Category: Markets, Business, and the Economy

Yesterday’s Sunday newspaper was interesting. It was not interesting for the headline reading “Roy fights for life,” although I do hope both Roy and the Montecore are alright. Far more interesting was the note next to the masthead: “More than $60 in coupons and 1600 job listings inside!”

Those 1600 job listings sure sound like the sign of a good economy. An optimist would point out that those are only the listed jobs, and doesn’t include the type of job one must see an agency or a recruiter about. However, this is the kind of town where even jobs for Doctors and Lawyers are put in the newspaper, so don’t get to thinking those 1600 jobs are a small fraction of the jobs available. Furthermore, some percentage of the available jobs are part time, reducing the number of actual “career opportunities.”

Another unfortunate fact about those 1600 job listings is the fact that this area is growing wildly. The county adds 5000–7500 new residents each month. Even if half those people are children — and yes, the school system is strained by the ever increasing number of students — suddenly 1600 jobs isn’t that much.

Driving around town, there are other signs that all is not well with the local economy. The overwhelming majority of apartment complexes have large banners proclaiming “$99 Move In Special,” or simply “Free Rent.” And remember, this is in a rapidly growing city with a relatively vibrant local economy.

Those $60 in coupons are looking awfully appealing.

If you do no other reading today, take a look at what the Canadians have to say about our economy, and this summary of American economic prosperity in the real world by Jonathan Tasini. Frankly, I could not have put it better.

Step one, make a car that people want. Step two, sell it for a price that people will pay, and yet is higher than the cost of designing, making, selling, and delivering the car to the final customer.

Alright, that was oversimplified.

As I write this, the large American auto manufacturers are trying desperately to sell cars. Ford has announced layoffs. Chrysler has announced $4000 incentives on brand new 2004 vehicles and $5000 on 2003s. GM is offering no-cost loans — something they are only able to do because they both build and finance the car. The number one item if you search Amazon.com for “American Cars” is “The End of Detroit: How the Big Three Lost Their Grip on the American Car Market.”

Meanwhile, the Japanese are selling cars almost as fast as they can make them. Honda and Nissan are both doing well, but by far the biggest success story is the redesigned Toyota Prius. You may remember the Prius as a very small, rather pricey hybrid car, distinguishable from the Echo only by the chrome. This year it is a somewhat larger hatchback available for roughly $21,000. It even gets substantially better milage than before. Edmunds describes it as “a legitimate family sedan that offers everything you would expect.” There are no incentives, no rebates.

Toyota is selling almost 6 times as many of them as they expected. It remains to be seen whether this demand will hold up, but this is nevertheless impressive. Although this car may not meet everyone’s needs, people who bought them seem to be happy with them. This isn’t one of those cars that wows the automotive press but falls short in real life, by all accounts. Toyota has step one (above) well under control.

But what about the second step, being able to sell it at a profit? Toyota claims they have that under control too.

Does it seem odd that the Detroit newspapers didn’t have much coverage of this success story? I thought so too. Maybe being someplace where the majority of the people can get family discounts on Big 3 cars gives them myopia regarding foreign cars. Time for Detroit to take a road trip.

Short quiz: all answers will be either a) Elliot Spitzer, b) William Donaldson, or c) None Of The Above.

1. Who is the current head of the Securities and Exchange Commission?

b) William Donaldson took the position in February of 2003, taking over from embattled Harvey Pitt, who was generally regarded as ineffective.

2. Who is the Attorney General for the State of New York?

a) Elliott Spitzer has had the position since 1999, and in all likelihood has done things that benefit you, even if you don’t live in New York.

3. Who recently reached a settlement with several major brokerages regarding alleged analyst hyping of overpriced stock for the benefit of the company?

a) Elliott Spitzer conducted a damning probe of brokerage research practices, resulting in massive settlements. None of the firms involved wanted to face criminal charges in the matter, as that would have been a corporate death sentence.

4. Who led charges against Dennis Koslowski, whose trial for essentially robbing Tyco Corporation blind while employed as its CEO began today?

c) None of the above. He is being prosecuted by the District Attorney of Manhattan (not this one, the real one).

