Posts Tagged ‘Recession’

Terrifying action in the markets

August 3, 2011 2 comments

FRA - OIS Spread

Just an FYI – we’re getting terrifying action in the interest rate markets.

The 3 month FRAOIS spread – the spread between overnight bank borrowing and overnight U.S. government borrowing* – is seeing huge gains.

In other cases, gains like this have meant there is a huge, worrisome problem in the world.  Right now, Europe is on the verge of blowing out, but will this mean a run in the european shadow banking system?  I don’t know.

The european leadership has been able to calm things down over and over again, but it’s pretty clear by now that the only solution is for the European Central bank to buy huge quantities of sovereign bonds.

Of course, this is political nitroglycerin. Macro Man will probably have some good insights if he will share them  Also, we shouldn’t discount his idea that currency interventions seem to solve the problem.

*This is a massive simplification, but good enough for non-pro’s, of course.



Job at McDonalds harder to get than acceptance to Harvard

April 29, 2011 6 comments

Ronald accepts award for lowest acceptance rate

McDonalds just hired 62,000 people. Over 1 million people applied for these jobs. That’s a 6.2% acceptance rate – and it’s probably lower lower because “at least 1 million people applied”.  They had said they would hire only 50,000, but upped the number to 62,000:

McDonald’s Corp. (MCD), the world’s biggest restaurant chain, said it hired 24 percent more people than planned during an employment event this month.

McDonald’s and its franchisees hired 62,000 people in the U.S. after receiving more than one million applications, theOak Brook, Illinois-based company said today in an e-mailed statement. Previously, it said it planned to hire 50,000.

The April 19 national hiring day was the company’s first, said Danya Proud, a McDonald’s spokeswoman. She declined to disclose how many of the jobs were full- versus part-time. McDonald’s employed 400,000 workers worldwide at company-owned stores at the end of 2010, according to a company filing.

Then we have this from the Harvard Crimson:

Acceptance Rate Falls to New Low

A record-low 6.9 percent of applicants have been accepted to the Harvard College Class of 2014.

The coveted fat envelopes will be mailed today to 2,110 students, the Office of Admissions announced earlier yesterday. Applicants will also receive their decisions via e-mail after 5 p.m. today.

6.2% acceptance rate for McDonalds.  6.9% acceptance rate for Harvard.

When I was a kid, getting a job at McDonalds is what kids did. Adults did not work at McDonalds unless they were supervisors or on the day shift.   Kids stocked shelves at stores too, and bussed tables.  When was the last time you saw a 14 year old bussing tables?

The economy is recovering, but is still in appalling shape.  When the acceptance rate for Harvard is higher than it is for a gigantic block of minimum wage, no future jobs, something is seriously broken with the system. These people are not Zero Marginal Product workers. We can and must do better.

[Important Update: Oops!  Major factual error!  Harvard reduced their acceptance rate to 6.2% this year. I somehow used the record low acceptance rate from 2010, instead of the record low acceptance rate for 2011.   I apologize for wildly misrepresenting the difficulty of getting a job at McDonalds.  It is only as hard to get a job at McDonalds as getting into Harvard, not more difficult as I stated.  I retract any claims about “more difficult”. Matt Yglesias – are you going to apply?  You might not make the cut.]

Oil prices already near highs when priced in GDP

March 1, 2011 Comments off

I was thinking along the same lines, but I didn’t have the full day to devote to this.  Glad to see I don’t have to now! The price elasticity of Oil is low, and remains low. This means that demand does not change much ever for large differences in price in the short term.

We’re used to pricing oil in USD.  But another really good way to look at the oil is “How much of our work is devoted to purchasing energy?”  The reason this is a good question is because the amount of energy demanded doesn’t change even when the price for this energy changes. So asking how much “money” this energy costs is not as useful ask asking how much work it costs.

For this, you translate the total cost of oil USD into GDP terms.   This is what BAML did! Nice one. It turns out that in terms of Global GDP, the price of oil is already nearing the 2008 highs.

Then they point out that this demand elasticity has a huge kink.  It is strongly linear until a point, but at that point the world capitulates and destroys a huge portion of demand.  This dynamic was one of the triggers of the 2008 Lehman Crisis – remember $4.50/gallon gas?

Apparently, we are very near that point with the current prices of oil.  Ouch.

First, the part that demand elasticity causes huge jumps in price for minor disruptions in demand.    (h/t to the FT Alphaville blog):

the price elasticity of global oil demand will ultimately determine how high oil prices go. Broadly, we would argue that a 10% increase in oil prices pushes down global oil demand by about 0.5%. In other words, a 600 thousand b/d production disruption should impact Brent crude oil prices by about 15% or $15/bbl, in our view. This calculation is consistent with the jump observed in recent days in response to Libya’s output disruption. Worryingly, it highlights the risk of further price rises if more production is shut in.

Then worry that we are really close to the discontinuous break point for demand destruction:

In our opinion, if Brent crude oil prices hold at around $110-115/bbl in 2011, energy as a % of GDP would remain close to record levels (Chart 14), suggesting that the point of demand destruction is in short sight.Even when looked at on a quarterly basis, we find that oil prices are already very close to the exceptionally high levels observed in 2008 (Chart 15).

While this suggests to them that we have a spike and crash scenario coming, I think it is already here.  I am waiting on the “Crash” part. Combine this with any few random posts from and you can see a spiky future for oil.

