The Big Picture | Wages & Income

Advice for Billionaires on Getting Things Done

Thursday, May 08, 2008 | 02:00 PM

Nice productivity round up for you billionaire TBP readers -- but much of the advice is applicable to everyone else.

While toys and baubles are nice, the one thing you can never have enough of is free time. "Days, hours and minutes are the new currency, the units by which the very successful measure their worth."

So how does one perfect the art of time hogging? Here, a few tips from the masters:

Delegate.
Delegate the delegating.
Don’t read—digest.
Jump the gun.
Prebook.
Don’t divorce.
Skip the party.
Simplify.

Note that the headings do not do the piece justice -- you really have to click through and read it.

My favorite quote in the piece? "Marrying a mistress just creates a vacancy."

Man, that's just cold.

Source:
Time Bandits
Gordon Bennett
W Magazine, May 2008
http://www.wmagazine.com/celebrities/2008/05/delegating?currentPage=all

via kottke

Productivity

Wednesday, May 07, 2008 | 01:30 PM

in Data Analysis | Economy | Wages & Income

While I am having lunch, check out this very cool chart porn on Productivity via Brian Jacobs:

click for ginormous graphic

Bracing for NFP Day

Friday, May 02, 2008 | 07:23 AM

in Data Analysis | Economy | Employment | Wages & Income

Once more unto the breach, dear friends, once more:

The monthly NonFarm Payroll report rolls out today, and the consensus is none too cheerful: Median estimates of 82 economists surveyed by Bloomberg for April 2008 is for a job loss of -75,000 (Dow Jones had -85,000). Estimates ranged from -150,000 to -18,000. None of the economists surveyed had a positive estimate.

Imagine that: +5,000 is a huge upside surprise.

Let's review the data points leading to NFP, starting with the positive arguments:

• According to Greg Mankiw there is no recession. Brian Wesbury agrees.

• James Pethokoukis went even further: "Out: Recession. In: Expansion."

• Today's WSJ notes: "In the past 10 business cycles, year-over-year growth in payrolls has averaged 3% in the 12 months leading up to a recession. Twelve months before payrolls peaked this time around, job growth averaged just 1.5%. That could mean there's not a lot of payroll fat to be trimmed in this downturn. It could explain why weekly claims for unemployment benefits still haven't climbed to 400,000, the level associated with recessions."

• ADP employment report shows addition of 10,000 jobs in April.

Hey, that's not too awful sounding -- why are the economists so negative? Let's consider a few reasons:

• ADP forecast a gain of 10,000 this month. How is that a negative? ADP has significantly understated job losses over the past 5 months. Their overestimates of private payrolls averaged +117,000. So if ADP remains consistent, a triple digit loss is a distinct possibility.

• Jobless claims data were 380,000 (April 26th week) -- these are levels consistent with large payroll losses. Also, continuing claims backlog surged 74,000 to new highs (3.019 million). I expect we will see 5.5% unemployment rate by Labor Day.

• BLS has been adding Business Birth/Death estimate jobs at a rate equal to or greater than 2007 rates -- a worrisome sign.

• Recent sentiment surveys -- University of Michigan sentiment index surrounding the job market outlook was at the worst level since January 1991. The Conference Board perceptions over the labor market deteriorated markedly in April; their ‘jobs-are-plentiful’ index printed its lowest level in nearly three years.

• Challenger layoffs were 90,015 in April -- a 68% increase from March, and up 27% Year over year, toa 19 month high.

• Manpower hiring index sank in 2Q to 14 from 17 in the first quarter and 18 a year ago. This was the softest result in four years. Merrill Lynch's David Rosenberg points out that "a 14-ish number in the past has often coincided with recession and deepening job losses – 2001Q3, 1990Q3, 1981Q1 just to name a few."

Bottom line: A positive number would be a huge surprise; a 6 figure loss is a small but distinct possibility . . .

Sources:
Job Cuts May Not Get Too Deep
MARK GONGLOFF
WSJ, May 2, 2008
http://online.wsj.com/article/SB120968657093061245.html

The ADP National Employment Report
April, 2008
http://www.adpemploymentreport.com/pdf/FINAL_Report_Apr_08.pdf

Manpower Employment Outlook Survey
Q2 2008, United States
http://tinyurl.com/6nzemt

Creating Fake Alpha

Monday, April 28, 2008 | 08:00 PM

in Corporate Management | Derivatives | Wages & Income

Saturday's discussion about the UBS report, including the post on banker's compensation, led to some intriguing email from people who must remain nameless because of their professional affiliations.