5. Who is prosecuting all the Enron executives?

c) None of the above. A consortium of State Attorneys General and the Department Of Justice are handling the various criminal cases. The SEC continues to investigate Ken Lay, who has yet to be charged with any crime whatsoever.

6. Who recently brought charges against several mutual funds and hedge funds for illegal trading practices, despite being a hedge fund investor himself?

a) Elliot Spitzer charged that some hedge funds were able to (among other things) buy and sell stocks to mutual funds at the previous day’s prices. That’s like being able to make a bet on yesterday’s sporting events. It is a well known fact that Mr. Spitzer has been an investor in a hedge fund formerly (and legally) run by noted commentator Jim Cramer.

7. Who is prosecuting noted banker Frank Quattrone for obstruction of justice?

b) William Donaldson’s SEC, although a) Eliot Spitzer is trying to determine if there is enough evidence to bring state charges against Quattrone.

8. Who is prosecuting the fraud case against various WorldCom executives, including former CEO Bernie Ebbers?

c) None of the above. It is being prosecuted by the Oklahoma Attorney General. The Feds are not happy about it.

9. Who has recently been in the Congressional hot seat?

b) William Donaldson has been grilled by the Senate several times recently.

Bonus extra credit short answer question
Given the answers to the questions 1-8, are you surprised by the answer to question 9?

Not at all.

It’s not just a proverb, it’s not just a Johnny Rotten lyric, it’s the undeniable truth.

At the beginning of the week, Forbes was proud to announce that the 400 richest Americans got 10% richer over the last year. Indeed, each of the 25 richest Americans saw an increase in net worth. These people are all Billionaires with a B.

Meanwhile on the other end of the economic spectrum, an authority no less credible than the United States Census Bureau reported at the end of the week that not only are there more people living in poverty this year than last year, not only is the median American income declining, but it is the second year in a row that poverty has increased and wages have decreased. The income gap between the highest and lowest paid Americans is also growing. Now, 12.1% of Americans earned less than the poverty level. That’s just short of one in every 8 Americans. About 13 million of them are your neighbors in suburbia — about 8.9%. These aren’t those people living under the bridge downtown; they are regular people like you. The change in suburban poverty is the lion’s share of the national increase. More than 1 in 4 single mothers and 1 in every 20 married couple live in poverty. Over 16% of American children live in poverty. There’s something to think about next time you drive past a public school.

It is oh so easy to blame the President, his tax cuts, and his economic “plan” for this divergence. He is the obvious target, the low hanging fruit. After all, it happened on his watch. There are also sound arguments to support the kneejerk reaction. Jackson Thoreau has written an excellent discussion of the ways Bush Administration policies have contributed to the poor getting poorer. It is worth a read, and although there is an insult to Kelsey Grammer, he does not resort to mindless Bush-bashing. Some members of Congress are not so circumspect, accusing the administration of “burying” the data by quietly releasing it on a Friday morning, a time when few people expect new economic data. The administration blames the increasing poverty on the economic slowdown — you remember, the one that supposedly ended almost 2 years ago.

There are more voices speaking about why the rich are getting richer. Forbes points out that much of the change is due to tech stocks rising. This does not explain Warren Buffett. Buffett, number 2 on Forbes’s list, has been against the repeal of the estate tax despite the fact that his heirs would greatly benefit. Furthermore, he called Bush’s dividend tax break “voodoo.” Although Mr. Buffett has not commented on today’s news, it is a pretty good bet that he would ascribe some blame to the Bush tax agenda. Others have come out and said so.* Another man who stood to gain a lot from Bush tax cuts, a man with more money than I am ever likely to have, Jim Cramer,* suggests that it is not the dividend tax cut that was the problem, but coupling it with a capital gains cut.

When the rich claim they are not paying enough taxes, you know something is wrong.

*Please forgive the links to abstracts. They were the only free way to present you with the relevant information.

Unless you really like financial news, you may not have noticed that the value of a dollar has been sharply declining this week. The dollar has been declining for quite a while, but the pace has started to alarm investors, economists, politicians, and businessmen both here and abroad.

