23 June 2013

Another Brick in the Wall, Part 2

Last September, I mused that education wasn't the path to some kind of global growth and income equality. The occasion was an Apple circle jerk, wherein a handful of folks got rewarded for iPhone leveraging. Great way to spread the wealth, Steve.

Well, more equally depressing news from Brazil. If you've been keeping up, this is getting to be old news, but this write up bears inspection.
... sustained, meteoric growth in emerging economies may no longer be possible.

Doesn't work at Apple, so why should it work for nation-states? It's easy (relatively) to grow at high rates when you're teeny. Not so easy when you've consumed the entire globe.

Ooops. The fiction that both the Left and the Right have been peddling has been met with facts on the ground, and found to be fantasy (double, at least). Capital demands its returns, and has always preferred cost cutting (i.e., firing employees) to expanding employment and output. The earlier Apple piece doesn't change that. In the old days, even when I was in school, the rule of thumb was that cost was 80/20. The 80 went to labor and the rest to capital and management. This recent paper has a slightly lower labor share, both for the US and elsewhere, and a more steeply declining labor share in recent years in the US. Can you say, Depression?

Back to the article:
And shrinking and older populations, of course, limit future economic growth.

This is the Right Wingnut excuse: you poor folks aren't having enough babies. And is directly contradicted by the author's earlier arguments (which are true), that automation (capitalization) is increasing productivity. More babies without an increasing labor share just means an ever faster decline into permanent Depression. We don't need no stinkin' workers. Remember, it was the Black Plague killing off about half of Europe that impelled the existence of a middle class in the first place. We need another plague. Someplace else, of course.

The author then goes into a spin, contradicting himself in adjoining paragraphs.
There was something special about the 20th-century mix of widespread, well-paying manufacturing jobs, which enabled the rise of a middle class that would take significant control of government, through its roles as voters and taxpayers.

Yes, there was. And I've (and I expect some formal academics somewhere) labeled this the WWII social contract afterglow. By the time of Vietnam, the OPEC oil embargo, and Alzheimer Ronnie's ascension to the throne, the afterglow had faded and the Right Wingnuts began their final charge. It's worked.

So, then he writes:
Just as inequality in income and wealth has been rising in the United States, newly growing nations find themselves in a more stratified world, without developing their own strong egalitarian histories to undergird political institutions or economic expectations. Many of the wealthy may produce their public goods -- like secure streets and clean, beautiful parks -- in gated communities.

As if the USofA is a bastion of equality. Not. And he doesn't write alarm about restrictions to gated communities.

A word about the author and his affiliation. When I lived in DC, George Mason was an emerging Right Wing bunker, and has taken that tack ever since. This is particularly true of the econ department. It was the home of Vern Smith, who had been one of my graduate professors at UMass, and was then paid to mouthpiece resource stripping when he had some spare time. Cowen is a self-described libertarian. I doubt that Cowen sees the cognitive dissonance twixt his avowed world view and his essay.

21 June 2013

I Don't Interest You Any More?

One of the recurring themes, recently bolstered by some real data (imagine that), of this endeavor is that interest rates would be low even without Greenspan/Bernanke fiddling with Fed Funds. This notion was based on the observation, supported with that data, that newer tech has a longer payback period, shorter product lifecycles, and larger expenditures.

As mentioned in passing a few times, such a circumstance has two side-effects: real physical investment will only happen at low interest rates (because it's not possible to earn enough to pay high interest), and real physical investment will coalesce to ever larger corporations (because they can afford it, and can control product lifecycles).

Well, lo and behold Krugman has figured it out, too. If he could read my mind (OK, Gordon Lightfoot gets credit for that). He cites GM, while I've cited Ford (ah, an age old rivalry).
... let alone for the financial industry, which is also marked by a lot of what look like monopoly rents, and these days accounts for roughly 30 percent of total corporate profits. Anyway, whether corporations deserve their privileged status or not, the economy is affected, and not in a good way, when profits increasingly reflect market power rather than production.

That 30 percent is actually down from the 40 percent that peaked just as the house of cards collapsed.

AT&T was broken up, allegedly, on the basis that "free competition" would prevail and costs/prices lowered. Hasn't turned out that way. The point is that monopolists see returns as cash flow from stifling investment:
... rising monopoly rents can and arguably have had the effect of simultaneously depressing both wages and the perceived return on investment.

