Art and the Profit Motive

I can’t face the idea of writing another 3,000-word book review, so I’ll blog Sarah Thornton’s Seven Days in the Art World as I’m reading it. I haven’t even got past the introduction yet, but I’ve already found one sentence which is probably a lot more interesting than Thornton intended:

Even the most businesslike dealers will tell you that making money should be a byproduct of art, not its main goal. Art needs motives that are more profound than profit if it is to maintain its difference from–and position above–other cultural forms.

I wish I knew a bit more about what Thornton had in mind here, because frankly art’s "difference from–and position above–other cultural forms" has already been severely eroded, insofar as it ever existed in the first place. Here in Berlin, DVDs comprising four hours’ worth of people dancing on YouTube are being sold for $22,250 apiece, thanks to being editioned and sold off as the work of Assume Vivid Astro Focus.

Elsewhere, the lines between fine art and other media have been blurring since long before Andy Warhol designed an album cover for the Velvet Underground, and even before Henri de Toulouse-Lautrec put his considerable talents to work designing posters for the Moulin Rouge in the late 19th Century. At this point, the dividing lines are all but indiscernible: if Julian Schnabel is an artist-turned-film-director, and John Waters is a film-director-turned-artist, what is Matthew Barney? And what is Chris Cunningham, whose music videos get more play in art shows than they do on MTV? I could come up with similar examples for any other "cultural form" Thornton cared to mention, from theater to music to dance and even fireworks shows. (I might have difficulty with standup comedy, but you get the general idea.)

In each of these examples, I doubt many practitioners of the art in question would meekly agree that art was "positioned above" themselves, just because they don’t exhibit in galleries. And they would all lay claim to "motives more profound than profit".

If there is a difference with fine art, it’s that the collectors are particularly concerned about the profit motive — or at least they often can be. For all that music fans complain about artists "selling out", no one really mind if musicians make a lot of money. And in the film industry, being ridiculously highly-paid is never an obstacle to artistic credibility.

But fine art motivated by profit is considered somehow ignoble. Why, those artists, they just toil away in their studios, doing whatever it is that their creative drive impels them to do; the dirty job of selling their product is outsourced to their gallerists, and the artists would never interfere in that side of things, or deliberately make work just because it will sell for large amounts of money. This fiction clearly it serves a purpose, or else it wouldn’t have made its way into Thornton’s book.

The purpose, I think, is that collectors never want to be reminded that they’re consumers. After all, this is a world where anybody can make their own Damien Hirst spot painting: when a collector buys one for hundreds of thousands of dollars, they’re buying the branding more than they are the object. (When Stevie Cohen bought the first Hirst shark, he even went so far as to throw the original away and get a new one flown in: so long as Hirst signed off on the switch, it was entirely kosher.)

In such a world, insecurities abound — and one way of reassuring collectors that they’re not blowing millions of dollars on the art-world equivalent of Crocs stock is by telling them that, really, it’s not about the money at all. Yes, art might be expensive, but there are lots of things which are expensive. Art, by contrast, has more profound motives. No wonder Thornton describes it as "a kind of alternative religion for atheists".

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Extra Credit, Sunday Edition

Big Numbers, Made Smaller: "G.M. sold 2.29 million vehicles in the quarter. The losses came to $6,756 per vehicle."

How To Get Twitter Wrong: It’s about reading, not writing.

And 15 once we reach Alderaan…: The mathematics of distressed CDS exchanges.

The Woonerf Deficit: More pedestrian-friendly streets means higher property values.

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Blogonomics: The Flame Warriors

Don’t mess with Jim Cramer. He went to Harvard, you know.

You swear a whole lot, but sometime you may want to learn the proper usage of “than” and “then”. Your “even than” manages to make you look even less educated THAN you are, which I didn’t think was possible, but THEN what do I know? I only went to Harvard.

Thanks,

Jim Cramer

On the other hand, Cramer was replying to Howard Lindzon, whose level of debate is hardly any higher:

CalacANUS (ANUS because every time his mouth open SHIT comes out)

Why is it about the internet that prompts successful fully-grown multimillionaires to descend to a level which most fourth-graders would find embarrassing? After reading 5,000 words on trolling in the NYT magazine, I’m still none the wiser.

My only real theory is that the trolling is a symptom of these men’s hyperaggressive personalities, combined with a twitterific internet where increasingly people post first and think later. Plus, in Cramer’s case, the fact that substantially all of his television success has come as a result of an astonishing ability to give his id free reign and to practice as little self-censorship as is humanly possible.

But when some of the most high-profile financial bloggers are this juvenile, it’s easy to see the need for sites like Seeking Alpha, which force their contributors to stay on message and civil.

Also worth noting: even as this kind of thing tends to pop up in the high-testosterone world of financial blogs, it’s much rarer in economics blogs. Maybe that’s because in the econoblogosphere, no one’s actually losing money.