The good news — if it can be called that — is that a weak dollar makes American goods more competitive overseas. For example, a Volkswagen will cost more relative to a Ford in the states, while the Ford will seem to have a price cut in Germany. Unfortunately, this logic applies to everything Americans buy that is imported: fruit, meat, clothing, computer chips, Canadian lumber, Italian leather sofas, Bosch spark plugs; frankly Americans import most of what they buy. That is the definition of a trade deficit. That is where this policy will hit you in the wallet. The theory is that a weak currency will make it more cost effective to manufacture things here in the Good Old U. S. of A. and cause companies to hire back those 3 million or so factory workers whose jobs have evaporated during the Bush II Administration. This assumes several unrealistic things, not the least of which is that companies that have moved manufacturing overseas to take advantage of cheap labor and brand new factories are willing to move back.

The same devaluation that makes it desirable for foreigners to buy American cars makes it undesirable for foreigners to have American assets, such as stocks and bonds. Big deal, you say? Asian banks own over $1 Trillion (with a T) of the United States’ national debt. Imagine what happens if they decide to sell just a tenth of their positions.

Furthermore, the weak dollar makes it undesirable for foreigners to travel to the United States, as if current visa policies do not do the job. Has anyone told the Treasury Secretary that the Commerce Secretary is trying to encourage tourism? Secretary Snow, who replaced the largely ineffective Paul O’Neill,* has made a series of statements that make sense in a vacuum, but not in reality-land.

For example, back in June, Snow defined a “strong currency” as follows: “You want people to have confidence in your currency. You want them to see the currency as a good medium of exchange. You want the currency to be a good store of value. You want it to be something people are willing to hold. You want it hard to counterfeit, like our new $20 bill. Those are the qualities.” This may be his personal definition, and it may even be the Administration’s official definition, but it is not the definition most people use. It’s like defining all computers as using Microsoft Windows; saying it does not make it so. As CNN’s Justin Lahart put it, “Most currency traders had thought that the “strong dollar” policy had something to do with fostering economic policies — like low inflation, reduced debt and strong growth — which lead to a higher exchange rate for the dollar.”

In a more recent example of Bizarro-World Economics, just yesterday Snow proclaimed before an international audience of leading bankers and economists that the United States’ budget deficit would be cut in half by 2008. He went on to say that would take place due to growth and “disciplined spending” without tax increases. I fail to see how this is possible without hiring accounting experts from Enron and Worldcom. The fact that an expert from the International Monetary Fund thought this was reasonable should raise big red flags. Granted, it only took 2.5 years to go from budget surplus to an over $400 Billion deficit. But that was before the War on Terror, nation building in Afghanistan, overthrowing the albeit oppressive government of Iraq, two massive tax cuts, adding an entire new Department to the Executive Branch, proclaiming that No Child should be Left Behind, and giving sweeping new powers to the Department of Justice. We haven’t even figured out how to make Social Security work out after the Baby Boomers start retiring, and we’ve had since 1946 to work on that.

In the end, the currency devaluation is a high stakes game of chicken with China and Japan. The primary aim is to force China to de-link it’s currency with the dollar.** This link is one of the reasons Chinese goods are so darn cheap you almost can’t avoid buying them in the States — well, that and slave labor. The secondary aim is to force Japan to stop artificially lowering the value of the Yen, making Japanese goods cheaper overseas and stimulating Japanese manufacturing.

Should prices of Asian goods rise, inflation will result. That will force Greenspan to raise interest rates. That in turn will effect mortgage rates, the availability of investment capital, and the amount of interest the United States has to pay on the National Debt.

No matter who blinks, you lose.

*O’Neill was a good CEO, lousy Secretary of the Treasury. When he was nominated, Wall Street was pleased, thinking it meant someone competent and clueful would be running the show. It is unknown why exactly the administration thought another good CEO would succeed where another failed.

**Linking a currency may be a good short term idea. For example, certain South American nations did it to halt hyper-inflation. However, in the long term, Alan Greenspan is paid to care about how monetary policy effects America, not any other nation whose currency may be linked to our own.

There. It’s done. Dick Grasso has resigned as head of the New York Stock Exchange. A man who was debatably the most powerful man on Wall Street is now unemployed, in answer to widespread calls for blood since disclosure of his $140 Million salary package. Please go ahead and feel free to sample some of the news coverage. Even the Head of the SEC and the Senate wanted to know what was going on. Many people are outraged that he received so much money. And yes, it certainly is a lot of money.

