July 31, 2007 12:37
The Journal is Murdoch's, it appears
The W$J is reporting that Rupert Murdoch now has enough votes lined up to buy Dow Jones & Co. This after News Corp. intimated yesterday that it was about to give up. What changed things was apparently the decision by those in charge of a Denver-based Bancroft family trust that controls 9.1% of Dow Jones voting shares:
Helping persuade the Denver trust to change its mind was a decision by Dow Jones's board to create a fund to cover payments to firms advising Bancroft family members, including Merrill Lynch and the law firms Hemenway & Barnes and Wachtell, Lipton, Rosen & Katz. News Corp. would assume these liabilities if it bought Dow Jones. The fees could total at least $30 million, according to people familiar with the situation.
After all that high-minded talk about editorial independence, then, it all turned on closing costs. Just like buying a house.*
* Idea stolen from James Poniewozik, who mentioned it as I passed him in the hall a minute ago.
Update: I've got a Time.com piece about the deal here.
Update 2: Now it's official. Although it's not really over until the shareholders actually vote.
July 31, 2007 11:44
Why I love currency markets, the loonie edition
From Bloomberg:
The Canadian dollar fell for a fourth day as investors sold commodity-linked currencies on speculation U.S. subprime mortgage losses will slow the world's largest economy.The Canadian currency was the second-worst performer among the 16 most actively traded currencies, trailing only Japan's yen, while falling 0.3 percent to 93.70 U.S. cents. One U.S. dollar buys C$1.0662. ...
Commodities account for about half of Canada's exports. Canada ships more than 80 percent of its exports to the U.S., including steel and lumber.
Canada's dollar also came under pressure after a German bank's losses from subprime mortgages renewed concern that rising defaults will reduce lending and curb corporate takeovers. Canada's dollar has benefited from foreign takeovers of Canadian commodity assets.
Okay, so let's get this straight: The Canadian dollar fell against the U.S. dollar because of concerns about weakness in the U.S. economy. And maybe also because a German bank got into trouble buying U.S. mortgages? That doesn't really seem fair, does it? I guess you could make the argument that, as a commodity-driven economy, Canada is subject to greater cyclical swings than the U.S.--if the U.S. catches cold, Canada catches pneumonia. But isn't it also possible that the currency traders that Bloomberg talks to are just making things up to explain something for which there is no real explanation?
July 31, 2007 9:39
A clearer explanation of Blackstone's sweet tax deal
A few weeks ago David Cay Johnston wrote a front-page NYT story (warning: available to Times Selectoids only) on how Blackstone had "devised a way for its partners to effectively avoid paying taxes on $3.7 billion, the bulk of what it raised last month from selling shares to the public." I wrote a post at the time commenting upon the article but complaining that I didn't really understand it. Johnston sent me an e-mail telling me to reread the chart that accompanied the article. I did, but I still didn't really get it (and I'm not blaming him for that). My main confusion was over whether Blackstone's partners were benefiting at the expense of taxpayers or of the company's new public shareholders.
In the new Fortune, Allan Sloan demonstrates why he gets paid the big bucks by finally making the whole thing clear to dense little me (the column's been online for more than a week, but I first noticed it when I opened up the magazine today):
By shuffling lots of paper, Blackstone Group LP - remember, that's the public company - set up a wholly owned corporation that created a very large asset (called goodwill, if you really want to know) that's tax deductible over 15 years at the 35% corporate rate. The public Blackstone agreed to give Schwarzman, Peterson, and the other sellers 85% of what it realizes from this deduction.
Kicking back 85% of the tax savings to the sellers dates to at least 2005, when Lazard and DreamWorks both did it, as did Fortress earlier this year. But outside of tax techies, almost no one noticed. Now this 85%-to-the-sellers deal, which is perfectly legal but in my opinion shorts the public shareholders, has become standard for "alternative investment" firms seeking to go public while they can. Offerings I've read that do this include KKR, Och-Ziff, and Pzena, with more doubtless to come. ...The bottom line: The public company is giving Blackstone's selling partners more than half their $700 million capital-gains tab, reducing their tax outlay to 7%. That, fans, is an example of why Steve Schwarzman is worth around $10 billion. And why most of the rest of us aren't.
July 31, 2007 9:10
What if the unintended consequences of taxing private equity fairly are good consequences?
The W$J reports this morning that:
Some prominent Democrats are beginning to rethink proposed tax increases on hedge-fund and private-equity managers' earnings, after an aggressive pushback by industry lobbyists and arguments that the impact could extend far beyond Wall Street. ..."When you first hear about it, it seems like, 'Yes, this looks like an appealing way to generate a lot of revenue,' but when you study it more it seems like there are some serious unintended consequences," said Rep. Brian Baird of Washington, a member of a coalition of centrist Democrats who often play a deciding role on business and tax bills.