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Location, Location, Location

BusinessWeek had a good idea this week: look at big metropolitan areas and see how the best-performing zip codes have compared to the worst-performing ones. Unfortunately, the final implementation is atrocious: it involves clicking laboriously through an interminable slide show, and it’s impossible to see all the data at once. So here’s an at-a-glance table:

City Best ZIP Price change (%) Worst ZIP Price change (%) Difference (ppts)
Atlanta 30022 +12 30310 -49 61
Boston 02481 +21 01902 -27 48
Chicago 60613 +19 60649 -24 43
Cleveland 44001 +6 44139 -22 28
Dallas 75220 +33 76110 -19 52
Denver 80007 +18 80216 -24 42
Detroit 48304 +17 48214 -31 48
Houston 77418 +23 77380 -26 49
Las Vegas 89005 0 89085 -35 35
Los Angeles 90004 +15 93591 -43 58
Miami 33469 +24 33314 -30 54
Minneapolis 55127 +15 55409 -24 39
New York 11963 +15 08757 -18 33
Philadelphia 08057 +12 21919 -25 37
Phoenix 85018 +18 85031 -40 58
Salt Lake City 84103 +17 84044 -7 24
San Francisco 94920 +20 94801 -49 69
Seattle 98034 +7 98199 -20 27
Tampa 33606 +15 33573 -25 40
Washington DC 22043 +19 22191 -49 68

As a rule, expensive neighborhoods seem to be the ones which have gone up in price, while cheaper ones have gone down. But Cleveland is an exception: houses in Solon, which fell by 22% over the past year, are still 44% more expensive than houses in Amherst, which rose by 6%. The same’s true in Seattle, whose worst-performing neighborhood, Magnolia, has a median listing price of more than $700,000.

It’s interesting that there are bits of the Miami metropolitan area – like Jupiter, Florida – which have gone up substantially in price. (Admittedly, it’s almost 100 miles from Miami proper.) But my favorite pair of datapoints is in San Francisco — where Belvedere/Tiburon, in Marin (median house, $2.965 million, up 20% on the year), is directly across the bay from Richmond (median house, $202,771, down a whopping 49% on the year).

One big thing to learn from all this is that it’s silly trying to hedge downside in the value of your home by using the CME’s housing futures. It’s entirely possible that you could short your city’s house prices only to see your city’s housing prices go up and the value of your own home go down — thereby losing on both legs of the trade.

And the other thing to learn is that there are still entire zip codes, like Preston Hollow in Dallas, which have massively bucked the national trend and have seen house prices rise by a third over the course of the past year. Yes, we’re in a nationwide housing recession, but not all houses in the nation are falling in value. Exactly where you are within a metropolitan area can mean the difference between soaring values and slumping ones.

Update: Jake at Econompic Data has turned this into a pretty chart!

Location.jpg

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More Savings Advice for Twentysomethings

Bryan Keller has just written a very astute email taking issue with my retirement advice for twentysomethings, and asks if it doesn’t contradict slightly the points I made when I was promoting financial wellness. Keller says that financial wellness is more than just staying out of debt: it also involves saving a reasonable amount. He continues:

The whole act of saving money is one they relies heavily on actions that run contrary to people’s emotional and psychological makeup. And to effectively encourage someone NOT to begin establishing precisely the habits and behaviors that creates, and ultimately leads to, financial wellness, confuses me.

I think the bottom line is really this: the act of saving is habitual and needs to be nurtured from a young age. The expectation that we can encourage people not to save in their twenties, and then expect them to just flip a switch once they hit they’re (insert proper age here), is naive. Our society needs to be weened off of our unsustainable consumption habits, and to a more balanced approach that nets out to savings accumulation. Our culture’s current financial awareness is not such that we can discourage any form of saving, even at a young age.

It’s a good point, although saving doesn’t run counter to everybody’s psychological makeup. Many people will, yes, go out and spend every penny they’ve got; many more will further spend every extra penny they can borrow. But there are two other substantial groups too. One is those people who like to have a cushion of savings to fall back on (or to use, eventually, as a down-payment for a house); the other is people attracted by the concept of financial markets as a place to grow your money, and the idea that you can make money not only by working for it but also by investing it wisely.

I’m actually quite unsympathetic when it comes to this last group, despite the fact that they’re almost certainly disproportionately over-represented among my readers. For me, the best way to earn money is to earn money. Financial instruments can be a sensible place to put the money you’ve earned and haven’t spent — your savings. If you’re wise, your savings will then grow. But by far the best way to maximize your savings is to save more, not to try to invest them in a clever manner.

So how to reconcile the advice to spend your money when you’re young and it’s most valuable to you, with the advice to save?

Firstly, take a look around you at work. Do nearly all of your colleagues make substantially more than you do? And do you intend to continue working in more or less the same career/industry for a few years at least? If you can answer yes to both questions, then it’s entirely fine to save only insofar as it’s stupid not to (when you have employer-matched pension contributions, for instance).

On the other hand, if you’re making a lot of money in your twenties and you don’t think that’s sustainable — perhaps you’re working as a Wall Street trader, or a highly-paid athlete — then of course you should be saving a very large amount of your income.

But let’s stick to the situation that most twentysomethings find themselves in: starting out on the bottom rungs of the career ladder, with money very tight. Do I think it’s sensible to encourage such people to save for retirement just because saving is a Good Habit? No. But I do think that most such individuals have a mental idea of the point at which money would not be tight: the point at which they really should be able to start saving.

So here’s one piece of advice: write that number down. Chances are, you’ll reach it, and when you do, you’ll discover that money’s as tight as ever. It’s called the hedonic treadmill, and it doesn’t do you any good at all. So promise yourself now that a substantial part of any income over and above that number will be saved. Not necessarily for retirement: a simple savings account at your local credit union is fine, especially if you need to save up a down payment on a house. Once you do start earning more money than you need, you’ll have made a promise to yourself to save it rather than spend it.

It’s worth noting here that there’s a world of difference between savings, on the one hand, and retirement savings, on the other. My blog entry yesterday concentrated on retirement savings: long-term stock market investments which are tied up for decades. Those are less useful, and therefore less important to a twentysomething, than common-or-garden savings-account savings which can be used to buy property or in some kind of emergency.

