01 October 2014

Birds of a Feather, And All That

Steven Davidoff Solomon makes a run at corporate boards in his piece on Darden Restaurants, today. He closes the piece with:
Absent a last-minute, face-saving compromise, the likelihood of a full-scale ouster raises the glaring question: Why would the board pointlessly and perhaps foolishly invite its own demise?

To recap, for those not wanting to read the piece: a couple of tutes decided to buy up stock as activist shareholders. These are Starboard Value and Barington Capital Group. Both are hedge funds. They determined that Darden Restaurants, and the management thereof, was being mismanaged. The CEO and board disagreed. Much mayhem has ensued.

As Adam Smith (the real one, and I suspect the fake one, too) is so famous for: each economic actor behaves with enlightened self interest, which gave rise to the term homo economicus. Of course, Smith was opposed, on the whole, to capitalists generally and concentration specifically. What is this self interest for a corporate board member? Well, evidently it is to be best buds with other CxOs. In the case of Darden, as of today, eleven of twelve directors are current or former CxO/director of some corporation. If you want to expand your scope of earnings as a director, it helps if you don't look behind the curtain of whatever boards you currently have. Be nice to your CEOs and fellow board members, and you'll find far more opportunities to be a board member. I think that's what's called a sinecure. One hand washes the other. Birds of a feather flock together.

This is not to say that hedgies have the best interest of Main Street or Ma and Pa Kettle foremost in mind, of course.

For the quant types, this all raises the core question: if macro effects are just the sum of all those micro effects, isn't the whole shebang the result of such (low grade) corruption, rather than some human-centric version of thermodynamics? It ain't what ya know, it's who ya know; ya know? Or, as one who's been there puts it:
Directors were not appointed to compensation committees on the basis of distinctive skills or interests. Rather, they tended to be directors who could be relied on by management to be both sympathetic to management's compensation requests, and non-confrontational.

To get on the compensation committee, of course, one need be on the board. Be nice to your CEOs, and they'll be nice to you when it's your moolah to be decided. Stingy comp committee members won't be around long, ya think? Ring around the Rosie.

So, to answer Solomon's question (that does have a nice ring to it, doesn't it?): what's one board when you've got a whole life of other boards to run, ahead of you? Hedgies, after all, are not viewed as white knights anywhere.

15 September 2014

Up The Down Staircase

I'm not a fan of David Stockman, to say the least. But recent punditry on the subject of interest rates, asset prices, and bubbles led me to the obvious question: is it true, as it appears, and in the data; that corporations (that is to say, their capital allocators) are executing share repurchases in excess? Which is to say, as I have said more than a few times, that the growth in share prices is the result of intrinsically lowered returns on real investment? Which is to say, further, that the Masters of the Universe CxO types simply aren't generating any return?

So, of course, I went wandering on the innterTubes asking for the value of corporate repurchases. Alas, a Stockman piece came up first. Ever more alas, since he uses the data to make his usual wrongheaded conclusion. He hasn't actually learned much since his defense of Voodoo Economics.
Self-evidently, the corporate form of business organization is designed such that some considerable portion of net earnings should be returned to their owners each year. But a 95% rate of distribution is a giant aberration. Were this outcome to occur on the undisturbed free market, for example, it would signal an economy that is dead in the water and that participating companies face a dearth of opportunities to reinvest profits in future growth.

And, of course, that's exactly what's been going on. As the science and engineering geeks figured out some time ago, we're in the post-discovery age, of marginal incrementalism (kind of like, very unique). With real interest earnable near zero, then share prices (and bond prices, to be clear) go up to meet this rate. Or, as Vinny in those mob movies used to say, "who's gonna give ya a better deal, huh?" Lots of Chinese and Germans and such thought that Florida and Costa del Sol real estate was a sure thing. Not.

Or, as another pundit put it:
Corporate CEOs, with their massive share-buyback programs are in effect investing in the stock market rather than in expanding business opportunities at their companies. Either they expect higher returns from the market, or lower returns in their business, or some combination of both. Given their questionable track record in timing the market, this may be a cause for concern.

It's one thing, although wholly foolhardy, to pay Goodell $44 million to "oversee" the behavior of his employers, since it's just football. Quite another for the Masters of the Universe to get paid such sums and not actually do anything.