It's true: Any tax increase can have unintended consequences. They don't necessarily have to be bad consequences, though. Raising taxes on private equity and venture capital partners and some hedge fund managers (many hedgies don't get the tax break) might cause our rivers to run with chocolate and our air to smell minty fresh, all the time. Hey, you never know.
And I just feel the need to repeat that, if you're talking logic and consistency, there is no conceivable reason for these people's carried interest to be taxed as capital gains (at 15%) instead of earned income (35%). It's compensation--just like CEO stock option gains and investment banker bonuses, both of which are taxed as income. The private equity people have no argument. So they go instead with "unintended consequences." It's the last refuge of the tax code scoundrel.
July 30, 2007 1:06
Glenn Hubbard puts odds on good times, recession
Economist and Columbia Business School Dean Glenn Hubbard was making the rounds of summer executive education classes this morning, giving his spiel on the state of the economy. I happened to be sitting in with a class full of Chinese CEOs. Here are the three scenarios for the immediate future that Hubbard laid out for them:
1) The good scenario. Credit market troubles remain mostly contained, energy prices drop a little, U.S. economic growth is in the 2.5% to 3% range. Odds: 60%.
2) The bad scenario. Credit problems get worse, risk spreads (the difference in rates between Treasury bonds and riskier debt like junk bonds) widen and stay big, and energy prices fail to drop. With that, economic growth would slow substantially. Odds: 25%.
3) The ugly scenario. Credit markets freeze up, oil prices stay high, and the economy falls into recession. Odds: 15%.
I wouldn't put too much weight on the specific percentages. It's all guesswork, after all. But Hubbard is a congenitally optimistic guy, and he admitted without prompting that, as the first chairman of President Bush's Council of Economic Advisers, he failed to see the 2001 recession coming. If he now sees a 40% chance of worse economic times ahead, I'd say it's a good idea to have a contingency plan ready.
July 30, 2007 7:16
The private equity guys can't count on the business community, but they can count on Chuck Schumer
The FT has a story about how corporate lobbying groups like the Business Roundtable and the Financial Services Forum aren't lining up in support of their private equity brethren on the battle over how to tax private equity partners' paychecks. And why ever would they? Corporate executives have to pay the full 35% income tax rate on their paychecks, even the risky parts like bonuses and stock option gains. But the private equity guys pay 15% on most of what they make. And they expect the CEOs of the world to stand up in defense of that? Actually, yes, they do. Here's Robert Stewart, vice president of the Private Equity Council:
“I don’t think the potential unintended consequences of this legislation, particularly as it is related to economic growth and development, are fully understood by broad sectors of the business community,” he said.
Well, no, because nobody has any real idea what the economic consequences would be. One might expect that the main effect would be a slight shift away from private equity firms and toward regular old corporations. And again, the private equity guys want the rest of the business community to help them fight that?
They do, however, have New York's Chuck Schumer on their side, as the NYT points out in its story today on the private equity tax battle:
Mr. Schumer said in an interview that he was torn between the need to protect an industry vital to his home state and the need to generate revenues to finance government programs. He said a tax increase on private equity and hedge fund executives could lead to an exodus of jobs and companies from New York, and even from the country. He said the plan, if enacted federally, would also lead to an increase in New York State tax that would further bear down on the industry. He said he worried that the industry was being unfairly singled out.
“Unintended consequences often occur when you do major tax work. And you have to be careful,” Mr. Schumer said in the interview, held in his office just off the Senate floor.
I guess you can make a purely parochial New York case for not wanting to mess with private equity. I'm not sure why anyone outside New York would want to listen to it, though.
July 27, 2007 4:15
Michael Mandel's low-rate world collides with my end of easy money
Business Week's Michael Mandel wrote Wednesday, in response to my article on "The End of Easy Money":
But here's the problem--long rates are falling. The ten-year rate is now down to only 4.91% on the bloomberg machine outside my office (at roughly noon). And the latest mortgage rate for 15-year mortgages is 6.38%...that's compared to 6.39% for July 2006.
Now, there's no doubt that subprime woes are going to tank the subprime mortgage market. And some of the riskier CDOs are going to have real problems.But the question is whether the difficulties in these particular markets will spill over to other parts of the credit market. A look back at the last credit crisis--the dot.com bust--suggests maybe not.
Michael has some skin in this game: He co-authored a cover story back in February called "It's a Low, Low, Low, Low-Rate World: Why Money May Stay Cheap Longer Than You Think." And I don't entirely disagree with his premise, which is that the growing sophistication of credit markets, coupled with foreign investors' and central banks' appetite for U.S. Treasuries, will keep long-term rates on low-risk securities down for years.