With tech physical investment under pressure from extended payback periods and shortening lifecycles, what's a fella to do? Control the market, of course. Just like Ma Bell did for decades. Except that Ma Bell didn't have a laissez faire free hand to do as it wishes.
If household income and hence household spending is held down because labor gets an ever-smaller share of national income, while corporations, despite soaring profits, have little incentive to invest, you have a recipe for persistently depressed demand. I don't think this is the only reason our recovery has been so weak -- weak recoveries are normal after financial crises -- but it's probably a contributory factor.

So, simply put: those with the moolah are impelled to hoard. And we all know from history what happens in that circumstance.

Home Sweet Home [update]

Alabama. Well, not so much. Mayhaps some who should have been paying attention before are paying a bit more attention this time. I'd begun to wonder. Today's news (many sites, I expect) brings this quote:
"Some of the increases can be explained by the fact that it is recovering from an over-corrected situation," said Lawrence Yun, chief economist for the Realtors. "But with people's income rising at only 1 or 2 percent and prices rising in double digits, it cannot continue."

Now, what to do about it? The banksters and realtors are the ones who make the up-front moolah from such scams. Self-regulating? I doubt it.

"These are huge moves especially considering--when purchasing a house using a mortgage--most people buy based on 'monthly payment and the maximum allowable debt-to-income ratio.' This means first-timer share will fall even further. They are already at a multiyear low even with record-low rates," said [Mark Hanson, a California-based analyst].

So what, gentle reader, has this endeavor been pounding the table about for all these years? If we have another Viagra in the Home blooming, can disaster be far behind? The issue is: who's doing the fiddling this time? Because there has to be a Nero out there. As the man said, they ain't enough moolah to go around.

Well, this feed goes one better.
"Home buyers have survived rising mortgage rates in the past, often by shifting from fixed rate to adjustable rate loans. In the housing boom, bust and recovery, banks' credit quality standards were more important than the level of mortgage rates."

"The most recent Fed Senior Loan Officer Opinion Survey shows that some banks are easing credit restrictions. Given this, the recovery should continue," [David Blitzer of S&P Dow Jones] said in the report.

Here we go again. The pumpers are at it again. Will the economy crash just in time for the Republicans' 2016 coup? The Supremes have just given them carte blanche to disinfranchise the Democratic base, and more than enough time to get that done. I wonder how the quants will include these Black Swans in their MCMC?

14 June 2013

Crabby Appleton's Wake

What's Apple's problem? Yet more fandango, what with iOS7 looking more like win95 than the fanboys can handle? Has Apple lost its mojo? Or has it hit a Black Swan crisis out of its control? Or, worse, both? Will it never again trade much past $450?

I've been musing on this for some time, and Krugman spurred me to type. Today he launched a Luddite lament, which just happens to contain the core of Apple's problem.
In 1786, the cloth workers of Leeds, a wool-industry center in northern England, issued a protest against the growing use of "scribbling" machines, which were taking over a task formerly performed by skilled labor. "How are those men, thus thrown out of employ to provide for their families?" asked the petitioners. "And what are they to put their children apprentice to?"

As Krugman goes on to point out, between financialization of Western economies (by shipping actual widget making elsewhere) and highly concentrated capitalization of new industry (save, financial services, itself), all labor has taken it on the chin, starting with the PATCO workers. Reagan/Thatcher made it fashionable to blame all economic ills on greedy wage earners. The result has been massive redistribution of income and wealth to the 1% and .1%. So, why is this Apple's problem? Shouldn't Apple be happy that the 1% get richer, and the poor have kids?

Today, however, a much darker picture of the effects of technology on labor is emerging. In this picture, highly educated workers are as likely as less educated workers to find themselves displaced and devalued, and pushing for more education may create as many problems as it solves.

All those Indians and Bulgarians and Chinese are willing, in no small part due to (nearly) free education, to do what has historically been high wage American brain work for the price of low wage farm work. In such countries, the choice is rather stark: earn $1/day; your choice, in the steaming hot fields, or an air conditioned office. Not too hard to see where the choice goes.

Wage arbitrage has been going on in the USofA for centuries. Manufacturing left New England in the mid-19th century for "business friendly" Southern states. When Mexico and the Caribbean acquired adequate power and water supplies and automation reduced the need for any skilled labor, off the businesses went there. And so, on to China and Vietnam (those commie bastards!) and such. It's always amusing to see Toyota pickups with those American flags, and "Proud Member of XYZ Union" bumper stickers.

So should workers simply be prepared to acquire new skills? The woolworkers of 18th-century Leeds addressed this issue back in 1786: "Who will maintain our families, whilst we undertake the arduous task" of learning a new trade? Also, they asked, what will happen if the new trade, in turn, gets devalued by further technological advance?

