300 a day. Under the circumstances, most local customers seem to have reached the reasonable conclusion that there was no point in rushing to take their money. Given the restrictions in place, a run on the bank would be not only irrational, but impossible.

Quantitative Ending?

2013-03-21T00:04:00.001-04:00

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)."

The Fed open market committee ended its latest two-day policy meeting with little change in the wording of its announcement from those of the last few meetings. That means that the extraordinary policies – such as quantitative easing – meant to combat deep recession and unemployment will remain in place for the foreseeable future. In comments to the press after the announcement, Chairman Ben Bernanke emphasized the "variable" plan in place to unwind the Fed's $85 billion monthly purchases of mortgage bonds and Treasuries. However, the implementation of that plan requires the economy to move beyond "partial" and "modest" recovery into one that "can be sustained for a number of months."

The Fed has previously pegged an unemployment rate of 6.5% as the level at which QE may safely be unwound. However, its own forecast calls for a rate of between 7.3-7.5% this year, leaving some doubt as to whether the ending of easing will precede the ending of Mr. Bernanke's term in 2014.

A Peripheral Question

2013-03-19T09:00:00.000-04:00

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?

This past weekend, the banking crisis in the tiny Mediterranean island nation of Cyprus came to a head with the announcement of a recapitalization plan. However, the plan - co-authored by the "Troika" of the European Central Bank (ECB), European Commission, and the International Monetary Fund (IMF), along with the government of Cyprus - contained a shocking, new element: in addition to a bailout funded by the rich, northern countries, there is a "bail-in" funded by Cypriot savers. In a development that is still open to change at this writing, deposits of €100,000 or less would be subject to a 6.75% levy, and any deposits greater than that could be taxed at a 9.9% rate.

This provision seems designed to ensure that the Cyprus banks' depositors "feel the pain" along with German voters who are asked to underwrite yet another bank rescue in the periphery of Europe. Also, Cyprus has become a huge offshore financial center for wealthy Russians, so the idea of virtuous, hardworking northerners bailing out presumed gangsters and oligarchs is politically explosive in Berlin and Helsinki. However, small savers in Cyprus were supposed to have an ironclad deposit guarantee, which has now been run over roughshod.

Stress Test

2013-03-15T07:00:00.001-04:00

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."

The Fed has announced the results of its annual stress tests of 18 of America's largest banks, and most of them are substantially less favorable than the results calculated by the banks themselves. Nevertheless, 14 of the banks have passed the test, which estimates the adequacy of a bank's capital in the event of a severe economic downturn. The Fed has approved the dividend and share buyback plans of those 14 banks, which include Citigroup, Wells Fargo, Morgan Stanley and Bank of America. The pressure having abated for the moment, these banks may presumably join in this weekend's St. Patrick's Day festivities with clean consciences.

Two other firms - Goldman Sachs and J.P. Morgan - may proceed with dividend and share buyback plans as long as they submit improved capital plans by September. Not so fortunate are Ally Financial and BB&T Corp, for whom dividends and buybacks are verboten for the time being. Ally, the former GM financial arm which is now majority owned by the government, was found to risk depleting its capital if the effectuation of its capital plans were followed by a bad recession. Waxing wroth, the bank responded that its capital levels are more reasonable than the Fed's loan-loss assumptions.

Dividends and share buybacks are favored means of raising a stock's appeal to investors, as they put more cash in shareholders' pockets or raise the share price, respectively. However, both measures reduce capital, a cause for concern among regulators who must ensure the safety and soundness of the financial system.

Things Are Looking Up

2013-03-14T07:59:00.004-04:00

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."

Weekly jobless claims have just been announced as 332,000, much fewer than the consensus estimate. First-time applications for benefits were expected to rise to 350,000 from around 340,000 a week earlier. Claims have been drifting lower, another sign that layoffs have continued to dwindle and that hiring may be picking up. The US job market has presented a mixed but - on balance - positive picture so far this year, with steady but slow job growth offset by a continued long-term unemployment problem. Anecdotally, many search firms report that they are seeing renewed activity in their own business, so the overall picture gives cause for cautious optimism.

Update on Helping the Long-Term Unemployed

2013-03-13T10:36:00.000-04:00

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

2013-03-13T09:21:00.000-04:00

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."

According to the Library of Economics and Liberty, "most governments around the world intervene actively in the operation of their agricultural markets." This is because the volatility of growing conditions leads to volatility of prices, which may cause acute misery to politically sensitive groups. However, political sensitivities play differently in different countries. In the world's many poor nations, especially in Africa, governments intervene to keep the price down, thus calming the potentially restive urban masses. They do so by forcing farmers to sell only to state agricultural boards, which use their monopoly powers to peg artificially low prices. Such tactics tend to disadvantage farmers and discourage production and supply.