Once you’ve amassed at least a few thousand dollars in real-world savings-account savings, then you can start worrying about stock-market investments and asset allocation and retirement. But in the mean time, if you’re struggling to choose between a pension contribution and a trip to Nepal, take the trip to Nepal.

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Retirement Advice for Twentysomethings

A reader writes:

As a "younger investor" myself looking for ways to retire with millions (we can all dream), I’ve been trying to start early and doing my research to figure out ways to gain an advantage in the long run. Starting young is always helpful. But the idea of timing the market makes me nervous. At the same time, with the market in the dumps – isn’t this the best time, as a 20-something, to jump in and fill my retirement portfolio exclusively with stocks? Maybe if I close my eyes and look away for a year, when I look back there will be a nice ROI.

She wrote this in response to my blog entry in June about research saying that if you’re young and investing for retirement, it’s a good idea to take a lot of risk — perhaps even more risk than putting everything in stocks. But do read the comments on that blog entry: they’re all very smart, and there are indeed good reasons not to borrow the money you’re saving for retirement.

What that means is that the first thing you do, if you’re in your 20s, is pay off your credit cards and all your other debt, with the possible exception of any low-interest-rate student loans you might have. Only once you’ve done that should you even think about saving for retirement.

But the second thing you should do, frankly, is think seriously about spending your income rather than saving it. People in their 20s get more value out of every marginal dollar than they will in their 30s, 40s, or 50s. Steve Levitt puts it really well:

The right reason to save is so you can even out your consumption. When times are good, you should save, and when times are bad, borrow.

Most likely, I would never be as poor again as I was starting out. That meant I should have been borrowing, not saving.

There’s a reason why it’s commonplace for parents to give or loan money to their children, while flows in the other direction are rare indeed: older people, as a rule, have more money — which means that one dollar is worth less to them than it is to their kids. When you’re in your 20s, a couple of hundred dollars can significantly change your standard of living; when you’re in your 40s, it probably won’t. (And if you do find yourself, in your 40s, at a point in your life where a couple of hundred dollars will significantly change your standard of living, I can assure you that having saved more in your 20s wouldn’t have changed anything.)

If it hurts to save, then, don’t. You’re only young once: enjoy it. No matter what the financial-services industry would have you believe, now’s not the time to worry about your income when you’re 80.

Okay, now we’ve got that out of the way, let’s say you’re in your 20s and you do have some excess cash you want to use for retirement — maybe you’re in the fortunate position of having an employer who’ll match your retirement savings, or something like that, in which case it’s a much better idea to try and maximize those 401(k) contributions.

In that situation, then yes, putting your savings 100% into stocks makes sense. The worst that can happen is that your retirement savings go down — but since you weren’t going to touch this money until you were in your 60s anyway, that makes zero difference to your present standard of living. Meanwhile, if your investments go up, as stocks usually do, then you’re precisely where you want to be: leveraging the magic of compounding for decades.

The key insight here is that you’re making relatively small regular contributions to your retirement account. As you earn more money in the future, those contributions will increase in size. The contributions you make at the beginning of your career are small enough that only a long period of good returns will turn them into something you can live off in retirement. If those small initial contributions are wiped out, you haven’t lost that much, by the standards of your 70-year-old self: remember, older people are richer. On the other hand, if they do well, then you’ll feel great.

So yes, if you’re saving for retirement, put 100% of your contributions into stocks. (If you want to start getting sophisticated, then maybe buy ETFs of other asset classes like real estate and commodities, but let’s keep things simple for the time being.) You’re not timing the market, you’re just giving yourself the maximum amount of time to see that investment blossom over the decades into something really substantial.

But if you’re not saving for retirement, don’t let the financial services industry guilt-trip you into thinking that you’re doing something horribly wrong. Retiring with millions is all well and good, but don’t let it prevent you from going out and having fun today.

Posted in investing, personal finance | Comments Off on Retirement Advice for Twentysomethings

Did Reg FD Have Unintended Consequences?

Heidi Moore has an interesting interview with Vanderbilt professor Robert Whaley, who claims to have found some nasty unintended consequences to the SEC’s Regulation Fair Disclosure, which tried to ensure investors were on a level playing field with respect to getting information from listed companies.

Here’s how Whaley explains it to Moore:

We looked at the behavior of bid-ask quotes. What we found is that the cost of trading with informed traders had actually gone up. The market maker has to charge this premium because he may be trading with someone that’s better informed than he is. The material information about a company is known by a handful of people who are now in a better position to trade on it and the rest of the market doesn’t know. The market maker has to protect himself against those people…

What surprised me was that the magnitude of the insurance-cost component of the trading went up 36% for a pretty large sample of firms.

It’s one of those cute and counterintuitive results which economists love, especially if they have a libertarian bent and are suspicious of government regulation. But if you look at the paper, it turns out that market-makers’ bid-ask quotes actually narrowed after Reg FD was implemented, from 13.23 cents per share to 11.43 cents per share.

Whaley’s contention is that the component of that bid-ask spread attributable to "adverse selection" costs rose by 36% — from 0.88 cents per share to 1.20 cents per share. Here’s how his paper puts it:

The adverse selection component rose from

about 6.6 percent to about 10.5 percent of the volume-weighted effective spread. In dollar terms,

this increase amounts to .0663x$.1323

or $.0088 per share pre-Regulation FD, and

.1049x$.1143

or $.0120 post–an increase of 36 percent. We conclude that Regulation FD had

an economically significant chilling effect.