And the modern counterparts of those woolworkers might well ask further, what will happen to us if, like so many students, we go deep into debt to acquire the skills we're told we need, only to learn that the economy no longer wants those skills?

Education, then, is no longer the answer to rising inequality, if it ever was (which I doubt).

Therein lies the problem. Unrest in the Arab world, and Southern Europe, has been sparked by educated youth with no prospect of using that education appropriately. There's that old saw about philosophy Ph.D.'s driving cabs. What happens when it's math and engineering kids who face that prospect because IBM can find Indian equivalents for a fraction of the price? Even if education were free, worldwide, what would happen? Think of it this way: Intel has a few hundred, perhaps a few thousand, engineers designing a given chip. And a few more running the manufacturing. What's the marginal value of yet another engineer? Do we really need more folks like the London Whale? Is such the best use of talent? And those Texas ads touting all those jobs? Mostly low wage, no benefits, customer facing shift work; "want fries with that?".

What have been the growth occupations? Medical and financial services. The latter cratered the economy, and the former will bankrupt us. If you abide with certain political philosophy. What, exactly, should displaced workers learn to do? Is there sufficient work in this newly capital controlled economy for any high skill, high wage employment? Was the middle heavy income distribution of the past due to education, or mores? The answer is the latter. And that will always be the latter. Education, intelligence, and income are all relative; none is absolute. Is there any benefit to Apple if growth in employment is only in hamburger flipping? Does Apple really want, or need, the Gekkos to prevail? Or, is it already too late? The bed made, and must be slept in?

As returns to capital increase, the value of labor, educated or not, decreases. With declining wages, folks can't afford widgets. This is a particular problem for capital. As I've confirmed recently, computer tech finds itself in a bind. Payback periods are increasing (since the cost of new physical capital increases), yet product cycles are, at best, static; at worst,shortening. The result is a diminished return on investment, even without distributional effects. One attempt to combat the arithmetic is merger and competition elimination. Good luck with that. In simple terms: capital is well on its way toward destroying its customers.

In the short, and may be medium, term capital wins the battle. But doing so loses the war for all. Without enough folks in the 1%, the likes of Apple and Rolex collapse. When that happens, capital no longer has much value; the value of capital is in production, not hoarding, unless it's the Dark Ages and you're a thane with a castle. The Bernanke Bucks (and Greenspan Greenbacks earlier) are being hoarded by capital. Bush/Obama have engaged in supply side, trickle down, voodoo economics (to conjure that other Bush). It can't work. Some of the quants are figuring out that the QE money has only caused an asset bubble, both by corporations indulging in buybacks and coupon clippers seeking 10% return. The net effect is to boost demand for equities, thus trading interest return into capital gain. The problem with capital gain is that it's a one time deal. The only way one can continue to get 10%, say, is to churn ahead of the lemmings. The only way that the real economy (as opposed to the financial sector) can support X% return on capital is if that capital is more productive by something more than X%. What we're finding out is that the days of decades of return on investment (a steel mill, for example) are long gone.

Without continuing, long term gains in productivity, there can be no long term return on capital. The arithmetic doesn't work. The capitalist can only afford to pay 10% if his fiduciary capital has been turned into physical capital, which in its turn is somewhat more productive than 10%. Financial, i.e. time preference, can "demand" 10%, but if the real world use of capital can't sustain 10%, it won't get paid. If, through market or political power, financial gets more than the real world increment, the same seeds of destruction (collapse of consumer demand, for lack of moolah) are sown.

But, the whole artifice is held up by end user consumption, i.e. the Middle Class. Apple, and its adherents, crow about having the biggest margins, and all that profit. But without a growing (in terms of count) demographic, Apple (and Rolex) is limited in how large it can grow.

Think of it through a small thought experiment.

Time0 we have the 1% with 10% of GDP, so for a nation of 1,000, that's 10. And, say, that works out to $1,000/annum of income. This is enough to afford an Apple Widget; less than $900 prices you out of Apple. Let's say the total population at $900 and above is 20.