But personally, I’m inclined to think he worked pretty hard for it. Several of those news items in the last paragraph make it clear that he worked his way up from the bottom, earning less than $85 per week in the late 60s, and that he simply knows more about how the arcane NYSE system works than anybody. Who coordinated things such that the markets were only closed for 4 days after September 11, 2001? Dick Grasso, that’s who. For those who aren’t experts in Manhattan Geography, the World Trade Center was walking distance from the NYSE. Many brokerages, mutual funds, and financial advisors had offices in the WTC. There are faces you no longer see on CNBC because they were at Ground Zero. There were other companies that lost 3-letter types in the terrible incident — that falls under the category of what the SEC likes to call “material information.” Almost everybody on Wall Street lost someone they knew that day. Many of them watched the Towers go down live and in person. The financial markets would have fared far worse to be closed another week. This is to say nothing of the impact such a delay would have had on the economy as a whole. Yes, I do believe that not being able to access the capital markets would have had a negative effect on American business.

Fine, that was 2 years ago, what has he done lately? Where was Dick Grasso when the lights went out last month? In his office, making sure things would run smoothly in the morning, on generator power of course. He slept in his office that night.

Don’t start thinking this is the end of the story. The money was not just sitting on the floor of the NYSE waiting for somebody to pocket it. The Board of the NYSE had to sign off on this mess, and now they will have their noses rubbed in it. In fact, if you think Dick Grasso was overpaid, the Board is where to lay the blame. Expect heads to roll. The volatility of the situation is illustrated by the fact that they couldn’t find someone to replace Grasso before lunch.

My inner tin-foil hat wonders who stood to benefit from Grasso’s demise.

The markets in the United States are having a nothing day, as everyone digests conflicting data. While manufacturing appears to be expanding, manufacturing output is falling. Meanwhile, there are fewer jobs and continuing layoffs. Nevertheless, some economists are predicting 4.0% growth in the Gross Domestic Product — a figure Reuters reminds us is “the fastest pace since the height of the boom in 1999.” Furthermore, although there is scant coverage of the fact, they are predicting profits to grow even more than that. Nevertheless, inflation is expected to stay low, that is as long as you don’t include gasoline or insurance rates. In the midst of all this, the Fed is expected to sit on their hands when they meet tomorrow. Nothing to see here, the economy is fine. Right?

Meanwhile, WalMart reports that same store sales growth will be near the top of the estimated range.

Growth is great! It is un-American to say otherwise. However, growth in profits in the long term cannot exceed growth in the GDP. Otherwise the GDP would rise, not just because all those goods were sold, but because they had to be manufactured and shipped. Short term, such hyper-growth is made possible by taking market share away from competitors (which only lasts until competitors change business practices to compete better, or go out of business), having an innovative product (which lasts until everyone who wants one has one), getting into new business segments (either by continuous research and development, or by acquiring other companies, neither is sustainable), or by accounting legerdemain (Enron, Cendant, Worldcom, the list goes on). Similar arguments go towards continual sales growth. One additional and important constraint exists on those “same store sales” that the retail sector is always on about: one business location has finite capacity. You can only cram so many people into a WalMart. You can only make them buy product so fast. You can only put so much merchandise on the shelves. Making the store bigger is expensive and only pushes the problem out a little.

If I sound skeptical about the idea of continued corporate growth in excess of GDP without creating inflation, it’s only because I am.

In this Jackson Hole, we have Alan Greenspan, proclaiming his belief that “The U.S. economy and the global economy are now better able to withstand shocks because of government deregulation and more flexibility in such areas as labor markets.”

Meanwhile, in Washington DC, we have Ohio Democrat Representive Sherrod Brown proclaiming on behalf of the party “In the last two and a half years, since George Bush became president, our nation has hemorrhaged 2.5 million manufacturing jobs…. Ten percent of our manufacturing jobs have disappeared. … Good jobs in steel and auto and textiles.” Days later, President Bush finally has acknowledged that just maybe, this loss of manufacturing jobs in our economy is a problem. Particularly for a man who would like to be re-elected.