Included amongst the feedback was the phrase "Creating Fake Alpha," which I had first read in John Cassidy's Portfolio column earlier this month, titled The Banker's Bailout:

"Then there is the central and controversial issue of how to pay people who work for financial firms. In blowup after blowup, compensation schemes based on short-term performance have encouraged traders, division heads, and C.E.O.’s to act recklessly.

In the typical case, a trader or executive places a bet that pays off immediately—or soon enough to increase the individual’s bonus or stock-options value—but exposes the firm to long-term dangers.

Examples include Merrill’s decision to step up its production of mortgage securities just as the outlook for the real estate market darkened and Bear’s refusal to keep an adequate reserve of cash on hand. Earlier this year, Raghuram Rajan, a former chief economist at the International Monetary Fund, referred to such behavior as “creating fake alpha—appearing to create excess returns but in fact taking on hidden risks.”

One possible solution to this is to "force traders and senior executives to take a more long-term view." And the way you accomplish that is simple: Pay the traders and risk managers in stock or options that don’t vest for five or 10 years.

Perhaps when we look back at this era from a future vantage point, we will see that this was the last great era of finance (see today's WSJ: Is Finance's Economic Role Ebbing?).

I wonder if the bankers and financial engineers responsible for creating the subprime meltdown and the credit crunch may have finally killed the goose that laid the golden eggs . . .

~~~

What say ye?

Previously:
UBS $37B Write Down, Part II: Compensation
http://bigpicture.typepad.com/comments/2008/04/ubs-37b-write-d.html

Sources:
Analyzing Bear Stearns' Bailout
John Cassidy
Portfolio, Apr 14 2008
http://www.portfolio.com/views/columns/economics/2008/04/14/Analyzing-Bear-Stearns-Bailout

Is Finance's Economic Role Ebbing?
Sector May Make Up Smaller Part of GDP as Jobs Are Being Cut
JUSTIN LAHART
WSJ, April 28, 2008
http://online.wsj.com/article/SB120933096635747945.html

Related:
Switching boats in midstream to ride out credit storm
John Dizard
FT, August 14 2007 03:00
http://www.ft.com/cms/s/0/0739ecac-49fe-11dc-9ffe-0000779fd2ac.html

Bankers’ pay is deeply flawed
Raghuram Rajan
FT, January 8 2008 18:04
http://www.ft.com/cms/s/0/18895dea-be06-11dc-8bc9-0000779fd2ac.html

UBS $37B Write Down, Part II: Compensation

Saturday, April 26, 2008 | 11:26 AM

in Corporate Management | Derivatives | Wages & Income

Buried at the end of the report discussed earlier is the specific criticism of the financial compensation system in place at UBS for traders and the engineers of structured products.

The bigger question is how little their quaint little system differs from any other large bank or brokerage firm on Wall Street. Remind me to ask Johns Thain & Mack about that.

Excerpt:

6.3.8 Compensation

UBS has identified the following contributory factors related to compensation and incentives:

• Structural incentives to implement carry trades: The UBS compensation and incentivisation structure did not effectively differentiate between the creation of alpha (i.e., return in excess of a defined expectation) versus the creation of return based on a low cost of funding.

• Asymmetric risk / reward compensation: The compensation structure generally made little recognition of risk issues or adjustment for risk / other qualitative indicators (e.g. for Group Internal Audit ratings, operational risk indicators, compliance issues, etc.). For example, there were incentives for the CDO structuring desk to pursue concentrations in Mezzanine CDOs, which had a significantly higher fee structure (approximately 125-150 bp) than High-Grade CDOs (approximately 30-50 bp).

• Insufficient incentives to protect the UBS franchise long-term: Under UBS’ principles for compensation, deferred equity forms a component of compensation that generally increases with seniority. Essentially, bonuses were measured against gross revenue after personnel costs, with no formal account taken of the quality or sustainability of those earnings.

Gee, with that compensation structure in place, how could anything possibly go awry . . . ?

Previously:
Report on UBS' $37 Billion Writedown
http://bigpicture.typepad.com/comments/2008/04/report-on-ubs-3.html

Related:
Bankers’ pay is deeply flawed
Raghuram Rajan
FT, January 8 2008 18:04
http://www.ft.com/cms/s/0/18895dea-be06-11dc-8bc9-0000779fd2ac.html

Middle Class Squeeze

Monday, April 21, 2008 | 05:30 PM

in Employment | Inflation | Wages & Income

You may have missed this info graphic in the WSJ over the weekend.

click thru for full interactive graphic

Source:
Are You Better Off Now Than Eight Years Ago?
Kelly Evans
Real Time Economics, April 19, 2008, 12:31 am
http://tinyurl.com/3zm6xf

Hedge Fund Compensation

Sunday, April 20, 2008 | 08:04 AM

in Corporate Management | Wages & Income

Earlier this week, I asked, "What's Wrong With Billionaire Fund Managers?"