An "economically significant chilling effect"? Bid-ask spreads came down, remember, and even if you sign on to Whaley’s math, the bit of the bid-ask spread that he’s worried about rose by less than one-third of one cent per share. I’m surprised that’s even statistically significant, let alone a "chilling effect".

No wonder, then, that Whaley says reaction to his paper has been "kind of muted". But "I’m out there advocating," he says — maybe if he does a few more interviews with WSJ reporters, he might be able to get a reaction from people who haven’t bothered to read his paper.

Posted in economics, regulation, stocks | Comments Off on Did Reg FD Have Unintended Consequences?

Unemployment Spikes

5.7% unemployment? That’s ugly. The headline payrolls number of -51,000 jobs might be less bad than the market expected, especially since the fall in June was smaller than originally reported as well. But only the financial markets care about the monthly change in non-farm payrolls. Real people care about the unemployment rate, and that’s the highest it’s been since March 2004.

This isn’t some partisan commentator, it’s the official BLS press release:

Both the number of unemployed persons (8.8 million) and the unemployment rate

(5.7 percent) rose in July. Over the past 12 months, the number of unemployed

persons has increased by 1.6 million, and the unemployment rate has risen by 1.0

percentage point.

Remember too that the official unemployment rate understates the severity of the downturn, as it doesn’t count formerly full-time employees now working part-time. The number of people now who are either unemployed or underemployed is surely larger than it has been for many, many years.

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How is GM Still Alive?

In the world of eye-popping earnings, GM has managed to beat even Exxon Mobil. Exxon made a profit of $11.7 billion in the second quarter; GM has manged to come out with a

$15.5 billion loss, or $27.33 a share.

How this company is still operating as a going concern is really beginning to baffle me:

GM, turning 100 this year, in 2007 reported its largest annual loss, $38.7 billion, after a tax-accounting change. It hasn’t posted a profit since 2004.

Check out the penultimate line in GM’s 20 pages of "financial highlights". It shows a "total stockholders’ deficit" of $57 billion, up from a deficit of less than $4 billion a year ago. Yet the decline in market capitalization over that time is less than a quarter of that: the company was worth about $18 billion then and is worth about $6 billion now. Was the market really pricing in $40 billion of losses a year ago? And more generally, how and why is the market keeping this insolvent company afloat?

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The Upside of Moral Hazard

Bob Van Order, a former chief economist of Freddie Mac, has a long and sensible piece describing what Fannie and Freddie are good for, and examining the problems they’re currently facing. Along the way, he talks a bit about the upside of moral hazard, as it applies not only to Fannie and Freddie but also to big banks in general:

Since the Great Depression when financial markets really went crazy we have developed institutions to try to control financial panic. A big part of this development has been deposit insurance, which provides bank depositors with assurance that they can get their money no matter what their bank does. Most of the time deposit insurance has served us very well. We don’t see bank runs to any great extent; in 1987 when the stock market crashed in a way that was not that different from 1929 we saw not a whiff of a bank panic…

Fannie Mae and Freddie Mac (FF) are a part of this apparatus. They are usually referred to as Government Sponsored Enterprises or “GSEs.” That is, they are enterprises (they are privately owned), but they have special charters and benefits primarily in the form of implicit guarantees, for which they do not pay…

Guarantees involve a subsidy, if they are not paid for. In FF’s case their debt has been rated AAA or AAA+ because of the government connection; whereas on its own it has been rated in the low AA range. The difference in borrowing rates between the two is around a quarter of a percent to .40%, which is a rough measure of their subsidy. Banks get a similar subsidy, which varies from bank to bank. The subsidy is probably larger now.

The analogy with deposit insurance is deliberate. Banks are de facto GSEs. Indeed, so are most major financial institutions around the world, which is in part why we have had relatively stable financial markets for decades.

This is why I don’t share Steve Waldman’s worries about covered bonds. Steve thinks that starting up a covered-bond market would turn banks into de facto GSEs; I’m more inclined to believe that banks are de facto GSEs in any event.

Obviously, being a de facto GSE means that there’s a moral hazard play and that the government will, on occasion, end up bailing you out. It also encourages excessive risk-taking, which is why all that regulation is needed. On the other hand, it does tend to mitigate financial panic — even now, during the worst financial crisis since the Depression, there’s been almost no sign of real panic, and the economy is continuing to grow. So there’s something to be said for the government backstop.

Posted in banking, economics, regulation | Comments Off on The Upside of Moral Hazard

Privatizing Parking

Kit Roane reckons it’ll be a long time before we see any significant infrastructure privatization in New York State:

If Paterson wanted to turn the New York State Thruway over to private operators, he’d first have to pilot a bill through the sclerotic state legislature.

New York would also have to untangle the finances of its infrastructure assets, which often end up supporting a diverse array of unrelated and unprofitable side businesses…

"Right now everything is on the table, and it’s going to take some planning to decide what steps will happen next," admits Erin Duggan, a spokeswoman for governor Paterson. That is probably the understatement of the year.

But what about privatizing assets which don’t yet exist — like smart parking meters?

According to a senior municipal bond analyst at a leading Wall Street firm, New York City could raise between five and six billion dollars immediately if it privatized its parking meters as Chicago is doing…

Curbside parking in New York and most U.S. cities is grossly underpriced and could potentially be a crucial source of revenue for much needed transportation improvements…

Chicago will require vendors to use state-of-the-art parking meters that monitor parking space availability and adjust rates to ensure an open space on every block.