But my article, being as how it was in Time and not Business Week, was almost entirely about the rates being paid by U.S. consumers. And guess what: short-term rates (ARMs, home equity loans, credit cards) are higher than or as high as they've been in years, and fixed-rate mortgages are almost as expensive as they were last summer, when the domestic economy and in particular the housing market were a lot stronger (yeah, I know the GDP number released today was pretty good, but everybody's saying it won't hold up this quarter). And if you've got a low credit rating, it's a whole new world from a year ago, when lenders were competing to throw money at you. I'm not predicting some kind of future credit Armageddon, just stating that, from the perspective of American consumers, the easy money days are over.
July 27, 2007 11:51
If Sumner Redstone is Haile Selassie, is Rupert Murdoch Abe Lincoln?
From Patrick Goldstein's excellent column in today's LA Times:
The conclusion is almost inescapable: Redstone's imperial behavior is a drag on Viacom's future. When I spoke to him last year after the Cruise affair, he had the air of an elderly grandfather, straining to keep up with the conversation. He now resembles one of those old sultans of Hollywood -- men like Darryl F. Zanuck, Jack Warner and David O. Selznick -- hanging onto the trappings of power long after they'd lost the cunning and creative zest that had made them titans of the industry. ...
CEOs, like dictators, don't often age well. Whenever I hear tales of tumult in the Viacom kingdom, I am reminded of Ryszard Kapuscinski's book "The Emperor," a masterful account of the last days of the reign of Haile Selassie. In it, he describes a ruler not so different from Redstone."The King of Kings preferred bad ministers," he writes. "He preferred them because he liked to appear in a favorable light by contrast. How could he show himself favorably if he were surrounded by good ministers? What disorder would have broken out in the Empire if instead of one sun, fifty would be shining.
No, my dear friend, you cannot expose the people to such disastrous freedom. There can only be one sun."
This is the second recommendation to read The Emperor that I've gotten this month. One more and I'm buying the book.
Interestingly, Goldstein describes Rupert Murdoch as Redstone's polar opposite, a ruler who appoints good ministers and allows them to shine:
If Rupert Murdoch thinks he could do a better job of running Fox News than Roger Ailes, he's done a great job of keeping it to himself. ... Unlike Redstone, Murdoch has an accomplished regent, Peter Chernin, who has given News Corp. a stability and nimble corporate culture that Viacom lacks. Despite a messy divorce of his own, Murdoch has a close relationship with his family. If Shari Redstone had brought the idea for "American Idol" to Sumner, as Murdoch's daughter did to him, she might not have gotten past the security guards.
July 26, 2007 8:14
Reasons for the Dow's not very big drop today Thursday
The stock market had an interesting day Thursday, with the Dow down 311 points. How interesting is that? Well, it is the second-biggest one day drop this year. But when you've got a number in the 13,000s, subtracting 311 just isn't something to get too worked up about. Today's 2.26% drop was just the 94th-biggest the Dow has experienced in the past 20 years. On Oct. 19, 1987, it lost 22.61%. On Oct. 26, 1987, it lost 8.04%. On Oct. 27, 1997, it lost 7.18%. You get the picture.
It's entirely possible that today's drop was just meaningless noise. Still, U.S. stock markets are in an interesting place right now, driven by conflicting forces whose interactions nobody can really forecast (not that anybody can ever reliably forecast the market, but it strikes me as especially confusing right now). There's the booming global economy outside the U.S., which is bringing in big profits for the big, global companies represented in the Dow and the S&P 500. There's the troubled U.S. housing market, and in particular the troubles it is posing for U.S. consumers accustomed to financing their spending with mortgage refis and home equity loans. Then there are the sudden jitters in the risky end of the corporate loan market, which may mean a lot fewer private equity deals in the months to come, which in turn removes a bunch of potential buyers for the companies on U.S. stock markets. How does all that add up? No idea.
July 26, 2007 7:40
Chinese currency manipulation, Chuck Schumer and Senate bean soup
The Senate Finance Committee voted 20-1 this afternoon to send some "anti-pussyfooting legislation," as John Kerry dubbed it, to the full Senate. I know because I was there for all the action at the lovely Dirksen Building. I also ate at the all-you-can-eat buffet in the basement and had a little bowl of Senate bean soup. Big fun.
The "markup" of the bill happened shockingly fast: The meeting started at 3:00 (the photo at left is of the line of lobbyists etc. waiting to get in), and there was some kind of vote on the Senate floor at 3:45, so Chairman Max kept things moving right along. He let the mom in tennis shoes explain why she was voting no and the old Kentucky fireballer explain why he had wanted the bill to be even more anti-pussyfooting than it was and TV Chuck, who together with Lindsey Graham (sorry, all out of nicknames) got this whole anti-pussyfooting campaign going a couple of years ago, gloat a little. But that was about it. Then, bam, they voted and left. Something makes me think this thing is going to pass, and overcome the near-certain presidential veto, without much trouble.
The alleged pussyfooting that the legislation seeks to prevent is being committed by the Treasury Department, which was commanded by the 1988 Trade Act to scour the earth in search of countries manipulating their currencies to gain a competitive advantage, then cite the offenders and try to make them stop. Treasury actually did this in the early 1990s with Taiwan, South Korea and China, but has professed to find no offenders since 1994.