In wealthy countries, such as our own, farmers are seen as a naturally disadvantaged class, and governments intervene to set a floor under prices. Of course, such programs have long been exploited by politically connected agricultural producers to reduce their own business risk. One of the most politically connected American agribusiness groups is the sugar industry, which, according to the Wall Street Journal, "has long relied on subsidies that critics say are disproportionate to its contribution to the U.S. economy." The fact that such price support programs come at a substantial cost is underlined by today's news that the US Department of Agriculture is considering buying up to 400,000 tons of sugar to prevent defaults under a program in which sugar producers borrowed $862 million from the government. As the Journal helpfully points out, this is enough sugar to make 142 billion Hershey's Kisses. "The sugar industry has long relied on subsidies that critics say are disproportionate to its contribution to the U.S. economy," writes Alexandra Wexler. Since the loan program began in October, sugar prices have fallen from about 25 cents/lb to roughly 21 cents. Because of that, a program that was supposed to involve no cost to the US consumer has lost $80 million, the most in 13 years.

Help the Long-Term Unemployed

2013-03-12T09:04:00.003-04:00

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'.

One of the most persistent economic and social problems in the US today is that of the long-term unemployed - those who have been without a job for a year or more. As one's working experience recedes into the past, it becomes harder to retain skills that were honed by daily practice, and accordingly more difficult to qualify for a new position in one's industry. Moreover, both data and anecdotal evidence suggest that many in the labor force lack the necessary skills to reach their most productive potential and to fill some of the most urgent vacancies. The United States, in particular, is a long way from number one in the most basic measures of achievement in math, science and reading, according to PISA (the Program for International Student Assessment).

All this points to the importance of rebuilding the nation's skill set as a means of rebuilding our workforce and employment rate. Is it possible that concerted action by the public and private sectors could accomplish this goal? It seems more likely than either fiscal stimulus - politically imposssible in these days of sequestration - or monetary stimulus, which amounts to pushing on a zero-interest-rate string. The Fed, in particular, has been forceful in declaring that it will stick with its quantitative easing programs and zero-interest-rate policy until unemployment comes down to 6.5% (from the current level of 7.7%). However, it's hard to make the case that QE and ZIRP have contributed much of anything to the modest employment growth the US, while their contribution to the rather mystifying stock rally seems undeniable.

High? What High?

2013-03-08T07:00:00.001-05:00

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."

All the fuss over the record-breaking Dow Jones Industrial Average figures this week has brought out the wet blankets who like to spoil the fun by adjusting things for inflation. "The Dow Jones' new high is fake," says the Washington Post's Ezra Klein, who points out that, to equal the inflation-adjusted record set at the height of the Dot-Com bubble in 2000, the Dow would have to surpass 15,731.54 - 9.8% higher than Thursday's close of 14,329.49.

But why stop at an inflationary critique? Other commentators have taken down the DJIA itself as a "lousy", "ridiculous" way to measure stock market performance. This is because, as even Charles Dow himself realized back in 1896, his eponymous index simply adds up the prices of the companies that it comprises, with no further weighting or adjustment. Thus, two of America's biggest companies - Apple ($AAPL) and Google ($GOOG) - cannot be used in the index because their very high per-share prices ($430.58 and $832.60) would throw off the average. Instead of a price-weighted index such as the Dow, it's more useful to measure the market with an index weighted by market capitalization (i.e., the total value of each company), such as the S&P 500. And while you're at it, don't forget to do so in constant dollars.

Dow Jones Record High

2013-03-06T09:10:00.000-05:00

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.

The Dow Jones Industrial Average reached a new high yesterday, ignoring continued low growth and policy paralysis in the US. The Dow closed at 14,254, passing its previous high of 14,164.52 in October 2007. The stock market's remarkable recovery, in the face of a tepid comeback in the real economy, appears to reflect both a surge in US corporate profits and the Fed's quantitative easing programs, which have lowered the rates of return on "safe" investments such as bonds, and thus driven investors into riskier assets such as stocks.

As shown in the graphic at right, the market's recovery is also not good news for the job market, which is stuck at around 8% unemployment, and has not regained the mid-level-wage jobs lost in the mini-depression. It is on the high and low ends of the wage scale that any rehiring is occurring. There is an unpleasant, but inescapable sense in which the bad employment figures have actually contributed to, rather than detracted from corporate profits. Companies have been able to achieve higher productivity with fewer workers, and the high unemployment rate has held down wages, i.e., labor cost.

Safe Investments?

2013-02-28T07:00:00.000-05:00

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."