This is a very smart idea, I think: reduce congestion and raise revenue at the same time! An enormous proportion of traffic in the most congested parts of New York City is cars driving around in circles looking for a parking spot. If there’s an open space on every block, a huge problem is solved at a stroke. Of course, the price of on-street parking would rise, but only to the level mandated by demand for something which is in sore undersupply.

Incidentally, Roane also says that New York State taxes on bank profits totaled a tiny $173 million in 2007. Who says New York’s corporate tax rates are too high?

Posted in infrastructure | Comments Off on Privatizing Parking

Hiring Alan Schwartz

Dear John Thain is very upset that Alan Schwartz, the last CEO of Bear Stearns, might get a good job elsewhere, now that he’s decided not to stay at JP Morgan. Indeed, he says that offering a job to Schwartz would be "unacceptable and unthinkable":

it completely destroys the entire notion of executives at firms, especially like Bear, as having any real personal risk…

Alan Schwartz, who is not a trader, vetoed the very trade(s) that would have saved Bear and was proposed by his senior traders. What happened from that decision was that thousands of people lost their jobs, the firm went out of business, and a lot of other, very bad, things. That’s fine that he made the decision. I almost don’t care that he was wrong. However, it’s a huge moral hazard/slippery slope/perverse incentive/etc. Alan Schwartz should be toxic right now.

There are two reasons why it makes sense to offer Schwartz a job. The first, as glossed by DealBook, is that he’s a very good dealmaker. You might recall the Peter Principle: in a hierarchy, every employee tends to rise to his level of incompetence. In the case of Bear Stearns, it’s actually quite understandable what happened: after Jimmy Cayne was ousted as CEO, the shortlist of possible successors was very short indeed. Schwartz was well-liked and an internal candidate — both important politically — and he wound up with the job despite the fact that he was an investment banker by trade, much better at dealing with clients than at managing traders.

I’m sure that none of the firms mooted as possible Schwartz employers are considering hiring him as CEO; most of them are probably not inclined to give him any executive responsibilities at all. Instead, he’ll be a rainmaker, doing what he’s good at. Which is fine.

But if he does get an executive position (I’m sure he wants to redeem himself), then in a sense Bear’s shareholders and employees have already spent billions of dollars training him — the hard way — how to do the job. In the "up or out" culture of investment banks, the people who survive tend to be as lucky as they are smart. If you get hit hard by an unexpected event, you’re out, generally. As a result, people with experience of being hit hard by unexpected events are relatively rare. But maybe that kind of experience is something which some employers might value — especially when they weren’t the ones having to pay for the executives lack of experience the first time round.

One thing ingrained in any executive is that "opportunity cost is paramount, sunk cost is irrelevant". The costs of Schwartz’s previous decision are, now, sunk. But if he’d be profitable for your firm if you hired him today, the opportunity costs of not hiring him could be large indeed.

Posted in banking, leadership | Comments Off on Hiring Alan Schwartz

Extra Credit, Thursday Edition

Scholastic puts the blame on "Do Not Call Registry": One of the lamest corporate excuses of all time.

Shorts Crack the Code: This appeared in the NYT Business headlines for some reason; it’s not what you think, but it is pretty funny.

Yes, the Market Has Bottomed: Says Jim Cramer. So it must be true!

Wachovia will walk-over-you: In the interests of transparency, shouldn’t banks be forced to reveal publicly how much they’re paying on new CDs?

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Lies, Damned Lies, and Blog Rankings

I’m not a fan of lists, and I’m especially not a fan of top-blogs lists. But I’m kinda tickled by Wikio’s August blog ranking:

blogs.jpg

Hey look, Market Movers is higher up than really great blogs like Wooster Collective and Stuff White People Like! Which is all well and good, until I see that felixsalmon.com is also right behind it; I’ve posted 15 entries there so far this year. But hey, maybe I have the most-neglected blog in the top 300, that’s gotta be worth something, right?

Posted in statistics, technology | Comments Off on Lies, Damned Lies, and Blog Rankings

SWFs vs Free Trade

Matt Cooper says that sovereign wealth funds are "the opposite of free trade" and "anathema to a free-market economy". I don’t see why that should be the case: if anything, the funds are a natural consequence of free trade.

If the US does a lot of free trade with some entity and runs a trade deficit with that entity, the entity in question will end up with a lot of dollars, and ultimately those dollars will be used to finance the US current-account deficit by investing in US stocks and bonds. Does it make any difference whether that entity is a corporation or a country? Not as far as the macroeconomics are concerned, although admittedly the politics are another matter.

Sovereign Wealth Funds might not live up to the ideals of laissez-faire economists who think that governments should never interfere in financial markets, but you don’t need to be a laissez-faire economist to believe in free trade. And there’s no irony in US banks being recapitalized by the entities which are running a trade surplus with the US. Indeed, it’s exactly what you’d expect.

Posted in economics | Comments Off on SWFs vs Free Trade

Q2 GDP: Looking at the GDP Deflator

Edward Harrison makes a good point about the unreliability of GDP numbers: the headline GDP number is equal to nominal GDP growth minus the GDP deflator — a measure of broad inflation. When the Q4 2007 GDP growth was revised from +0.6% to -0.2%, half of that was due to the deflator being revised upwards from 2.44% to 2.84%. In Q1 2008, the revised inflation figure was 2.63%. So we’re in a world of inflation somewhere between 2.5% and 3.0%? Not according to the Q2 2008 deflator, which was a very low 1.06%.

Here again I’m with Mike Mandel: when this number is revised, the risks are very much to the downside, if only because the risks to the deflator are to the upside. If inflation was running at a 2.5% pace in Q2, then growth would come down to just 0.5%.