We noted the very top % of this profession carried enormous compensation for those Alpha creators who earned tremendous returns for their partners. Most of the top earners are also have very significant holdings in their own funds. They not only get paid for taking risks with OPM, but with their own money at risk as well.

At the same time, if you really want to be upset at enormous paydays, the collection of thieving former CEOs who helped destroy shareholder value then parachuted out with 100s of millions of dollars were better targets for your ire.

All About Alpha looked at manager compensation from a different perspective, and asked Is high hedge fund compensation really that new?

Their approach was from a different angle, based on both earnings size and source

1. Appreciation vs. Compensation
2. Paper vs. Cash
3. Income vs. Options
4. “Creating” vs. “Speculating”

Here is the quadrant they put together:

In today's NYT, Harvard prof Greg Mankiw also looks at wealth disparities, using Lloyd C. Blankfein, chief executive of Goldman Sachs and Bill & Hillary Clinton as examples (The Wealth Trajectory: Rewards for the Few).

Note to Professor Mankiw: From a statistical perspective, perhaps another example from a pool of candidates greater than three (living former US Presidents) or one (the most recently retired President) might be more suitable, informative and tad a less political. That choice tainted an otherwise fine article...

Courtesy of NYT

Previously:
What's Wrong With Billionaire Fund Managers? http://bigpicture.typepad.com/comments/2008/04/whats-wrong-wit.html

Source:
Is high hedge fund compensation really that new?
All About Alpha, 17 April 2008
http://allaboutalpha.com/blog/2008/04/17/is-high-hedge-fund-compensation-really-that-new/

The Wealth Trajectory: Rewards for the Few
N. GREGORY MANKIW
NYT, April 20, 2008
http://www.nytimes.com/2008/04/20/business/20view.html

Disappearing Economic Indicators

Friday, April 18, 2008 | 06:47 AM

in Data Analysis | Employment | Psychology/Sentiment | Taxes and Policy | Wages & Income

First M3, now . . .

Sometimes, when the data is (how shall we say this) less than delightful, politicians pressure bureaucracies to modify their models. This attempt to misrepresent reality goes back at least to JFK, and probably much further. It is not party specific, but is a characteristic of the all too common creature, Politico Disinguousi.

Yesterday, we discussed the unprecedented seasonal changes to CPI (Pre-Revision CPI: 9%) that managed to all but eliminate inflation reporting. And the absurdity that is the birth death adjustment has all but completely bastardized the Non-Farm Payroll (NFP) data series. Of course, the cowardly scam that was the Boskin Commission was the most outrageous change in modeling over recent decades.

More brazen politicos don't even bother gunking up the models -- they simply press to stop reporting the data. The most egregious example of this in the recent past was M3 reporting. We noted as it happened that once the Fed decided to save a few pennies stopping M3 reporting, you knew that M3 was going to skyrocket.

And so it has.

Recently, there was an attempt to close Economicindicators.gov; That was a warning the economy was about to worsen. Thanks to readers and NY Senator Schumer, it was successfully beat back.

The latest such attempt at reducing economic information is brought to our attention by the WSJ's Real Time Economics. They note that:

"A statement from the chair of the NABE’s statistics committee, Haver Analytics President Maurine Haver, asserted that “just when reliable and timely indicators are needed most, resources devoted to their production at our federal statistical agencies have been cut, requiring the termination of data series or a reduction in sample sizes used to produce the data.”

Ms. Haver catalogs the casualties of budgetary tightening, writing that “the Bureau of Labor Statistics (BLS) has been forced to terminate all hours and earnings data reported for local areas as well as payroll employment for 65 small metro areas. The BLS International Price Program has also eliminated a number of series including prices of transportation services such as passenger air fares, air freight, and crude oil tanker freight. The Census Bureau will discontinue its Survey of Alterations and Repairs in May. The Bureau of Economic Analysis will reduce the level of industry detail in its county data and will eliminate the benchmark capital flow tables that provide baseline data on industry-by-industry investment by type of investment. This may only be the beginning.”

Let's draw the appropriate conclusion from this: First M3 reporting stopped, and shortly thereafter, M3 skyrocketed. Next was the attempt to stop aggregating general economic information, and then we learned that GDP fell off the cliff.

Now comes the attempt to reduce the reporting of hours and earnings data. Gee, can you guess what coincidence is about to happen?