Time1 we have 1% with 20% of GDP, so for the nation of 1,000, that's still 10. These 10 now have $2,000/annum of income (or thereabouts, with the historic US data stream, the 1% have gotten nearly all of the GDP growth since 1980). Clearly, those 10 can still afford Apple. But what about those on the margin? Those from $900 to $999? Are there more now, or fewer? The answer is fewer. The top 10 have increased their share of the pie (which doesn't grow by 100%, the increase realized by the 1% in this experiment) out of proportion to their population. In this scenario, not only have the 1% kept all the productivity gains, but now have more of total GDP. The only place the additional moolah can come from is the remaining 900, whose incomes must fall. Depending on how right skew the full distribution was at Time0, the decrease in addressable market for Apple at Time1 could be even worse. Those having the $900 is fewer than before; perhaps 8. Apple can't sell more widgets in this scenario, at the same price, margin, and profit.

If, on the other hand, the 1% moves to 5% of GDP, the count of those having at least $900 goes up; by how much depends on the specifics of the distribution, perhaps 17. It is, in any case, a larger number than at Time0, or the alternative Time1.

Krugman closes with,
I can already hear conservatives shouting about the evils of "redistribution." But what, exactly, would they propose instead?

Well, they just want the rich to get richer and the poor have kids, since macro growth is of no concern to them and so have nothing to propose, beyond "we like it this way". Apple, on the other hand, has to be concerned.

That's Apple's problem, at its core. While Apple makes its appeal to the Gekkos, Apple's concerns diverge from that of the Gekkos. The Gekkos don't want macro growth, only Gekko growth. Apple can't survive the Gekkos. Apple needs more, not fewer, $900 households. Unlike exotic cars, there's not much demand for multiple Apple widgets. Yeah, having both an Aston Martin and a Ferrari is neat. Having two iPhones? Not so much. Apple has been able to capture most, if not all, of the high end market (population) during the Bush years. But, if the trend of concentration, both of current income and income growth, continues their market (population) must shrink. The arithmetic makes it so. The only question is how fast and how bad is the collapse?

Those happy with the trend will reply: "Apple just needs to sell to the high end incomes in other countries". OK, but how do those incomes get generated? In particular, how does Apple ensure that it gets the US dollar equivalent for its widgets sold ex-US? All of those Foxconn drones won't be buying iPhones. Ah, matey, thar's the rub. For Apple to profit (to the same degree) from ex-US sales, exchange rates have to remain in the US's favor. That was the regime while Bretton-Woods prevailed, but currency wars have been the norm since the 1973 OPEC embargo. Out went the dollar's favored status. Sort of. A recent post implies that chaos could ensue if Abe's gambit fails in some spectacular way, since Japan (and every other country, for that matter) holds US dollars as reserve currency. Now, whether the global/macro effect would be materially different if Japan loosed equivalent specie is debatable. I don't see any material difference; all specie would fall in value if trading supply spiked. In any case, Apple's problem with ex-US sales is that most of those countries, save Europe's, have even more skewed distributions. Not so many potential customers as national population numbers might imply.

So, in the end, Apple needs the 1% (or whatever the quantile is that they covet; it's likely more like 10%) to grow in count. Concentration doesn't help Apple's future, at all. The Gekko types aren't smart enough to see beyond the ends of their noses, so they can't figure this out. Not even Jonah with Excel. It's not coincidental that the growth in the US up to 1973 was driven by an income distribution which was heavy in the middle. And it's not coincidental that it all began to unravel after 1973, and gained momentum with Reagan in 1980/1 with the head swelling up like a melon.

Apple's problem is that it painted itself into a corner. And they don't seem to know it, yet.

01 June 2013

Fellini Meets Bergman

Federico Fellini and Ingmar Bergman crossed paths in the news the last couple of days; satiric hilarity meets major depressive disorder in the span of one day.

So, first Federico.

We all still remember The Great Recession's start, and the London Whale's puking (not Jonah, alas), yes? Much has been made here that quants, by and large, know little about economics (beyond certain micro adages) and, it turns out, little beyond Excel to accomplish their "analyses". Turns out, they don't learn much Excel until just as they're needing to use it. Kind of like a soldier who's never loaded or fired his weapon (a single action Colt revolver) until the enemy comes out of the bushes, Uzis blazing. What a way to run an economy.

Imagine my surprise, then to read that quants, in a manner of speaking, are being trained in just a few days, and to use Excel!!! As if that were what a serious quant would depend on. I guess when there's sufficient money to be made by going on the cheap and stupid, Wall Street just can't resist.
Enter specialized boot camps where -- for fees that sometimes exceed $1,000 a day -- would-be masters of the universe can perfect Excel modeling techniques and financial analysis.

So, where are these Masters?
"I just want someone who can really use Excel and PowerPoint," said one senior loan syndication banker at a European bank, describing his recent interviews of newly minted M.B.A.'s in New York.