05 September 2014

Alice In Wall Street

Financial engineers, despite their pronouncements of math/stat/coding wizardry, are really just some truffle pigs and cockroaches. The truffle pigs snuffle in the ground, generally around trees in deep parts of the forest, for the scent of the black truffle. A valuable fungus, that black truffle. Finding one, the handler has to quickly extract it from the maw of the pig. Turns out, unlike retrieving dogs, pigs like to eat their catch. Cockroaches insinuate themselves in the darkest parts of dwellings, seeking water and the occasional crumb. Few of the mainstream pundits have taken this bull by the horns. Today, Floyd Norris, reliably more aggressive then 99.44% of his brethren, lays out the story. Again, and with some rather wonderful quotes.

Not to mention: I've referenced Lewis Carroll more than once, generally repeating the phrase "... words mean what I say they mean...". Which isn't exactly the text.
Part of the regulatory challenge was laid out in 1871 by Lewis Carroll's "Through the Looking-Glass":

"When I use a word," Humpty Dumpty said in rather a scornful tone, "it means just what I choose it to mean -- neither more nor less."

"The question is," said Alice, "whether you can make words mean so many different things."

"The question is," said Humpty Dumpty, "which is to be master -- that's all."

Norris spends most of the column with the history of Lehman, and Repo 105.
Lehman taught us that there were plenty of tricks around to make balance sheets look better for one day and then revert to an undisclosed reality that was much worse.

One of the tricks was to adjust the weights of assets; as in weighted average. Of course, analogous to a Bayesian prior, the banker gets to make up the weights. And that's what Lehman (and the rest as well, of course) did.
It turned out Lehman was valuing some securities at 85 percent of face value while competitors thought they were worth 20 percent or less.

In general, the bankers do have a point: some assets are riskier than others. Home mortgages, for example, won't go rotten all at once all over the country. Will they? So the banker puts a lower risk weight when figuring the backing capital.
That made sense in theory -- some assets are clearly riskier than others and more likely to produce losses. So less capital was needed for low-risk assets, like loans to high-quality borrowers. Trusting regulators let the banks use their internal risk models to determine the weightings.

But, quoting Stanley Fischer, Fed vice chairman
"... any set of risk weights involves judgments, and human nature would rarely result in choices that made for higher risk weights."

But, here's the pig/cockroach bit:
Financial engineers invented securities that would count as equity for bank regulatory rules and balance sheets but looked like debt to the Internal Revenue Service. Unfortunately, when the pinch came, they turned out to be more like debt. Big banks are being forced to stop using such things.

Not satisfied with just putting a heavy thumb on the scales, they dispensed with the scale entirely and made up the numbers.

So, are financial engineers good for the commonweal, or only for themselves and their handlers?

As the song says, "Mama don't let your kids grow up to be banksters".

28 August 2014

Reservations for ... 8 billion??

Quite recently, in various versions of these endeavors, there was an essay dealing with the Old Gold vs. New Gold situation. Not for the first time.
The hidden truth: the country with the reserve currency of the global economy will always, in fact must, run trade deficits. Think about the situation from the point of view of other economies. They have to get reserve currency in order to acquire goods and services.

Imagine my surprise, and wistfulness at not having gotten paid, to see today's NYT piece on just that subject. And about the same conclusion. Well, sort of.

Bernstein paraphrases a Treasury economist (Kenneth Austin) who has published an essay in The Journal of Post Keynesian Economics, here (it's not open, alas). The notion of post Keynes usually means full bore Randian, but not in this case:
Post-Keynesian economists are united in maintaining that Keynes's theory is seriously misrepresented by the two other principal Keynesian schools: neo-Keynesian economics which was orthodox in the 1950s and 60s -- and by New Keynesian economics, which together with various strands of neoclassical economics has been dominant in mainstream macroeconomics since the 1980s.

In any case, neither Bernstein nor Austin (filtered by Bernstein) defend the notion of the reserve country having to be a net debtor, only that the level of its currency circulating can, more or less, be under its control. As events stand now, they both argue the USofA is at the world's economies' mercy.

The Unfortunate Alternative is hard specie, and one need only read up world, and USofA, economic history from the 19th century through the Great Depression to see how foolish that is. If you think the world is not level now, you ain't seen nuthin yet.