Let me end your suspense: Workers Get Fewer Hours, Deepening the Downturn.

"Throughout the country, businesses grappling with declining fortunes are cutting hours for those on their payrolls. Self-employed people are suffering a drop in demand for their services, like music lessons, catering and management consulting. Growing numbers of people are settling for part-time work out of a failure to secure a full-time position.

The gradual erosion of the paycheck has become a stealth force driving the American economic downturn. Most of the attention has focused on the loss of jobs and the risk of layoffs. But the less-noticeable shrinking of hours and pay for millions of workers around the country appears to be a bigger contributor to the decline, which has already spread from housing and finance to other important areas of the economy.

While official unemployment has risen only modestly, to 5.1 percent, the reduction of wages and working hours for those still employed has become a primary cause of distress, pushing many more Americans into a downward spiral, economists say.

Moreover, this slippage is a critical indicator that the nation may well be on the verge of a recession, if not already in one.

Last month, the hours worked by those on American payrolls dropped, compared with six months earlier, according to an index maintained by the Labor Department. The last time the index moved into negative territory was February 2001, when the economy was on the doorstep of recession. A similar slide emerged in August 1990, one month into what proved an even more severe downturn."

Now what were the odds of that ?

Previously:
Can M3 be Saved?
http://bigpicture.typepad.com/comments/2006/03/can_m3_be_saved.html

WTF? Feds Shutting Down Economic Data Site http://bigpicture.typepad.com/comments/2008/02/wtf-feds-shutti.html

Sources:
A Slump in Economic Indicators
Matt Phillips
April 14, 2008, 12:02 pm
http://tinyurl.com/48urm5

Workers Get Fewer Hours, Deepening the Downturn
PETER S. GOODMAN
NYT, April 18, 2008
http://www.nytimes.com/2008/04/18/business/18hours.html

Some key statistics as prediction aids: M3
NowAndFutures.com, 2008
http://www.nowandfutures.com/key_stats.html

Alternate Data Series
John William's Shadow Stats
http://www.shadowstats.com/alternate_data

WSJ Economists Survey

Friday, April 11, 2008 | 09:00 AM

in Economy | Employment | Inflation | Wages & Income

The latest Wall Street Journal forecasting survey of economists is out (in the free section of the WSJ). Some of the survey respondents' answers might surprise you:

Inflation

As the WSJ chart shows, more often than not, economists as a group have underestimated inflation.

19% of economists said inflation poses the biggest risk to the economy.
42% said inflation poses a moderate risk
31% said it was a minor risk.
8% said it poses no risk at all.

GDP

Dismal? Hardly. In addition to their chipper view of inflation, as a group, Economists consistently overestimated GDP.

Employment
A similar pollyannaish bias: Most of the group underestimated Unemployment, and at the same over-estimated NFP job creation.

Commodities
Economists are divided on whether commodity prices are at a peak: 51% said “yes,” 49% said “no.”

Recession
Here are the probability forecasts for "A Recession will occur over the next 12 months:"
2007 27.1%
2008 42.1%
2009 70.9%

Source:
U.S. Economy Hasn't Hit Bottom, Survey Says
PHIL IZZO
WSJ, April 10, 2008
http://online.wsj.com/article/SB120776362649702195.html

Charts
http://online.wsj.com/public/resources/documents/info-flash08.html?project=EFORECAST07

Stagnant Wages

Wednesday, April 09, 2008 | 10:43 AM

in Economy | Employment | Politics | Wages & Income

I am running out to the AMEX, but I wanted to make sure you read a piece in today's NYT by David Leonhardt: For Many, a Boom That Wasn’t. The entire article is worth reading.

The chart is pretty hard to argue with:

While I agree that many of the contributing factors leading to this wage stagnation were in place for a long time, I think the librul NYTimes gave President George W. Bush too much of a pass:

"The causes of the wage slowdown have been building for a long time. They have relatively little to do with President Bush or any other individual politician (though it is true that the Bush administration has shown scant interest in addressing the problem)."

As you will note in the links below, these are issues we addressed many years ago. This administration chose a stimulus that was, for better or worse, stock market and CapEx focused. While I am not debating the merits of that choice, the selection of those targets -- versus targeting labor and wages -- was a very conscious, ideological choice.

Thus, the policy results are, not totally, but to a not insignificant degree, the responsibility of the administration that selected them . . .

Previously:
Stock Market vs the Economy (September 2003) http://bigpicture.typepad.com/comments/2003/09/stock_market_vs.html

Tax Cuts: Stock Market vs the Economy II (October 2003) http://bigpicture.typepad.com/comments/2003/10/tax_cuts_stock_.html