Lately, though, China has been running a huge trade surplus with the U.S., and Congresspeople have been feeling a lot of pressure to do something about it. And because China does in fact manipulate its currency by allowing it to fluctuate only slightly against the dollar, and by most estimates the Chinese remninbi is now significantly undervalued against the dollar, it is currency that has become Capitol Hill's obsession.
There is the complication that, during the Asian currency crises of the late 1990s, China's resolve in maintaining the remninbi's link to the dollar actually cost it export business and was wildly applauded on Wall Street and in Washington. That's probably one reason why Treasury has been so reluctant to label China a manipulator. Another is that the folks there seem convinced that taking a tough line with Beijing will backfire (which was also Maria Cantwell's avowed reason for voting no on the bill). And some people might say Treasury is a tool of the big New York investment banks, which want nothing so much as for the current status quo with China to continue forever and ever regardless of its impact on U.S. manufacturers. But I wouldn't say that. Well, maybe a little.
The bill reported out of committee today would remove much of Treasury's discretion and leeway. Now the standard will no longer be manipulation but "fundamental misalignment," which means "a significant and sustained undervaluation of the prevailing real efffective exchange rate, adjusted for cyclical and transitory factors, from its medium-term equilibrium." And if there is such a misalignment, then all sorts of stuff that I don't fully understand is supposed to happen involving the WTO, the IMF, and probably CONTROL.
The bill has been portrayed as the second coming of Smoot-Hawley, the infamous tariff act of 1930 that probably worsened (and maybe helped cause) the Great Depression, but that strikes me as wildly exaggerated. The original Schumer-Graham bill, which called for 27.5% tariffs on Chinese imports if China didn't revalue its currency, was Smoot-Hawleyish, but Chuck Schumer said today that it was never meant as anything but a bargaining chip.
"In the end what all of us want is simply for a bill to become law that will cause the Chinese to take action," he said during the markup. Afterwards I corralled him (not hard to do; it was just after he left the gaggle pictured at left), and he elaborated: "I don't believe the Chinese move out of a sense of comity and magnanimity. They are a mercantilist state."
Yeah, whatever. I can totally understand why people in Congress feel the need to do a bit of saber-rattling with China, and this strikes me as relatively harmless saber-rattling. But I also understand that there are a bunch of non-mercantilist reasons why China wants to go slow on adjusting the remninbi and even slower on letting it float freely. And I also think that, even if the RMB goes up 40% against the dollar, we'll still run a huge trade deficit with China.
July 25, 2007 5:57
Yeah, the dollar really is hitting record lows, sort of
I always get a little irked when I read an article stating that the dollar has hit a "record low" against the euro. The euro's been around for less than a decade, and happened to come into existence at a time when the dollar was extremely strong. Record lows against it are meaningless.
Of far more interest is the value of the dollar against the currencies of our main trading partners. So I checked out the Federal Reserve's trade-weighted index of the dollar vs. the other major, freely traded currencies, which goes back to 1973, and found that, indeed, the dollar is the lowest it's been since the creation of that measure. Things are different when you look at the "broad" trade-weighted index, which just goes back to 1995 and mixes the major currencies with the likes of the Chinese remninbi, the Mexican peso, and the Indian rupee. The dollar's still well above its mid-1990s lows there. All of which means ... I dunno. I just think it's a nice excuse for yet another chart:
July 25, 2007 2:09
Robert Scoble fails to solve my Google Reader problem
I use Google Reader to keep up with blogs that I think might be useful to me in my own blogging and columnizing.
Actually, that's being far too generous to myself. For days, sometimes even weeks at a time, I use Google Reader to keep up with the 16 blogs whose feeds I've subscribed to. There are many other blogs and news sources that might be useful to me, but I don't subscribe to them because of what happens already with my mere 16 feeds: I miss a day, or two, of checking Google Reader, and then the sheer number of unread posts begins to weigh upon me. I start actively avoiding Google Reader. I see the link on my browser toolbar and it shames me. I don't click on it. I stop looking at my browser toolbar. I stop looking at my browser. Etc.
Finally, on some afternoon or evening when I have a bit of free time, I go into Google Reader, take a cursory look at the hundreds of posts there, click "Mark all as read" and start over.
For obvious reasons, then, I've been meaning for a while to take a look at the semi-famous video, posted a couple months ago by Tim "4-Hour Workweek" Ferris, in which superblogger Robert Scoble explains how he gets through 622 feeds on Google Reader every day. And the answer is ... (1) he looks at the headlines, (2) he looks at the graphics, and (3) he looks at who the author is, and makes a split-second decision whether to read the post or not. Here's the video (it's more than 11 minutes long and appears to have been filmed by a four-year-old, so carve out some time and take a Dramamine before you click play):
My biggest learning (as Alan Mulally would say) is that Scoble still spends an awful lot of time staring at his Google Reader. ("I can't belive [sic] this guy has time to make babies," wrote one commenter on the video.) I don't want to spend that much time staring at my Google Reader. Yet now that I write a blog and work at a newsweekly, I sorta have to keep up (when I was at Fortune I would sometimes go weeks without even looking at a newspaper; I had books to read and people to interview, and figured that really important news would find me). Anybody got a better way?