Posted in economics, statistics | Comments Off on Q2 GDP: Looking at the GDP Deflator

Carl Icahn Gets Bloggier

It’s well known that one of the first things that happens to grown men after they get a blog is that they get SIWOTI disease. And Carl Icahn, it seems, is no exception. He still feels constrained from putting up anything as bold as a hyperlink, but he can still make it very clear what he’s reacting to and then fire off a thousand-word rebuttal. That said, Carl is showing some signs of age: it’s taken him over a week to write those thousand words. Maybe he doesn’t stay up late to write his blog posts, like the rest of us, after all.

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The Limits of GDP Statistics

Zubin has the quarter-by-quarter GDP chart; he, like many others, is particularly taken that in the fourth quarter of 2007, the GDP figure fell below zero. But while the Q4 revision from +0.6% to -0.2% was big, the Q2 revision from +3.8% to +4.8% was even bigger.

In a world where GDP revisions made a full year after the time period in question can amount to a whole percentage point up or down, it’s a bit silly to get overexcited about whether any one reading manged to squeak below 0. GDP figures, it seems, are much less exact than the market seems to give them credit for, and today’s +1.9% is probably well within the margin of error vis-a-vis the +2.3% expectations.

Here’s Mike Mandel:

Most people–and most journalists–take the economic statistics as fact, and report them that way. In fact, they are approximations, estimates, and in some cases educated guesses. Much better than nothing–but not reality.

Mike adds that the BEA releases "better and better estimates over time" – which means, I guess, that the 4.8% figure for Q2 2007 is significantly more reliable than the 3.8% figure was. My feeling is that the best you can really do with GDP statistics is lump them into three vague buckets: "good", "mediocre", and "bad". GDP growth was good in mid-2007, and it was mediocre in the first half of 2008. Was it bad for one quarter at the end of last year? I dunno: what with all the seasonal adjustments surrounding the holiday shopping season, I think it’s hard to get that specific. I’d be happier just saying that we’ve gone from good to mediocre, and leaving it at that.

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The Problems With For-Profit Microlending

After posting about the spat between Muhammad Yunus and Compartamos yesterday, I found a recent Economist editorial in favor of the Mexican for-profit lender. Since it’s one of the more lucid arguments in favor of the for-profit model, it’s worth examining it a bit more closely to see where the disagreements are.

The Economist’s argument starts off unpromisingly:

Compartamos was born out of the same social concern that inspired Mr Yunus.

This is a dangerous road to go down, because it seems to imply that motivation matters more than incentives. Most observers here agree that there are two ends on the spectrum, with non-profit lenders like Grameen on the left and for-profit loan sharks on the right; the former is Good and the latter is Bad. This is Compartamos’s first difficulty: if they’re going to convince people that making profits is a good thing, then they have to explain why they’re different from the loan sharks, and from only-slightly-more-respectable lenders like Mexico’s Banco Azteca. It seems that being "born out of social concern" will make much a difference, especially now it is years after the birth, and there’s been a whopping great IPO in the interim. After all, Compartamos is a public company now, with a fiduciary obligation to its shareholders.

The argument continues:

It says its mission has not changed, but it has become convinced that by pursuing profits it will be able to provide financial services to many more poor people far more quickly than it would if it had continued to act as a charity.

I actually buy this. There’s no doubt that Compartamos’s profits have fueled its growth; it’s now by far the biggest of Mexico’s microlenders. But then again, why are we comparing Compartamos to other microlenders at all, rather than the arms of much bigger banks which lend to the poor? After all, Banco Azteca is big too, and is living proof that providing financial services to poor people is not in and of itself always a good thing.

The Economist then falls back on an outdated idea of what interest rates are like in developing countries:

By charging an interest rate that generates a profit, the bank can grow fast and provide many more “micro-entrepreneurs” with the finance they need, even at interest rates that by the standards of rich countries seem unacceptably high.

By the standards of rich countries? Mexico is a rich country, a long-standing member of the OECD with an investment-grade credit rating and single-digit interest rates. If a lender in the US were making $450 loans at triple-digit interest rates, it would be declared predatory in the blink of an eye. In Mexico, interest rates are maybe a few points higher than they are in the US: there’s no reason why rates of over 100% (the ones used by Compartamos’s critics) or 79% (the ones cited by Compartamos itself) are justifiable.

Besides, what about the standards of poor countries? Grameen is based in Bangladesh, which is undeniably a poor country, and has much lower interest rates than Compartamos.

At this point we get the weakest argument of all: that Compartamos has lots of customers, and that "none of these new borrowers was compelled to come to its doors". It’s the same argument used by loan sharks and predatory lenders everywhere, and its use by Compartamos and its apologists hints at how weak their case might really be.

The Economist then brings out one of the weirder of Compartamos’s arguments. Because Compartamos is so successful, goes the claim, more microlenders are entering the Mexican market. And with the increased competition comes lower interest rates. So big profits are good, because they lead, ultimately to lower profits.

Except one has to wait a very long time: Compartamos itself points to a reduction in interest rates from 115% to 79% over seven years. At this rate, how much longer will we have to wait before rates fall to non-usurious levels? And if your long-term intention is to make less money by offering lower interest rates, why not just do that now? Oh, yes, I forgot: because you’re not here to serve borrowers, you’re here to serve shareholders.

The Economist also has a very narrow definition of predatory lending:

Profiting from the poor can be wrong, when lending is predatory–when the lender expects that the borrower will be unable to pay the interest or repay the principal.