Accelerated Depreciation of Capital Spending (September 2004) http://bigpicture.typepad.com/comments/2004/09/accelerated_dep.html

Source:
For Many, a Boom That Wasn’t
DAVID LEONHARDT
NYT, April 9, 2008
http://www.nytimes.com/2008/04/09/business/09leonhardt.html

More on Federal Withholding Taxes

Thursday, April 03, 2008 | 08:45 AM

in Data Analysis | Economy | Employment | Wages & Income

Yesterday, I referenced Matt Trivisonno's chart on federal withholding taxes in order to defenestrate some wildly inaccurate research from TrimTabs. I don't know what the specific methodology employed by TrimTabs actually was, but simply calling 4.1% tax receipt increase proof that the recession is now over, in light of the overall data series, is not only wildly poor math, its awful analysis.

Let's revisit the issue of federal withholding data, only this time considering a different time frame: If we look at the quarterly data, instead of the shorter term charts, we see something interesting: Quarter-over-Quarter, withholdings are now down 0.09% - the first negative quarterly number since 4Q03.

Note how comparable this first quarterly drop in years is to the first recessionary quarter in 2001.

Quarterly Percentage Gains, Federal W/H Tax Receipts

Chart courtesy of Matt Trivisonno

Here's the odd thing about this: I went from trashing a horrific quote by Biderman (Blaming the Retail Investor) to praising his intellectual flexibility (Consumer Spendables Indicator) to critiquing his firms flawed analysis (TrimTabs: Its a Recession, and Its Already Over (Wrong)).

I don't know what the significance of this is, but I thought it was worth pointing out . . .

Uh-Oh: Cars/Vacations/Flat Panels Not Tax Deductible

Monday, March 31, 2008 | 06:30 PM

in Economy | Employment | Real Estate | Taxes and Policy | Wages & Income

Here's some more bad news for John Q. Public:

We all know that the fun of the past few years Housing binge / ATM withdrawal / GDP Party is long since over. But it turns out that the hangover isn't nearly done.

Why is that? Well, one of the advantages of Home Equity financing is that if you use the proceeds for capital improvements to the home -- *new floors, walls or lighting, installing central A/C, removing trees, refurbishing bathrooms, new lawns or gardens -- then it has the same tax deductiblity as if it were a primary mortgage.

What abut if you use the proceeds for other, non-capital improvement purposes?

From Realty blog Patrick.Net:

"Word from the IRS is that they are auditing people based on refiances on their house. If you refied and pulled money out of the house and use for other purposes than home improvement you can not claim that as Mortgage Deduction, needs to be claimed as Interest expense. Guess what, they want proof of home improvements…"

Uh-Oh !

Why do I smell some big trouble coming down the road for some people?

Source:
Refi Interest Trap?
March 28th, 2008
http://patrick.net/wp/?p=594

_______________________
* What we did to our home

Was 2007 Q4 GDP Positive -- or Negative ?

Monday, March 31, 2008 | 11:52 AM

in Consumer Spending | Data Analysis | Economy | Wages & Income

Many breathed a sigh of relief over the final revision of 2007 Q4 GDP. However, we took a closer look to at some of the data to see what was happening beneath the surface.

Our advice to those who think we escaped recession in Q4 2007: Not so fast.

As you might have guessed, actual below-the-headline data was less encouraging than even that weak 0.6% final number.

Under Gross Domestic Purchases, the BEA wrote:

"Real gross domestic purchases -- purchases by U.S. residents of goods and services wherever produced -- decreased 0.4 percent in the fourth quarter, in contrast to an increase of 3.3 percent in the third."

Real gross domestic purchases are purchases made by U.S. residents of goods and services wherever they are produced (domestic and imports). They decreased 0.4% in the Q4, very significant drop when compared to the 3.3% increase in Q3. Add to that the Gross private domestic investment decline of 2.2% in Q4.

Given those huge swings, how was it possible that GDP in Q4 was still positive?

It all comes down to the Current-dollar GDP (and the implied implied price deflator). Current dollar GDP was lowered by a significant 0.3% more than was expected.

Why does this matter? Real GDP (after inflation) is obtained by dividing nominal GDP by the GDP deflator (x 100). The smaller the deflator is, the less of GDP gains can be attributed to inflation. Had the change to above not occurred, Real GDP would very likely have been 0.0% -- or worse.

UPDATE: March 31, 2008, 1:30pm

I just got off the phone with BEA -- in the current GDP release, the changes in Q4 Current-dollar GDP were due to lowered "Imputed Financial Services" prices.

Let me also emphasize that I am not in the "books-got-cooked" camp. I am merely trying to wrap my head around how Real GDP was the same, but current dollar GDP fell so precipitously when compared to the last revision . . .