July 24, 2007 2:39
A statement from Ford's Alan Mulally that I'd like to hear more about
This little tidbit was in an interview in yesterday's W$J (yes, I'm behind) with Ford CEO Alan Mulally. The interviewers asked him what had been the biggest surprise he'd encountered since coming over to Ford from Boeing last September. Mulally responded:
The biggest learning was the fact of how all our customers are aware of the brand but over the years, on the car side, their consideration of us is much less than the competition. We hadn't been concentrating on the smaller cars like we had on the big SUVs and trucks. Now the question is, how do you get the consideration on cars to get [customers] back in the showroom?
The biggest aha was on CAFE [federal Corporate Average Fuel Economy regulations] and what a market-distorting policy that is, what a failed policy that has been in reducing our dependence on foreign oil.I learned about it from the team. You have these charts with the critical issues and boom on three or four of them is a question about "where are we going to go with CAFE?" So all of a sudden one of the biggest issues on everyone's mind is CAFE in these 2- to 2½-hour meetings. The first time I heard about it was about two weeks into the job. It's on everyone's mind.
The CAFE standards, because they exempted pickup trucks and SUVs from the mileage requirements applied to cars, have been a huge factor in motivating Detroit to focus all its energies on the big and the wasteful and to neglect cars. It's nice to see that Mulally and others at Ford seem to realize that. But I am very curious as to Mulally's prescriptions for fixing it. The carmakers are opposing the energy bill passed by the Senate that would require a 35 mpg average for their fleets, cars and trucks combined, by 2020. They're supporting a House bill that would make it 35 for cars, 32 for trucks, by 2022. Is that all he thinks needs to happen to cure CAFE's "market-distorting" effects, or is there more? Does he think an increase in gas taxes is in order?
What's that you say? I'm a journalist, so I should ask him? Okay, I'll get to work on it.
July 23, 2007 10:28
Another way to look at the S&P 500
A reader e-mailed to ask if it was possible to put together an inflation-adjusted chart of the S&P 500. Well, yeah: Anyone with Excel and an Internet connection can do it (the data here is from Yahoo! Finance and the Bureau of Labor Statistics). But I was curious, so I put together this chart going back to the beginning of the great 1980s/1990s bull market in the summer of 1982:
What does one learn from this? That, uh, inflation eats into long-run asset returns. And also that the stock market still isn't back to its 2000 highs in real terms.
July 20, 2007 11:50
Jeremy Siegel says the weak dollar is good for stocks. Except if gets weaker. Or something like that
In the new Time Asia, Wharton School prof and market guru Jeremy Siegel has a mostly optimistic take on the weak dollar and U.S. stocks (to be contrasted with the more sour one that I posted Thursday):
The weak dollar ... makes U.S. asset prices attractive to foreign investors. U.S. interest rates are higher than those in Continental Europe and are much higher than Japanese rates. Similarly, U.S. stocks look better by comparison. Measured in euros or pounds, the S&P 500 index is up less than 50% from its October 2002 lows, while European markets have more than doubled. Plus, Standard and Poor's recently reported that 44.2% of the revenues of companies in the S&P 500 index were generated abroad, up from 32% five years ago. With almost half of their revenues being earned in foreign currencies, these firms make tempting purchases, or even takeover targets, for foreign-based investors.
Any appetite overseas buyers are developing for U.S. assets could be easily spoiled, however. Asian investors are keenly aware of opportunities elsewhere. They are on the lookout for signs that Americans will not welcome foreign purchases of domestic companies—they remember the Congressional opposition to the bid by CNOOC, the Chinese oil giant, for U.S.-based Unocal. If barriers are raised against the acquisition of U.S. assets, then the dollar will be dumped on the foreign-exchange market and money will flow into currencies in countries where such investments will be welcome. And if foreigners turn away from dollar investments, the economic repercussions will be severe. Without overseas buyers, stock and bond prices in the U.S. will fall and the dollar will continue to slide. This will drive up the price of imports, especially oil, worsening inflation and reducing consumers' income.
So a weak dollar is good for us. But a weakening dollar would be bad. Don't you just love currency stuff? It makes almost everything else in finance seem simple and straightforward.