24 August 2014

The Poor Will Always Be Us

The environs of Washington, DC are widely excoriated by The Right as being the bastion of Liberal Evil. Not least, the disparity of median income there being higher than most, if not all depending on the year measured, of the rest of the country. Having lived there for the better part of a decade, I can say with certainty that income level was and is driven by the private sector consultants and such, not the bureaucrats who have difficulty keeping up. Bureaucrats aren't living in the big houses in McLean. The academic scene is largely liberal, with the notable exception of George Mason University, in Virginia. That state is really two, with Northern Virginia (actually spelled as such) turning a once deep red state a pleasing shade of lavender. It ain't blue yet, however.

GMU provides the NYT with one of its token right wingnuts, in the person of Tyler Cowen, who regularly displays a breathtaking degree of cognitive dissonance. That the Times would continue to print his stuff is puzzling. I can only guess that the Editors are allowing the loonies to shoot themselves in the foot on full view. I mention this mostly because his essay today exceeds his usual level of incompetence and villainy.

Let's wield the sharp cutlery, shall we?
For all the talk of the Great Depression, we might look at a different exemplar for modern times, 18th- and 19th-century economic history India. That country's economic retrogression during that era may help us understand the quandary that some parts of the world face today.

The overarching theme of the piece is that 18th and 19th century India is prescriptive for today's US and Western economies generally. Baloney. The 18th and 19th century global economy was dominated by mercantilism, with India and the New World colonies being principle examples of those on the losing end of the bargain. This period was marked, more than any other way, by the discovery and pillaging of natural resources in this New World, mostly by European overseers. The second most important point was the development of science and engineering from primitive to near completion (save for Einstein and Bohr and the final entries in the periodic table). Most of the widgets that you use and prize today were invented by The Great Depression, they're just smaller and faster now. In other words: the scope of new knowledge and new resources from 1800 to 1900 overwhelms what can be expected from 2000 forward. The simple fact is, we know just about all there is to know about the physical world and where the useful parts reside. And there is no New World to pillage. (For those talking about mining other planets and such: not with chemical rockets, boyo.) And we're nearing, if not met, the carrying capacity of these, now firmly limited, resources. Wealthy Chinese are scuttling away from their air and water as fast as possible. The notion that there's some magical, as yet undiscovered, venue of employment to support a vast new middle class is a pipe dream (and that phrase refers to the Chinese opium pipe, just so you know). The journey goes from farm to factory to cubicle. Full stop. We've found the whole pie, now we need to carve it up in such a way that civilization survives.
In 1750, India accounted for one-quarter of the world's manufacturing output, but by 1900 that was down to 2 percent.
...
India just didn't do enough to move toward production on a larger scale or with better machines.

Well, let's consider this period. Slave based production of cotton and textiles by the US South dominated the period. Why ship cotton half way around the world, when your slaves can grow it here? Of course, not. Virginia (tobacco) and the Carolinas (rice and cotton) are much closer to London than anywhere in India, after all. At the time of the American Revolution, slavery production was the major source of hard currency, not manufacturing. India didn't stand a chance. Moreover, industrializing agriculture yields more poor people when there aren't alternatives. Take the modern example: robotics replacing hands in the manufacture of autos. You know the rest. The notion that India somehow missed its opportunity to be Europe's supplier of industrial output in 1850, or thereabouts, if only India had spent more on machines is asinine. The reason that Apple, and the rest, can exploit China is the 747 freighter. That aircraft didn't exist in 1850. Nor did the container ship.

Here's where the cognitive dissonance really kicks in:
International trade grew rapidly after World War II, but at least in the early postwar years most of that trade was among countries with roughly comparable technologies and real wages. And that trade spurred growth rather than damaging laggard economies.

In the last 20 years, the economic surge of Asia, especially China, has brought a large trade readjustment to the world, one with few parallels with the possible exception of the rise of the Western economies several centuries ago.

The post WWII economic surge was built on the afterglow of socialism, but not by that name, of course. The war effort was a case of "all for one, and one for all". The notion of shared responsibility, rather than Randian greed (she didn't start in earnest until the 1950s), was the order of the day. Corporations paid real taxes, unions bargained widely, and Bretton Woods made the US buck supreme. Cowen, either because he's too stupid or vile, elides the simple fact: American corporations now exploit totalitarian labor for the benefit of the few. It was brought to you by Richard Nixon in 1972.