~~~

Given the impact of Inflation on GDP, is there another measure that might provide a clearer picture of the economy's direction without the pernicious impact of rising prices?

It turns out there is: Last year, Fed economist Jeremy Nalewaik suggested a different measure: GDI, or Gross Domestic Income. Nalewaik argued in a 2007 paper that GDI "has done a substantially better job recognizing the start of the last several recessions than has real-time GDP."

According to Nalewaik, GDP-based models did much worse at forecasting recessions than did GDI: The past four recession odds at their actual starting points were only of 52%, 40%, 45% and, for the 2001 recession, just 23% according to GDP data. The alternative measure of GDI did much better, signaling odds of a recession of 78%, 44%, 72% and, for 2001, 70%.

And what of today? Recent data shows an annualized GDI decline of 1% -- its largest drop since the 2001 recession.

While many people are debating whether or not the economy will fall into recession, the GDI data suggest that we are already in one -- and have been for several months.

Sources:
GROSS DOMESTIC PRODUCT: FOURTH QUARTER 2007 (FINAL)
FOURTH QUARTER 2007
MARCH 27, 2008
http://www.bea.gov/newsreleases/national/gdp/2008/pdf/gdp407f.pdf

Estimating Probabilities of Recession in Real Time Using GDP and GDI
Jeremy J. Nalewaik
Federal Reserve, December 19, 2006
http://www.federalreserve.gov/pubs/feds/2007/200707/index.html

Did Economy Really Escape Fourth Quarter Drop?
Brian Blackstone
WSJ Real Time Economics, March 27, 2008, 2:02 pm
http://blogs.wsj.com/economics/2008/03/27/did-economy-really-escape-fourth-quarter-drop/

4th-Quarter Data Confirms Frailty of the Broad Economy
THE ASSOCIATED PRESS
Published: March 28, 2008
http://www.nytimes.com/2008/03/28/business/28growth.html
>

~~~

Changes in US Withholding Taxes

Monday, March 24, 2008 | 07:12 AM

in Consumer Spending | Credit | Economy | Taxes and Policy | Wages & Income

Matt Trivisonno, a software developer in Miami Beach who follows the market, has come up with a neat way to track changes in the Federal Government's witholding tax receipts.

After being rangebound for the prior 4 years, the year-over-year growth in withholding began rolling over in Q4 of 2007 -- a possible date marking the beginning of the current recession:

click thru for larger graph
Source: Matt Trivisonno's Blog
>

Note that withholding comes directly from Wages and Income, and would likely precede major shifts in consumer spending or credit.

See also:
In Debt Crisis, Uncle Sam Is Piling It On
Mark Gongloff
WSJ, March 24, 2008; Page C1
http://online.wsj.com/article/SB120632203228958435.html

~~~

Latest Bank Headache: Home Equity Loans

Wednesday, March 12, 2008 | 07:58 AM

in Credit | Economy | Finance | Psychology/Sentiment | Wages & Income

"This product was meant to help people do construction on their house, [and] do debt consolidation -- not to take out every last dollar of equity in their home to finance a different kind of lifestyle."

-Charles Scharf, head of J.P. Morgan's retail business.

That is, in a short phrase, the reason that the US consumer is all spent out. They used debt and home equity -- as opposed to Income gains -- to finance an improving lifestyle. After the vacations are passed, the big screen TV and new cars become old, what are you left with?

Appreciation in the value of your home has long been considered a form of forced savings. (As in don't eat your seed corn). The economic boost is over, the savings impact is significant, and you are left with a financial hangover. Talk about a negative wealth effect.

For the banks, it raises all different manners of headaches. Unlike Mortgages, Home Equity loans are secondary against the collateral -- the house itself:

"While banks can foreclose on a first-lien mortgage, lenders often have little recourse when trying to collect a delinquent home-equity loan, especially if another bank holds the primary mortgage. Banks holding home-equity loans generally can only seize the collateral -- a house -- after the mortgage is paid off.

When another bank holds the mortgage and the mortgage payments are current, the home-equity lender is effectively powerless to collect the debt.

Unfortunately for home-equity lenders, many borrowers understand that pecking order, concluding there are few repercussions if they stop making payments on their home-equity loan . . . Other types of consumer loans also are souring, including credit cards and auto loans. But delinquent home-equity loans are rising faster, representing 12.5% of all delinquent loans in the fourth quarter at Bank of America Corp., the largest U.S. bank in stock-market value. That was up from 9.4% in last year's first quarter, according to research firm SNL Financial.

Pretty amazing stuff.

The bankers are finally asking themselves "How the hell did we get into this mess?" The answer surprises no one:

Leaning on outside mortgage brokers for home-equity business was "one of the biggest mistakes we've made." Those loans have performed worse than home-equity loans generated by J.P. Morgan.
-Charles Scharf, head of J.P. Morgan's retail business.