July 20, 2007 10:41
New column: the end of easy money
It's not technically a column. It is, in Time parlance, a story in the well of the new issue, with "IRAQ" (or is it "A IRQ"?) on the cover. But you can't tell the difference online. It begins:
Again and again in these past few months, financial markets have appeared to be on the verge of something very scary. It happened first and most jarringly in February, when subprime-mortgage woes made headlines in the U.S. and a market crashlet in Shanghai sent global stocks into a swoon. Lately the scares have been smaller but more frequent: a sharp rise in interest rates in May, runs on a couple of hedge funds in June, a sudden drop in demand for risky mortgage and corporate debt in July.
During each of these episodes, the financial pages filled with fret: Would this be the moment when markets turned south, when credit dried up, when hedge-fund managers and private-equity partners started applying for work at Wal-Mart?Then markets calmed, the Dow cracked 14,000, and the world got back to business. Don't count on that happening forever--today's jitters do probably presage something worse. "Rather like a brontosaurus that has been bitten on the tail and most of the body hasn't noticed it yet, the signal is working its way up the vertebrae," says Jeremy Grantham, chairman of Boston money manager GMO. But even the bearish Grantham doesn't see the reckoning coming tomorrow or even necessarily next year. And in the meantime, something with far more impact on most Americans' lives than a stock-market correction has already happened.
That something is the close of a remarkable era of easy money. Cheap credit helped fuel the stock bubble at the end of the past millennium and almost entirely fueled the real estate boom of the first years of this millennium. It kept us spending through the tough years that followed the stock market's collapse, and it allowed the Bush Administration to finance big budget deficits without strain. Easy money also helped enable the rise of private equity as a major economic force.
Now, though, it's history. With each new market minipanic this year, interest rates have gone up a tad, lending standards have gotten a little tighter, and the easy-money era has receded further. Rates are still low by historic standards, and some kinds of loans are still cheaper than they were last summer. But the economy was growing at more than 3% then. This year it has sputtered. Interest rates are supposed to sink when that happens. They haven't. Read more.
I'm not making any kind of financial Armageddon argument here. To a large extent this is a healthy development, indicative of a world economy on much stronger footing than it was in the late 1990s and early 2000s. But it's definitely different.
July 19, 2007 2:16
This U.S. bull market looks mighty unimpressive from overseas
The stock market has been breaking lots of records lately. Sort of. Wowsers! The Dow closed above 14,000 for the first time! Isn't that exciting? Not really. In his NYT column Wednesday David Leonhardt made the point that it's silly to get excited about such nominal-price milestones:
The S.& P. 500, which is a much better measure than the Dow, closed yesterday at 1,549, just 1.4 percent higher than the peak it reached in March 2000. Think about what that means. While the price of nearly everything has risen over the least seven years — while the price of bread has increased almost one-third, for instance — stocks have barely budged. They have only marginally outperformed cash sitting in a bureau drawer. So if we are going to talk about a stock market record, we should be doing the same for a whole lot of other things: Loaves of Bread Surge to New Highs.
The point that this hasn't been such a great decade for stocks in the U.S. is made even more dramatically, though, when you adjust the market's performance for the value of the dollar abroad. Here's what the Dow looks like since the beginning of 2000:
Now it is worth noting that, even after the adjustment, the Dow has been rising since early 2005. But it's still far from its past highs, and it has underperformed most other major world markets.
July 19, 2007 1:28
Go ahead and turn off that Bernanke testimony. It's irrelevant ...
All eyes (okay, some eyes; certainly not mine) have been on Ben Bernanke as he testified about monetary policy yesterday in the House and today in the Senate. In an interesting little essay in the latest Economist's Voice, though, veteran Chicagoan Lester Telser argues that the Fed's monetary decisions get far more attention than their limited impact warrants.
Business reporters and Fed watchers continue to focus on monetary policy, but that is no longer, if it ever was, the Fed’s main job.
The Fed’s main job today is to respond to crises, like the stock market crash in October 1987, the collapse of Long Term Capital Management in September 1998, and the terrorist attack on September 11, 2001 .... When crises threaten the financial system, the Fed puts out the flames. The record shows that Alan Greenspan’s Fed did learn the lesson taught by the Great Depression. Let us hope that Ben Bernanke’s Fed continues on this road.
July 18, 2007 7:50
The question I haven't heard anybody ask about today's big NYC explosion, yet
Why is that 1,800 buildings in New York still get their power and heat from a century-old network of steam pipes? I mean, I know it's all about the installed base. If you currently rely on steam, it would cost a lot to switch to more modern power sources. But at some point doesn't the system become so archaic and dangerous that it's worth subsidizing a mass switchover?
Update: By the way, I'm sure some editor down at the NYT has already asked this question and dispatched a team of reporters to find answers. Which I will link to in the morning.
Update 2: I was wrong. The morning paper didn't answer my question. But Curious Capitalist Senior Steam Correspondent Paul Lukasiak takes a stab in the comments to this post, and Chuck makes some good points as well. Blogosphere 1, NYT 0.
Update 3: Okay, so it turns out steam is the heat source of the future (see the comments). Who knew?