A poor person comes up to me needing $100 until Friday, when he’s getting paid. I give him the $100, in return for his $150 paycheck. Do I expect that the borrower will be unable to pay the loan? No. Am I a predatory lender? Yes.

The Economist does, inadvertently, make one good point about where for-profit entities can play an important role in microfinance:

Since Compartamos started to pursue profit, seven new regulated microfinance providers have begun to compete with it in Mexico, many of them financed by profit-seeking capitalists.

While I’m not a fan of for-profit microlenders like Compartamos, I do think that it’s a good idea for microfinance institutions, be they for-profit or non-profit, to fund themselves on the open market. In other words, it’s perfectly fine for for-profit banks to lend money on a commercial basis to microfinance institutions, and I have no problem at all with new regulated microfinance providers being financed in this way by profit-seeking capitalists.

Of course, those profit-seeking capitalists will have to provide the money relatively cheaply, since they’re themselves competing with any number of development banks and other do-gooders happy to fund microlenders at extremely low rates. Where big banks can be very useful is in providing funding in local currency, rather than in dollars.

The big difference between non-profit and for-profit microlenders is that the non-profit lenders are much more likely to put the interests of their current borrowers first. The for-profit lenders like Compartamos, meanwhile, argue that it’s future borrowers who benefit from their model: the people who wouldn’t get loans otherwise because growth in the industry would be lower, or the people who will benefit from lower interest rates as competition drives rates down over time.

But using presently non-existent borrowers as an argument for gouging your current customer base seems weak to me. The for-profit microlenders might have turned out to be great institutions, better for their borrowers than the non-profit lenders. But they didn’t: they turned out instead, at least in the case of Compartamos, to be mainly fantastic investments for their rich shareholders. Which wasn’t really meant to be the point at all.

Posted in banking, development | Comments Off on The Problems With For-Profit Microlending

Towards the Command-and-Control Economy

On a day when David Weidner jokingly proposes the "no-loss sale" rule (no selling a stock for a price lower than the last trade), Barry Ritholtz has anecdotal evidence that Wachovia, for one, is refusing to let its clients short Morgan Stanley or any other entity on the no-naked-shorting list – even if they can "get a borrow". It all sounds suspiciously Chinese to me.

But why stop at preventing stocks from going down? Why not try the same thing with things you don’t want to go up? Oil, corn, MRIs, school fees, a night at the St Regis — I think it’s time to implement a no-uptick rule here: force today’s prices to be no higher than yesterday’s price. Inflation would be whipped at a stroke, and Ben Bernanke could slash interest rates with impunity — what’s not to love?

Posted in economics | Comments Off on Towards the Command-and-Control Economy

Free Zimbabwe’s Banks!

As Zimbabwe knocks another ten (yes, ten) zeroes off its currency,

the central bank governor, Gideon Gono, is optimistic that somehow this will do some good: so optimistic, in fact, that he’s reintroducing coins.

It won’t work, of course. Something else is needed, and Daniel Davies has a rather good idea: free banking. Basically, the state doesn’t issue currency: the banks do. In Zimbabwe, the banks, who include global giants like Barclays and Standard Chartered, have vastly more credibility than the government; what’s more, since their own assets would be denominated in their own currency, they’d have every incentive not to print money in a hyperinflationary spiral.

As someone who’s spent a lot of time in Scotland, this idea appeals to me for a non-practical reason, too: I like the variety of banknotes one finds when the notes are issued by a range of different banks. (For historical reasons, Scottish banknotes are actually issued by private banks: the Bank of Scotland, the Royal Bank of Scotland, and Clydesdalel Bank. The same is true in Northern Ireland, of Bank of Ireland, First Trust Bank, Northern Bank, and Ulster Bank.) This can make inter-national travel rather interesting at times, but it certainly makes the world a more colorful and heterogeneous place.

Of course the problem with Davies’s plan is that the Zimbabwean government would have to somehow rely on tax revenue or borrowings to meet its own expenses. Since that would be impossible in the short term, if the government accepted the scheme it would probably be consigning itself to collapse in so doing. Which makes the idea rather unlikely, even if it would be good for Zimbabwe in the medium term.

Posted in economics, emerging markets, foreign exchange | Comments Off on Free Zimbabwe’s Banks!

Extra Credit, Wednesday Edition

No News, Little Movement: Lots of noise, no signal in July’s financial markets.

The Father of Wine Economics? "[Adam] Smith’s treatment of wine is not complete – there is no discussion of cork versus screw-cap, for example, and no treatment of en primeur wine futures, but what he does say shows pretty clearly how well he understood the political economy of wine."

Drilling in Alaska: Don’t Ask Don’t Tell: Rick Bookstaber comes out of blog-retirement to say that Alaska is big.

Paulson, Bernanke draw the line at Bennigans: Why no bailout for steak and ale?

Fraud in the 2008 Mortgage Vintage: Wells Fargo is the dupe.

“The Markets Can Stay Irrational ….” Did Keynes really say it? What’s the actual citation? (Update: According to Daniel Davies, Keynes didn’t write it, but he did most likely say it, the reliable source being Joan Robinson.)

Volunteer Bloggers: Stop Subsidizing the Entire Internet: A rant from Gawker after AOL Realizes Bloggers Will Work For Free; Stops Paying Them.