Indeed . . .

Source:
Latest Trouble Spot for Banks: Souring Home-Equity Loans
Losses May Hit Lenders That Skirted Subprime; Surprise Delinquents
ROBIN SIDEL
WSJ, March 12, 2008
http://online.wsj.com/article/SB120527998662928743.html

NonFarm Payroll Day: Not-So-Great Expectations

Friday, March 07, 2008 | 07:09 AM

in Economy | Employment | Wages & Income

We've been looking at various unemployment rates lately, heading into today's NFP report at 8:30 am.

A few things worth mulling over while we await that data point:

• Trend: The overall trend for the past 3 years has been decellerating job creation, and increasing unemployment. Of the two, job creation is the data series that has gotten appreciable worse the fastest;

• Birth/Death adjustment typically swings from a big negative in January to a big positive in February. This may skew today's results upwards.

• ADP data was a big downside surprise;

• Unemployment rates have only begun to move up, 0.50% off of the lows to ~4.9%. Initial and continuing claims for jobless benefits have been rising steadily. The risk is if and when this series begins to accelerate upwards.

• Today's consensus number is for 25,000 new jobs, from a range of -50,000 to +50,000;

• For unemployment, the consensus is a 5.0%, with a range from 4.9% to 5.1%. No one thing UR is getting any better, but few think its is getting much worse too quickly.

Rex Nutting points out two additional factoids: 1) The number of consumers who say jobs are hard to get increased sharply in the Conference Board survey in February; and, 2) Employment subindexes have fallen in the Institute for Supply Management and other similar business surveys. Neither of these are positives leading into today's NFP.

Remember, any single data point in a volatile series is relatively meaningless; Its the overall trend that matters.

Note: I am out of pocket for the next few hours, ending up at Bloomberg TV, and won't be able to follow up for some time . . .

Source:
Job growth has slowed to a crawl, economists say
Rex Nutting
MarketWatch, 7:39 p.m. EST March 6, 2008
http://tinyurl.com/3xtzu7

Hackonomics, Part II

Thursday, February 21, 2008 | 12:30 PM

in Economy | Taxes and Policy | Wages & Income

A quick follow up to last week's Hackonomics discussion, where we looked at how little alleged wealth inequality there is in America.

Part of our critique was that dividing the US into quintiles was a variation of the median/average error, and only served to hide the exhorbitantly greater wealth, income and consumption of the top few percent. To that end, there are two peices of evidence I want to point you towards: One anecdotal, and one data driven.

The first one is THE ONE PERCENT, to be shown Thursday night on Cinemax, at 6:30pm Eastern (and throughout the month). The film is directed by Jamie Johnson (yes, Johnson as in the Johnson Johnson & Johnson). Its his follow up to his "Born Rich,” shown on HBO in 2003.

Here's the Cinemax description:

Four years after turning his camera on himself and other affluent youths in his documentary Born Rich, filmmaker Jamie Johnson presents this look at the "wealth gap": the growing divide between the rich and the poor in America. In this film, the 27-year-old heir to the Johnson & Johnson fortune explores the political, moral and emotional rationale that enables a tiny percentage of Americans--the one percent--to control nearly half of the wealth in the entire country. Along the way, Johnson collects the points of view from a wide variety of Americans, ranging from media mogul Steve Forbes and Kinko's founder Paul Orfalea to Florida taxi drivers and Chicago residents in danger of losing their low-income homes. (TVG) (NA)

Looks to be rather intriguing.

One last thing: In the original Hackonomics, I buried the detailed spending habits of the of the upper echelon of wealth in America. I suspect you will find this data a bit more unequal than the quintile nonsense we saw from Alm and Cox.

Here is how this group spent their money as follows:

Dollars Spent Category - 2007 Spending per Affluent Elite Household
                    Category           Category
                    Spending           Spending
Summer Spending        *       2007       *      2005    Change 2007/2005
Activity               %      $ Spent     %     $ Spent  $Change %Change
Yacht Rentals        10.60%  $384,000    9.50% $317,000  $67,000  21.14%
Redecorating         44.90%  $129,000   30.90%  137,000  ($8,000) -5.84%
Villa Rentals        15.70%  $106,000   13.80%  $79,000  $27,000  34.18%
Experiential
Excursions          25.80%  $103,000   22.70%  $79,000  $24,000  30.38%
Jewelry/watches      73.70%  $94,000    63.20%  $63,000  $31,000  49.21%
Luxury Cruises       47.50%  $92,000    43.10%  $71,000  $21,000  29.58%
Charitable Giving    97.50%  $82,000    98.40%  $52,000  $30,000  57.69%
Vacation Home
Rentals             12.10%  $82,000    11.80%  $64,000  $18,000  28.13%
Out-of-Home Spa
Services            67.70%  $61,000    48.70%  $49,000  $12,000  24.49%
Summer
Entertaining        93.90%  $56,000    92.40%  $39,000  $17,000  43.59%
Luxury Hotels        95.50%  $48,000    93.40%  $36,000  $12,000  33.33%
Luxury Resorts       84.80%  $41,000    82.60%  $23,000  $18,000  78.26%
At-Home Spa
Services            53.50%  $38,000    47.40%  $26,000  $12,000  46.15%
Apparel/accessories  92.40%  $34,000    86.80%  $16,000  $18,000 112.50%
Audio/visual         51.50%  $31,000    50.70%  $14,000  $17,000 121.43%
Wines and Spirits
for Social
Entertaining        86.90%  $24,000    77.00%  $19,000   $5,000  26.32%
Wines and Spirits
for Personal
Consumption         84.80%  $17,000    74.30%  $11,000   $6,000  54.55%

                                  2007             2005     $Change  %Change
    Total Luxury Summer
    Spending/Household       $622,202.02        $399,187.50 $223,015  55.87%

    *Percentage of those surveyed spending in this category
Survey of Households with Net Worth $10 Million +

Prince & Associates (2007)

Yeah, that consumption spending looks pretty egalitarian to me! I got your top quintile RIGHT HERE.

~~~

Source:
A Gaping Divide: Straddling Capitalism’s Fault Line
By GINIA BELLAFANTE
NYT, February 21, 2008
http://www.nytimes.com/2008/02/21/arts/television/21bell.html

The One Percent
Jamie Johnson
February 19, 2008 | 06:31 PM (EST)
http://www.huffingtonpost.com/jamie-johnson/the-one-percent_b_87459.html

see also

Borrow and Spend
Floyd Norris
NYT, February 11, 2008, 12:42 pm
http://norris.blogs.nytimes.com/2008/02/11/borrow-and-spend/

Consumption and Income Inequality
Economist's View February 10, 2008
http://economistsview.typepad.com/economistsview/2008/02/consumption-and.html

What is wealth?
Saturday, May 22, 2004 | 08:34 AM
http://bigpicture.typepad.com/comments/2004/05/what_is_wealth.html

Hackonomics

Tuesday, February 12, 2008 | 07:00 AM

in Consumer Spending | Data Analysis | Economy | Wages & Income

"The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists."

-Joan Robinson, Cambridge University

One of the things that really perturbs me are disingenuous, intellectually indefensible commentary consisting of willfully misleading tripe. Up until recently, that territory has been owned by the WSJ OPED pages. This past weekend, the NYT was seen elbowing its way into the same space.

I call this approach to economic analysis Hackonomics.

An OpEd in the Sunday Times is classic Hackonomics. Unfortunately, it takes little craft to slip junk past the editors at the Times OpEd section. Impressive-looking academic or government credentials seems to be all that is required. (Its a shame they don't have, say, a professor from the Princeton Economics department on staff).

Perhaps there is a fear of looking silly or economically ignorant, rather than asking anyone else about any of these "analyses." What we get instead are pieces like You Are What You Spend. The authors are Michael Cox, and Richard Alm, chief economist and senior economics writer at the Federal Reserve Bank of Dallas. As my British colleagues would delightfully articulate, "their work is shite."

To wit: These two gentlemen press forward the idea that the proper manner to review economic inequality should involve looking not at income differentials. Rather, this Fed duo favors a more direct measure of economic status: household consumption. They claim "the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society."

Their analysis is so problematic and their theory so full of holes, that, if time permitted, we could identify errors in nearly every paragraph. That sort of critique is best reserved for serious intellectual analysis of major importance. For Hackonomics, we will simply identify 3 major flaws, and then get on to more pressing and important work.

Let's take a closer look at their arguments:

1. Income Disparity: Abstract? There is nothing "abstract" about income-based measures of poverty or wealth inequality. Merely calling income comparisons "abstract" does not make it so, nor does it make their position any less absurd. Instead, it reads as a transparent attempt by the authors to avoid any income discussion.

Why not discuss income? Perhaps the data is the reason: The share of national income of the wealthiest 1% rose from 14.6% five years ago (2003) to 17.4% in 2005 (Emmanuel Saez, University of California-Berkeley). And since 2005, the wealth disparity has grown even further.

Indeed, as several commentators have already pointed out, these same authors previously tried to make an income based argument that "the gap between rich and poor is far less than most assume" -- and crashed and burned.

Next attempt, please.

Continue reading "Hackonomics"