Now then, in what ways have deregulation improved our lives? Deregulating airlines has resulted in the hub-and-spoke system, substantially lower airfares, and a parade of airline bankruptcies putting both skilled and unskilled workers out of jobs. Deregulating the power grid has resulted in energy traders gouging the American consumer for their “well earned” mark-up, an unreliable power transmission system, and Enron. Deregulating meat packing may have kept meat prices down, but it has definately made life tough for the small rancher, and compromised the safety of our foodstuffs. Deregulation of financial institutions has, um, meant we can do all our banking and brokerage business with one company. Deregulating telecommunications may have facilitated the rise of the internet, but it also may have also facilitated the rise of WorldCom. Deregulating telecommunications, cable, electricity, and a host of other things was supposed to bring prices down for consumers; instead of putting money in consumers’ pockets, it lined the pockets of a few potentially crooked executives.

And can we talk about this flexible American worker for a few minutes? The American workforce is currently the most productive in the world. The American worker makes this possible not just by the judicious use of technology (you aren’t reading this at work, are you?), but mainly by putting in longer hours than anyone else in the world. An average* American worker put in 1825 hours in 2002, generating over $60,000 of value to his employer. That breaks down to $32 per hour. The hourly is higher in several other countries, but as one economist on the project put it, “If you work 15 hours a day, of course there are hours when you are not as productive as if you only work six hours a day.” Efforts to “reform” overtime pay regulations will not improve matters. In addition to working more hours, American workers are dealing with more dangerous workplaces than in much of the developed world. We encounter abusive customers, co-workers with weapons, clueless supervisors, tactless coworkers, repealed OSHA regulations, and bosses who try to cover up workplace injuries wherever possible. Wages are going down, good jobs are harder to find, and job security is a fairy tale. It would appear that “flexible” means “able to suck up any and all hours and hardships just to stay employed.”

As “productive” and “flexible” as the American worker supposedly is, it is amazing that jobs are still vanishing overseas. And not just those quality, high wage, high benefit manufacturing jobs Representative Brown is referring to. High tech, decent paying jobs are being sucked away from the American economy. Tech support is being outsourced to former British colonies such as India, taking advantage of English speakers who will accept wages that are low by American standards. All the while, customers with now-tenuous employment are being told that this exportation of American jobs saves them money.

Happy Labor Day. Particularly if you are one of the lucky people with employment, and one of the even luckier people getting the day off with pay.

*Unfortunately, the people covering this study fail to mention whether by “average” they intend the mean, median, or mode. We therefore must assume they are using whichever figure makes the data look better.

Today, I happened to see an interview with the CEO of Macrovision. Macrovision is a company that makes the anti-piracy technology you find in DVDs, DVD players, Cable Boxes, Videotapes, and the like. They are the reason you can no longer tape something on Pay Per View to watch later. The CEO cited estimates that the home video industry loses almost $1 Billion each year. He also said that 25% of people responding to their poll said they had tried to copy pre-recorded videos in the last year.

It’s a little harder to copy videotapes and DVDs than it is to copy CDs. A CD can be copied with the tape recorder already in your stereo in as much time as it takes to play the disk, or converted to MP3 tracks on your computer with software you probably already have in even less time. Furthermore, if you own the CD, it is perfectly legal for you to do so. It falls under “fair use.” This has not stopped the music industry from attempting to make such copying impossible. Such attempts have note been well received, and in some cases not very sucessful. The courts have upheld the idea that it is perfectly justified to make a backup of a CD, or a tape for in your car, etc.. Lending this backup temporarily to a friend is a grey area that is unlikely to get you into trouble. Making such tapes for everyone in the neighborhood, or allowing the MP3s you made freely available for download is not, and the RIAA is trying desperately to clamp down on the latter. The movie industry would prefer that the issue of online movie sharing not start. They have the undenyable advantage that, frankly, video data is big. It takes a long time and a big pipe to send a movie over the internet.

All of my discussion thus far has concerned a population called the “casual pirate.” They make copies of things they do not legitimately own for themselves (and maybe some close friends) for personal enjoyment. Maybe because they can’t afford the real thing, or don’t think it’s worth the money; maybe because they can’t find the real thing available legitimately; maybe to complete a collection; in some rare cases, maybe for the challenge of breaking copy protection. All but the last group are effectively thwarted by the most simple of copy protection: make it moderately difficult or complicated, and they move on. Macrovision’s data seems to suggest that half these casual pirates would otherwise rent the videos in question, and almost a third would buy some of them.