But this is all good for China, right?
China's per capita income, less than $300 in 1984, is now in the range of $10,000.

Well, Cowen, being an econ professor, knows that even in the best of economies mean/average/per capita income overstates reality. I can't find a median income measure for China, but that's not too surprising:
Results of a wide-ranging survey of Chinese family wealth and living habits released this week by Peking University show a wide gap in income between the nation's top earners and those at the bottom, and a vast difference between earners in top-tier coastal cities and those in interior provinces.
...
In March 2012, Bo Xilai, a top party official who was trying to create a populist image for himself and was later purged, said at a news conference that the Gini coefficient had reached an alarming 0.46. His willingness to announce the number came as a surprise to many observers.

(The US gini, 2011, was .477. That's worse than China, just to be clear how the number works.)

China's .1% are doing just fine, thanks. The rest, not so much.
Average annual income for a family in 2012 was 13,000 renminbi, or about $2,100.

I wonder, how did per capita income quintuple in a year? It didn't of course. Cowen just made it up. Or the ghost of Ayn whispered it in his ear while he nodded off during a lecture at AEI.

Back to Cowen:
French citizens expect a great deal from their government, and strikes are a common response to reduced wages or benefits.
...
Chinese export growth and wage competition may have been a kind of final straw that made old ways unsustainable.

So, it would appear, Cowen's remedy is for Western labor to accept Eastern poverty as the new normal? How, exactly, is that progress or a solution?

Reading history, and data, makes the story quite clear. Economies which (ahem!) enforce equity, such as the Scandinavians, thrive overall, while those which embrace Rand fall into revolt. Cowen bemoans the prospect of stagnant/falling median income in the USofA, but at no point offers a remedy other than benign acceptance; it's God's will. He has to know that while median income has gotten poorer, the 1% have gotten richer. And he has to know that these effects derive in concert, not by coincidence. And he has to know that slack demand is the result. And that slack demand leads to lowering median income. Rinse. Repeat.

When the dominance of a service economy was being first recognized, in the 1970s, the notion was that such a move was at least as beneficial, overall, as the migration from farm to factory pre-WWII. Instead of factory workers, we'd all be office think workers, earning much more than our beaten down factory fathers. Hasn't worked out that way. We, still, mostly buy real widgets. You can't eat software.

We can't all be London Whales, crashing our small corner of the economy. And if we were, the whole economy crashes. Wait, didn't we do that?

So, you can be poor because totalitarian regimes elsewhere keep wages at bare subsistence and your job goes there or... you can be poor here as corporations implement wage arbitrage down to bare subsistence with the outsourcing as threat. Of course, in due course, there'll be no one in the USofA, or anywhere else, who can buy the all the widgets being made. What a country!! The United States of Mississippi. But, of course, you can't sell much in Mississippi; they're all really, really poor.

The fundamental problem is that wage or tax or foo arbitrage by corporations ultimately fails for structural reasons. As your Good Mother told you, "what would the world be like, if everybody behaved like you?" The second and third worlds, largely autocratic governments, provide cheap hands in order to earn hard currency (which they, mostly, keep for themselves, of course). Today, that's the US buck. The same thing goes on here, the red states ban unions and drive down wages, so corporations move to such states. The problem, of course, is that both kinds of arbitrage depend, absolutely, on a high wage population (those God hating blue staters, of course) to suck up output. What happens when there's no longer a pool of high wage earners to export to? The issue grows more dire as automation becomes both more widespread and expensive. You do remember the story about ditching 300mm wafer production for 450mm?? Hasn't happened. Likely, never will; insufficient demand for so many more chips to pay for the machinery. In due course, and since the world is non-linear (according to Dr. McElhone), demand utterly collapses when least expected.

21 August 2014

Between Roxbury, CT and a Hard Place

Ah, to be a Googler (or spend enough time there to know about all of its nooks and crannies): Google Correlate powers a lengthy (the summer long?) analysis by David Leonhardt, et al of searches by the rich and the poor. Rich and poor, in this instance, being a bespoke index.

The main takeaway?

BARRY WAS RIGHT
And it's not surprising then they get bitter, they cling to guns or religion or antipathy to people who aren't like them or anti-immigrant sentiment or anti-trade sentiment as a way to explain their frustrations.