Update 4: The Times finally comes through:
As antiquated as steam power may sound, it is a vital presence in modern Manhattan. Nearly 95 percent of commercial buildings south of 96th Street use steam provided by Con Ed, including many landmarks, like the Empire State Building and Rockefeller Center, and newer buildings like the Time Warner Center, as well as hospitals, colleges and museums.
Steam remains a constant in New York — and other Northern cities like Boston, Chicago and Philadelphia — largely because it saves space. Instead of installing boilers or other bulky and expensive machinery, landlords just need to accept a 16-inch pipe from outside the building to carry steam inside.“Switching off steam is never going to happen,” said Steve Mosto, the chief executive of Mosto Technologies, which helps commercial landlords maintain their steam systems. “It’s as critical and inherent to the city as electricity. The price of real estate is so high that it’s not worth giving up the space to put in your own boiler or steam turbine.” ...
In some ways, it is a more eco-friendly fuel, because in many cases the steam is a byproduct of electricity generation. And since steam pipes are buried, they also are less susceptible to extreme weather conditions.
“Steam was green before green was fashionable,” said Mitchell Moss, a professor of urban policy and planning at New York University. “I’ll take our steam system any day over the suburban power lines that fail every time there is an ice storm.”
Blogosphere 1, NYT 2 (but only because the ref allowed for way too much extra time).
July 18, 2007 4:42
How 'bout that Indian rupee?
Time's man in New Delhi, Simon Robinson, has an article on Time.com that deserves some more attention than it's been getting. He writes:
As U.S. politicians line up to bash Beijing for its weak currency and gigantic trade surplus, one message they might want to offer their constituents is, buy Indian. Unlike China, Asia's other emerging giant has allowed its currency to appreciate almost 9% against the greenback since January. You might not have heard much about that in the U.S. — where total imports from India last year amounted to $22 billion, compared with $288 billion from China — but in India the rupee's appreciation is one of this year's biggest business stories, as exporters and labor groups scream that the strong currency will mean lower profits and fewer jobs.
So, what's going on? The rupee exchange rate is neither completely free-floating nor fixed, but is "managed" by the Reserve Bank of India through buying and selling other currencies. Up until April, the Reserve Bank was buying lots of U.S. dollars — perhaps as much as $24 billion in the previous six months — to keep the rupee at around 44 to the dollar. But with investor sentiment so hot on India and money pouring in from abroad — international investors have bought more than $7.5 billion worth of Indian stocks so far this year, compared to $8 billion in all of 2006 — the Reserve Bank found itself having to spend more and more on foreign currencies just to keep the rupee stable. When inflation shot up to over 6% in April, Bank officials appeared to decide — they never comment explicitly on such matters — to stop buying dollars. The result was, over the next couple of months, a strengthening of the rupee to close to 40 to $1. Read more.
This sharp rise is obviously causing some problems for Indian exporters. But still, what great evidence of the dramatic shift in the country's fortunes over the past few years. I went to the Federal Reserve's historical FX page, downloaded the rupee/dollar exchange rate since 1973, and got Time.com's Feilding Cage to make it into a pretty chart. Check it out:
July 18, 2007 10:43
The real estate slump claims another victim: newspapers
The real estate boom/bubble of the past few years had a lot of interesting effects on the American economy that are now being unwound. One was that everybody's brother in law became a mortgage broker. Another was that consumer spending kept rising even though incomes were stagnant. Yet another, which I hadn't really thought about before, was that it made the struggling newspaper industry look slightly healthier than it actually was. From today's W$J:
In the first quarter, revenue for every major ad category -- classified, national and retail advertising -- was down. The sharpest declines were for classifieds, where spending dropped 13.2% -- not so much a result of competition from the Web as of economic woes affecting certain categories of advertisers. Real-estate classifieds, until recently a bright spot for the industry, have plunged along with the property market. Auto and employment classifieds are also sinking. Financial-news outlets such as the Journal are being hurt by a slump in technology advertising.
"Right now, you've got a perfect storm," says Edward Atorino, an analyst with financial broker Benchmark Co. He predicts total ad revenue will fall 4.3% this year. The decline will be one of the steepest in history.
July 17, 2007 12:16
Like so many things in Detroit, Ford's Volvo sale may be all about the retiree health benefits
The WSJ has a very interesting article today explaining that Ford's main motive for thinking about selling off Volvo is the need to raise money to pay for a deal with the UAW:
General Motors Corp. and Ford Motor Co. have moved in recent months to pare assets and build up cash as they seek answers for their loss-plagued North American auto operations. Potentially adding to the moves, people familiar with the matter said over the weekend that Ford is considering selling its Volvo car unit, a profitable business expected to receive considerable interest from other car companies and financial buyers such as private-equity firms.