Sometimes you hear something interesting at one of those presentations that investment advisors love to arrange. On Wednesday evening, Dr. Goose was a guest of Marc Leibowitz at Oppenheimer & Co. in Florham Park, New Jersey, and the featured speaker was Matthew Murphy, a global portfolio specialist at Eaton Vance. Unlike the standard investment company approach of managing against benchmarks (such as the S&P 500 or JP Morgan bond indices), Eaton Vance manages expected returns against expected risks, and they are judged on their Sharpe ratios; i.e., the ratio of return to volatility. The most striking manifestation of this approach is a complete disregard of benchmarks and traditional, "prudent man" asset class allocations, in favor of a top-down evaluation of expected risks and returns, with allocations made accordingly.

This means, for example, that Mr. Murphy's portfolios would not have risk-averse investors, or those who will soon need liquidity, in US Treasuries, because of the imminent expected losses in that asset class. The Fed's zero interest rate policies have pushed their yields down and their prices up as far as they will go, so the expected distribution of returns is asymmetric, with almost no upside but a large downside, as the Fed eventually reverses its quantitative easing programs and raises rates again.

So where is Eaton Vance bullish? Mr. Murphy extolled the economies and, by extension, the currencies and government bonds, of Serbia, Sri Lanka and Uruguay. In all three countries, the firm takes note of dramatic, fundamental improvements to economies that had been held back by civil or political strife, and where foreign investment is expected to increase, boosting the respective values of the dinar, rupee and peso. In the meantime, rates on their short-term government debt are in the 9% range, offering some cushion against the risk of loss. It's an interestingly contrarian perspective on markets that most people would consider too risky to touch. In the meantime, be careful with those T-notes!

Disclosure: Dr. Goose is not invested in any of the aforementioned assets, including the Eaton Vance Global Macro Absolute Return Advantage Fund; treasury bills of Sri Lanka, Uruguay or Serbia; or tea leaves, beef processing or trans-Balkan toll roads.

Bernanke's Records

2013-02-27T09:29:00.000-05:00

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 New York Times' Catherine Rampell writes that Fed Chairman Ben Bernanke had an "oh, snap!" moment in front of the Senate Banking Committee during his testimony on Tuesday. Defending himself against attacks on the Fed's monetary stimulus programs, such as quantitative easing and Operation Twist, Bernanke said: "You called me a dove. Well, maybe in some respects I am, but on the other hand, my inflation record is the best of any Federal Reserve chairman in the postwar period, or at least one of the best, about 2 percent average inflation." In fact, it's true: since the Great Depression, in which an undesirable state of deflation reigned, no Fed chairman has presided over such a consistently low CPI.

So can the Chairman "drop the mic"? Not so fast, says the Times' Floyd Norris. On the other half of the Fed's dual mandate, to "promote effectively the goal of maximum employment," Mr. Bernanke looks like a "sucka MC". Among the postwar Fed chairmen, only Paul Volcker presided over a higher unemployment rate.

Paul Volcker, 7.7%
Ben S. Bernanke, 7.3%
Arthur Burns, 6.3%
G. William Miller, 5.9%
Alan Greenspan, 5.5%
Thomas McCabe, 5.0%
William McC. Martin, 4.6%

Mr. Norris sums it up: "All this means very little in determining how good a job Mr. Bernanke has done. He, along with others, deserves credit for keeping the Great Recession from being even worse than it was. The weak world economy had a lot to do with keeping inflation low and unemployment high. He does not deserve credit for the first, or blame for the latter."

The Difference 2% Makes

2013-02-26T11:58:00.000-05:00

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!"

In Washington and on Wall Street, we're all talking about the looming sequester, but many Americans are still waking up to the impact that the New Year's Fiscal Cliff deal has had on their take-home pay. The most consequential component of that deal - the non-renewal of temporary payroll tax cuts - has reduced the net wages of every American by 2% of their gross wages. In other words, thanks to the resumption of the 6.2% payroll tax rate from 4.2%, if you make $100,000 a year, you're now cashing $2,000 less per annum. Considering that per capita discretionary income (defined as the amount remaining after monthly bills and other necessary spending are deducted from after-tax income) ranges from $7,000 to $9,000 across the United States, such a net wage reduction makes a big difference.

You wouldn't know this from recent reports, however. Typical is a story heard yesterday on NPR, which asks if it's "too soon to blame payroll taxes for stagnant retail sales?" Although downscale companies from Burger King to Walmart are attributing weak sales to the payroll tax hike, or forecasting weakness on account of it, retail sales did not fall in January overall. (It should be noted that this flat trend follows a weak December.) The public radio report quotes Christopher Carroll, an economics professor at Johns Hopkins University: "He says that while it's likely smaller paychecks will affect spending eventually, we just don't know yet." Auto sales have also started the year strongly, fueled by cheap credit and the need to replace an aging fleet of cars. However, no matter how delayed the effect of reducing discretionary income, simple arithmetic says it must be felt soon, if it hasn't been already.