Excel and PowerPoint, the Leopold and Loeb of finance. "Wonderful", as Dirty Harry opined. It's the Lemming Triple Crown.

But, it gets better:
In June, Training the Street will start a four-day Undergraduate Wall Street Boot Camp in New York and will charge students $3,000 (not including accommodations) to learn the basics of financial modeling, valuation and analysis. Wall Street Prep, widely viewed as more intensive on analytics, sells CD-ROMs for $39, for a basic Excel course, and as much as $499 for a "premium package" detailing financial modeling.

If you've ever been a cigarette smoker, and of a certain age, let me take you back to the Goode Olde Days of matchbooks. Inside, invariably, was an ad for some get rich quick program, for just a few dollars. Taxidermy at home, was my favorite. Now, you can spend a few dollars, and you too can participate in destroying the world economy.

Wait, wait. Could it be? Yes, as we read on to find:
But Wesley Hansen said such a course was vital when he switched to a career in finance. He was a camera operator on reality shows like "The Bachelor" before graduating last year from the University of Southern California's Marshall School of Business, where he took Training the Street courses.

"I had no clue how to use Excel, so it helped me get a job, no doubt," said Mr. Hansen, who is now an equity analyst in California with the brokerage firm BMA Securities.

I suppose it's beyond hope that Mr. Hansen stays as far as possible from Other People's Money.

And now for Ingmar, and his tale of a canary in a coal mine.

Recall how this endeavor has pointed to the disconnect between median house price and median income, starting about 2003? The canary in the coal mine, so to speak. Widely ignored, of course, because ignorance was compensation bliss for the Masters of the Universe. As one said, paraphrasing, "everybody else was dancing, so we had to, too". The Lemming Trifecta.

Also, as this endeavor has mentioned more than once, most of that Fed moolah has been going to Banksters and the like, not wage earners. Thus, it's obvious, a priori, that this moolah flood is the reason the Dow and NASDAQ and S&P are on a tear. More dollars chasing a, more or less, fixed bundle of stocks. The other side of the coin, also mentioned here ad nauseum, is the flight to "higher risk free returns" by those coupon clippers who used to get a 7% solution holding Treasuries. Livin' high on the hog off the taxpayer. Whether the coupon clipper class realizes they're now embedded in a Ponzi scheme is unknown.

The ever dependable Floyd Norris has data on a related aspect: margin. Margin means you buy stocks without paying all the bill. Your broker lends you the extra. All is fine so long as the price goes up, since you sell off some of the appreciated shares to clear the bill.
The latest total of borrowing amounts to about 2.4 percent of G.D.P., a level that in the past was a danger signal.
The first time in recent decades that total margin debt exceeded 2.25 percent of G.D.P. came at the end of 1999, amid the technology stock bubble. Margin debt fell after that bubble burst, but began to rise again during the housing boom -- when anecdotal evidence said some investors were using their investments to secure loans that went for down payments on homes. That boom in margin loans also ended badly.

Recall the lesson learned from the run up to the Great Recession? Median income was, at best, stagnant. Greenspan crashed interest rates. The coupon clippers went on a frenzied search for "nearly risk free returns", and settled on US residential housing. In order to secure enough "product" to fulfill the demand from the coupon clipping class, the Subprime/ARM/liarLoan/etc. were devised. This clusterfuck had two, in the very short term, beneficial effects: 1) the 99% had a source (home equity loans against unearned appreciation) of consumption not of their meager wages, and 2) the coupon clippers got back to living high on the hog with their 7% (or even better) solution. But like heroin, the withdrawal hurt like an asteroid hitting in the Yucatan.

If that pattern repeats, it could indicate that the stock market rally, which carried the S.& P. 500 to record levels in May, will not last much longer.

Economists have a term, "wealth effect", which means that if you think you've got lots of moolah, you'll spend as if you do. The Wiki has a thumb nail sketch. It is clear from the data that during the Dubya years households spent, on the whole, motivated by the ability to monetize real estate appreciation, which was not driven by retiring mortgage value, but by increases in appraisals. That increase in demand for housing, in its turn, was driven by corruption in the mortgage process (not by rising median incomes able to pay higher prices for houses), to create ever more instruments for the coupon clippers. Kind of like screeching positive feedback one sometimes hears at rock concerts. Whether we're seeing the same thing with margining in the stock market, buying low and selling high on credit, hasn't yet been revealed in enough data. We likely won't have enough data until after the patient has died. A postmortem analysis, so to speak. What we do know is that median income remains stagnant. The inference is thus clear.