GM, meanwhile, agreed to sell its Allison Transmission unit for $5.6 billion after nearly 80 years of ownership. It has also raised more than $10 billion in recent months in credit markets, all of which was won by pledging assets essential to running its automotive business.A key part of GM's plan, according to people familiar with the matter, is to amass a cash hoard big enough to offload tens of billions of dollars of current health-care liabilities for blue-collar retirees to a new, union-run fund outside the company known as a VEBA, for voluntary employees beneficiary association. Industry observers say Ford's move also fits that goal.
Whenever I write that the Detroit Three have become retiree-benefit providers that make a few cars on the side, I wonder if maybe I'm overstating things. But here's Ford thinking about selling off one of its more valuable assets just so it can pay to get retiree benefits off its books. After that, the idea is, Ford will just be a carmaker again. From the perspective of the automakers, I think this a great idea. It will remove their executives' perennial excuse for losing ground to Toyota and Honda and Nissan. But that's a good thing, right?
For the retirees, it's a somewhat tougher call. They will no longer be at the mercy of Detroit, and no longer at risk of losing their benefits in a bankruptcy. But if health costs keep going up and the VEBAs turn out not to have enough money, retirees won't be able to hit up the automakers for more. Still, they've got Medicare already, and this seems like an eminently reasonable solution to a really difficult problem.
July 17, 2007 7:37
In the absence of much business news worth commenting upon ...
... I offer this scene of New York City in summer, from the Bohemian Hall & Beer Garden in Astoria, Sunday:
July 16, 2007 12:53
Optimistic investors make really poor sleuths
Three professors at the University of Minnesota's Carlson School of Management have assembled a mathematical model to explain why it is that financial fraud increases in good times and decreases in not-so-good times. Write Paul Povel, Rajdeep Singh and Andrew Winton, in a paper in the July Review of Financial Studies:
Our model highlights two key determinants of a firm's fraud decision. The first is investors' prior beliefs about the state of the economy, measured by the proportion of 'good' firms among firms seeking financing. When investors' priors reflect low or average numbers of good firms, there is little or no fraud. ... When priors are fairly optimistic, however, investors do not monitor a firm with positive public information carefully, because this merely confirms their view that the firm is very likely to be good, but they do monitor firms with negative public information. Here, incentives for fraud are high. ...
We also highlight the role of investors' costs of monitoring firms. Although intuition suggests that lowering such costs would reduce fraud, we show that this is not always the case. ... Throughout the 1990s, improved computing and communications technologies greatly reduced investors' costs of examining firms' prospects, yet at the end of the decade--a period of very high investor expectations--a wave of frauds occurred.
So there you have it: The only reliable antidote to financial fraud is a good old-fashioned bust.
July 16, 2007 8:26
Meanwhile, where David Beckham wasn't ...
At the Red Bull New York-New England Revolution game Saturday night. (The Mighty Revs won 1-0 on what the replays showed to be a beautiful Andy Dorman goal; I missed it because I was text-messaging Mrs. Curious Capitalist). Attendance wasn't really as dire as it appears in the above photo. Presumably to make things look better for the TV cameras, Red Bull ticket sellers cram people into the north stand:
Reported attendance was 13,819. Which looks really lame in Giants Stadium, but wouldn't be bad for a hockey game, a basketball game--or a soccer match in most smaller European nations.
Amid David Beckham's grand entrance in California Friday, there was lots of jabber on the TV and elsewhere about whether Becks could either "save" soccer in the U.S. or vault it into the ranks of the NFL and MLB. Meanwhile, there's been tons of dismissive talk in especially the English media about how Major League Soccer is miles below the top European leagues in quality.
But to become a permanent and successful part of the American sports scene, all that MLS really has to do is become a bit more popular than the NHL and field teams good enough survive in a second-tier European league like the Dutch Eredivisie. This is an age of niche entertainment, and the MLS can do just fine economically merely by broadening its existing niche a little.
Soccer already has a much bigger fan base than hockey here. It's just that most of those soccer fans think the MLS is too low rent or too Anglo for them. There's also a big talent pool of American players; it's just that many of the most talented young ones would rather try their luck in Europe than use the MLS as a springboard.
Will David Beckham's arrival change any of that? How the heck am I supposed to know? He will, definitely this year and probably for the next two or three, bring out lots of people to MLS games who have never been before. And he will sell tons of L.A. Galaxy merchandise. Especially to his relatives, as the Washington Post's intrepid sports blogger (or bogger) Dan Steinberg learned Friday:
I should note that I stopped into the team store to look around, and suddenly the place was locked down and Posh Spice was standing a few feet away from me, snapping up Beckham merchandise. Soccer balls, warm-ups, jerseys. The final tally came to $583 and change. She saw me writing down her purchases.
"We've got to look good for the first game, right?" she told me. "We've got three boys, myself, my sister, my sister's children, my brother, my dad, David's family." I asked how many t-shirts she was buying."A lot," she said. "We've got a lot of family."