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Marion Maneker, Art-Market Blogger Extraordinaire

What is it about blogs launched in May this year? Yesterday I lauded John Hempton of Bronte Capital; today I flicked through the archive of Art Market Monitor, and was blown away at the sophistication and insight of its blogger, Marion Maneker. For instance, here he is on the upcoming Hirst sale at Sotheby’s:

Whatever one thinks of Hirst’s art, there is little in the sale that does not seem either derivative or, perhaps, tone deaf. Fans of Hirst’s work will tell you that his art is about death. But a gold calf seems more like Hirst trying channel Jeff Koons than a commentary on decay. Do the Unicorn and Zebra, let alone the Shark (Mark II), represent forward movement in his ideas and work? Or is this just an attempt to re-harvest value that escaped the artist the first go round.

And he’s if anything even better on quantitative analysis than he is on qualitative criticism. In a long post on the London contemporary art market today, he pulls out some astonishing figures which astonished me:

In 2005, London saw £147 million in Contemporary art sold in three sales season in February, June and the smaller sales around the Frieze art fair in October. In 2006, that number was £232 million. But the real take off came in 2007 when the total sales with the buyer’s premium reached £502 million. So far this year, especially with the spectacular June sales, the total is £525 million or a 5% increase over all of 2007 combined. The Frieze sales would have to keep up the 40% rate this October for the London Contemporary art market to reach ߣ700 million this year. But that isn’t an unrealistic ambition given the current market.

Yes, the total amount of contemporary art sold at auction in London so far this year — remember, this is just the auction houses, not the galleries; just London, not New York; and just contemporary art, not Old Masters or Impressionists or anything else — has already exceeded the billion-dollar mark, with the October sales, and the special September Hirst auction, yet to come.

Here’s the chart, which is as bubblicious as anything I’ve seen in financial markets:

london-totals.jpg

Welcome to the blogosphere, Marion — you’re a much-needed addition!

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Muhammad Yunus vs Microlending “Loan Sharks”

BusinessWeek’s Steve Hamm has a good overview of the latest dust-up in the world of microfinance, where industry Top Dog Muhammad Yunus has started lashing out at for-profit microlenders like Mexico’s Compartamos, accusing them of "moving into the same mental mind-set as loan sharks".

This afternoon I got a press release from respected microfinance institution Acción, coming down strongly on the Compartamos side of the fight, and quoting the letter to our peers from Compartamos defending their high interest rates. But although Compartamos’s interest rates have come down a bit since last year, when I criticized the bank for placing shareholders above borrowers, I’m still far from convinced that the for-profit route is as socially beneficial as the likes of Acción would have us believe, especially in Mexico where it’s easy for small for-profit lenders to complacently let their interest rates drift up towards and even past the extortionate nationwide norms. Yes, Compartamos is right that by Mexican standards it’s not all that bad – but that’s precisely the problem, and it’s Mexican standards which need to be changed.

I have no problem with for-profit microlending in theory, but at the same time I think the burden of proof is on the for-profit microlenders to demonstrate that they can deliver better, cheaper services to the poor than their non-profit counterparts can. No one has done that yet, and until they do, I’ll still prefer the non-profit model to the for-profit model.

Posted in banking, development | Comments Off on Muhammad Yunus vs Microlending “Loan Sharks”

Buying Berkshire

I’m not really a stock-market kinda guy, but there’s a handful of individual stocks, foremost among them Apple, which seem to be able to transcend financial-asset status and be of interest to a much broader audience, including me. And one of those stocks is Berkshire Hathaway.

Berkshire’s interesting because it’s in many ways a publicly-listed conservatively-managed hedge fund, using an enormous quantity of policyholder cash from its insurance operations to make solid long-term investments. Nadav Manham made the excellent point yesterday that no one should invest in a hedge fund unless that hedge fund can compellingly persuade you that it will outperform Berkshire: he calls it the "Berkshire hurdle".

Along the way, Nadav said that "Berkshire’s stock price, $111,770 as we speak, certainly does not seem overvalued, and may in fact be significantly undervalued."

And Whitney Tilson, in today’s email blast, quotes a message-board posting saying that although Berkshire shares could certainly fall further from here, every time (such as now) that they’ve dropped more than 25% from their highs, they’ve gone on to perform spectacularly well the following year.

All the same, to the old Berkshire risks (a hurricane hitting an urban center on the East Coast, or Warren Buffett falling under a NetJet) must now be added a whole bunch of new Berkshire risks, which Todd Sullivan convincingly lays out.

For one thing, the firm is long the financial-services industry generally – not just Moody’s, which reported a 48% drop in net income today, and which, if sense prevails, will become increasingly irrelevant over the long term. Berkshire also has large long-term holdings in American Express, Wells Fargo, Bank of America, US Bancorp, and M&T Bank, one or more of which could easily find themselves in serious trouble if the current credit crisis gets worse rather than better.

Add to that Berkshire’s exposure to the housing industry, via shareholdings in public companies (Home Depot, Lowes, USG) and wholly-owned subsidiaries (Shaw Industries, Clayton Homes, Jordan’s Furniture, Benjamin Moore, Home Services, Acme Brick), and it all adds up to a decidedly dodgy outlook over just about any time horizon.

And yet: Berkshire’s shares still trade above the $110,000 level which they were bumping up against for the entire first half of 2007, before the credit crunch hit. Yes, they’re down from their silly December highs. But I can’t shake the feeling that if $110,000 was as rich as Berkshire got in the first half of 2007, the company’s valuation today should be substantially lower.

All the same, if you’re thinking of investing in a hedge fund which concentrates in US equities with a little global diversification, then you’d probably be well advised to consider simply buying Berkshire shares instead. With the smart money beginning to go long rather than short, why not simply buy the stock that many value-oriented hedge-fund managers invest in, and cut out the middleman? The risk of a blowup is lower, and there’s a non-negligible chance that you could make a very large amount of money indeed.

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