Far more dangerous to the software, music, and movie industries is the professional pirate. He makes hundreds or thousands of illegal counterfeit copies and sells them perhaps below retail for a very large profit. This is a very big industry, and it should not shock you that organized crime might be involved. These pirates are not detered by a little bit of copy-protection.

Since circumstances force the movie, music, and software industries to rely on law enforcement personel for the lion’s share of stopping professional pirates, they have no choice but to content themselves with the only small by comparison problem of the casual pirate. This is where Digital Rights Management (DRM) comes into play. The schemes vary wildly in their design and implementation. The bottom line is that the copyright holder wants users to pay for product.

On the surface this is disarmingly fair. Unfortunately, the public has come to expect quality for its entertainment dollar. We are tired of paying $17.98 for an album that turns out to have 2 or 3 good songs and 10 lousy ones. We are tired of spending a lot of money at the movie theatre, when with a little patience we can buy the DVD, watch it on our own sofa, drink our choice of beverage, eat our choice of snack, stop the show to use the bathroom, and we don’t even need to hire a babysitter. We are tired of overhyped films with tired plots, even when the cinematography and special effects are lovely. Fortunately, the movie studios in particular have discovered that there are limits to what audiences will tolerate. They have furthermore discovered that timely, well priced DVDs have kept casual piracy to a minimum.

Want to stop piracy? Really? Give the consumer something quality at a reasonable price.

I had a revelation this morning, as I read about the United States being the only industrialized nation with no legally protected vacation time. Here is where reality smacked me in the face:

“And just last month, before members of the House of Representatives took off on their month-plus vacations, they decided to pile more overtime on working Americans by approving* the White House’s scrapping of 60 years of labor law with a wholesale rewrite of wage and hour regulations, turning anyone who holds a ‘position of responsibility’ into a salaried employee who can be required to work unlimited overtime for no extra pay.”

“Vacations are being downsized by the same forces that brought us soaring work weeks: labor cutbacks, a sense of false urgency created by tech tools, fear and guilt. Managers use the climate of job insecurity to stall, cancel and abbreviate paid leave, while piling on guilt.”

So here you are, the factors that allow some economists to say everything is alright, when anybody who does not live in a box knows there is something very wrong. Combine pointy haired bosses focused on arbitrary short term deadlines, add supervisors focused on making budget figures look good to please executives who are focused on making earnings targets, and liberally sprinkle with congressional rhetoric claiming to help the Working Man while actually helping his employer.

Your boss starts the chain of failure by making you work longer hours, and trying wherever possible to avoid paying you extra for these hours. Congress plans to assist him in that goal by increasing the number of people who can be considered salaried, and allowing “Comp Time.” Don’t be fooled by the lofty talk of how this will help you make doctor’s appointments and teacher conferences. The ability to actually take this time is governed by the same Lumberghian boss who told you at 4:30 on Friday afternoon that he needed you to come in Saturday and maybe Sunday too. Frankly, comp time is a system I saw abused before it was even legal. At least that employer gave the deserved time off within a few weeks; the law in question allows as much as a 13 month delay. In the end, your boss is allowed to work you harder, pay you the same, and promise that at some date in the hazy future you can have some time off. Assuming you remember to claim it, assuming your boss lets you have it, and assuming you still work there. Why exactly should your company hire another worker — who requires training and benefits — when the company can force existing employees work longer hours?

Of course this same boss can’t really afford to let you have a week off — let alone the 4 weeks the President gets, or even the 3 weeks the Chinese get — for a vacation. There’s work to be done, and temporary employees are expensive. He’s already perpetually understaffed because he’d rather make you work more hours than hire anybody. Indeed, he seems unable to quantify the fact that you will be more productive if you are rested, not overworked. Furthermore, as much of a taskmaster as he is, he’s afraid you may use that time off to seek a better job.

In the end, it all comes down to this: a “jobless recovery” depends on labor practices that border on abusive, and a labor force too afraid of potential consequences to call foul.

*I have been unable to find independent confirmation that this bill has passed the House. If it has, it will still require passing the Senate, compromise on any differing passages, and of course signature by the President. Think this is a raw deal? Start writing your Senator.