The Rednecks love them Guns and God.

Of course, the comments on the article just reinforce that; rather than being the "Land of the free and home of the brave", the USofA is really the "Land (rural) of the stupid and home (urban) of the smart". Doesn't go down all that well with the Tea Baggers (props to Maher, of course). But they're just puppets of Koch, in any case.

Peter, Peter Pumpkin Eater

I've never been a fan of the Austrian schools, just because they're by, for, and of the .1%. There's not much good for an entire economy in that. In looking for data to confirm, or refute, the notion that the Captains of Industry are just playing financial engineering games with all that moolah, I ran across this piece by Peter Schiff. He's a right wingnut, by a wide margin. You can look him up on the Wiki, if you're interested. What caught my eye was this:
In 2009, Gross Private Investment collapsed to almost 12% of GDP, which was the lowest level in the post WW2 period and compares with a median level of 19% in the three decades prior to the Great Recession. Since 2009, Gross Investment has rebounded and is now 16% of GDP. Many growth bulls expect this level to rise over the next few years, noting that the average age of U.S. capital stock (i.e. plant/equipment) is at record highs and needs to be upgraded. Recently, this view has gained traction with improvements in forward-looking surveys, like the Purchasing Managers Index (PMI). In the near-term, we do expect a modest bounce in capital investment to make up from weather related disruptions earlier in the year, but we are more skeptical about a multi-year boom.

First, we believe much of the recovery in private Investment was supported by bonus deprecation tax benefits (initiated during the recession) that enticed many corporations to accelerate investments in 2010-13. These incentives ended on Dec 31, 2013, so businesses have less reason for new investment. For companies to increase investment without government support, sales levels need to increase, which will remain difficult as household balance sheets and incomes remain under pressure. As a note, the current level of private investment (16% of GDP) is below median levels during the thirty years prior to the Great Recession (19% GDP), but it is consistent with the thirty year period following WW2 (17% GDP).

Second, companies have recently been more inclined to acquire rather than try to grow organically. In the first half of 2014, total U.S. M&A deals were over $750B, which was up 50% from the same period in 2013 and on pace to hit annual levels not seen since 2006-2007. Also, almost 95% of recent deals have been strategic (companies, not private equity, buying other companies) which compares with just 75% in 2006-07. If companies saw organic opportunities then this cash would be invested in new plant and equipment instead of paying premiums for existing firms. With easy access to relatively cheap capital, we expect the M&A spree to continue, noting that this will actually result in job losses (vs. capital spending that drives job gains).

Finally, companies that have not found attractive M&A opportunities have been using cash to raise dividends and buy back stock. In the first quarter of 2014, U.S. share buybacks and dividends hit a record level of $241 billion. Returning excess cash to shareholders is normal when growth prospects are dismal, but the recent trend has been exacerbated by activist investors that are pressuring companies to use leverage to return cash. As a result of this, combined with M&A activity discussed above, business (non-financial) leverage is at record levels. This bodes poorly for a surge in real investment.

Closely read, he makes the refuting argument to his basic thesis: the US consumes too much and invests too little. Even though he is credited with calling the The Great Recession, he, by all accounts, missed the motivation; even in the early 00s the Captains of Industry were running from physical investment to financial game playing. Cognitive dissonance rides again.

The hidden truth: the country with the reserve currency of the global economy will always, in fact must, run trade deficits. Think about the situation from the point of view of other economies. They have to get reserve currency in order to acquire goods and services. In order to do that, they have to sell lots o widgets to the reserve currency economy, which means that economy has to buy lots o widgets. As The Great Recession demonstrated, when the global economy gets wonky, even a weakened reserve currency is still the best bet. The alternative is to return to a specie regime, which, among other things, puts the global economy in the hands of the likes of South Africa. The global economy had the chance to switch to a commodity based currency, the petrodollar, in the aftermath of the 1973 OPEC embargo. That never happened for the good and simple reason that the First World economies recognized, even if their leaders would never be so honest as to say so, giving control to natural resource rich, but otherwise backward autocrats didn't serve them. Neither in the long run or short run.

You can't have organic growth when the 1% or .1% control most of the moolah. Especially in light of the fact that you can't eat software.