By the way – you need to setup an RSS feed for both the FT Alphaville blog and for Business Insider.  These are some of the best sources for information on the web.  Plus you’ll find a good amount of quality IB reports.

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Saudi’s fill output gap as predicted

March 1, 2011 Comments off

Saudi pumped 8,425 but appear to be pumping 9,000+ now

At least according to them and an unidentified source!  We’ll see how this really turns out, but as of now, it looks like Saudi Arabia is able to fill the output gap.

From Reuters:

Saudi Aramco CEO Khalid al-Falih told reporters the demand caused by violent unrest in Libya had been met. [ID:nLDE71R0DG]

Saudi Arabia is pumping around 9 million barrels per day and has spare capacity of around 3.5 million bpd, a senior Saudi source told Reuters, confirming a figure given by an industry source last week

I wrote a few weeks ago already that Saudi Arabia had the capacity to pump much more, and then last week again said they were turning on the spigot.  The latest official data is Saudi Arabia was pumping 8,425 a day for January, but here are a few claims they are pumping 9,000 or more in February.

I’d be surprised if they don’t up it past 10,000/day just to show the world it can. It would take a few months, but I think they are very worried about the price of oil being too high.

Also, I guess I should have guess I should have known Jim Rodgers was turning into a crank when he started wearing bow ties.  It’s a pretty good predictor of Crankery.





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Saudi Update: They are turning on the spigot

February 24, 2011 Comments off

Incredible claim from the Saudis:

“Right now, there are active talks in order to implement what is needed,” the Saudi oil official added. He stressed that the kingdom retained spare capacity of some 4m barrels a day – more than than double Libya’s entire output which totalled 1.58m b/d in January, according to the International Energy Agency.” [Italics mine]

Wow. “Stressed” – usually people aren’t lying when they stress they can do it right away.  It almost sounds like he is begging people to take more crude oil.  The 4m barrels is far beyond the estimates of spare capacity that I’ve seen.

And that isn’t all:

“Traders believe Saudi Arabia has the capacity to boost production by at least 1m b/d with just 24 hours notice, meaning that if a decision was adopted now, the oil tankers could be arriving in Europe within 10 days.”

Wow.  Just wow.  24 hours notice.

Iraq: Where is the oil?

Also, why isn’t Iraq just pumping out the oil right now?  A few trillion, and this is what we get? No oil extra oil during an oil crisis?


Breaking the (Okun’s) Law

January 17, 2011 Comments off

Should the U.S., Ireland, and Spain be thrown in Jail for breaking a "Law"? Views diverge

One of the very first posts I wrote was a post on Okun’s Law, on the Daily Kos site.  This post shows my lack of writing skills, but it is noteable today for a few reasons.

  1. I wrote this post 2 weeks before Paul Krugman wrote the same post.  His traction was a bit more than mine, but we came up with similar estimates. I was quite shocked when Paul ripped me off – I’ll forgive him this time for his slow thinking, but next time…
  2. Today, Okun’s law appears to be breaking down all over the G-7.

I really like the work over at Worthwhile Canadian Initiative.  They ask consistently good questions, have a moderate and friendly tone, and then have good and productive back and forth as well, even if they do it with one of the shrill.

Brad DeLong has an excellent response to this question.

It used to be that labor productivity was procyclical: businesses would hold onto workers in downturns even when there wasn’t enough for them to do–would put them to work painting the factory–because the match between businesses and their skilled, experienced workers was valuable, and businesses did not want to see their skilled, experienced workers drift away in a temporary downturn and then have to go through the expense and loss of training new ones. We know this because when the overall unemployment rate rose higher, and so there were fewer places for laid-off workers to drift off to, labor productivity became less procyclical.

That era is over. (Well, there is still a very small sign of it in manufacturing.)

These days U.S. labor productivity looks to be countercyclical: firms take advantage of downturns in demand to rationalize operations and increase labor productivity, pleading business necessity in the face of the downturn to their workers.

It seems fairly clear to me that calling this “structural change” is somewhat of a misnomer. Structural change is when workers find jobs in expanding industries. That happens overwhelmingly during booms. For workers to lose jobs in contracting industries and to not find them in expanding industries is not “structural change” but rather something else.

If we were to pump up demand we would pump it up in expanding industries, and so accelerate rather than obstruct labor reallocation.

Why is do I consider this response to be so excellent?  Because I know about 4 business owners that have run businesses for 20 years, and all of them have made this exact change.  They are very quick to lay people off in downturns today, where in the 1990’s, this wasn’t the case.  In the early 1990’s, they would hold onto people for months and months, bleeding themselves of cash.  Now, they laid off probably 50 people between them in just a few weeks in early 2008.

This was a very perceptive observation on Brad’s part – obvious once stated.

Then the second part of the observation could probably be said better, because I think that as stated, this is so close to structural unemployment it would confuse people from Chicago.  I think a better way to say it would be:

For workers to lose jobs in contracting industries and not find work in expanding industries that “should” be able to use these workers is not “structural change” but rather something else.

These is a small distinction but might make it a bit more clear. There is something quite strange going on, and the change makes a huge difference to our economy. It should make a difference to the policy response to cyclical upturns and downturns.

*I am starting to think that this relatively unknown collection of Science Fiction Stories from Michael Swanwick is more important than I ever knew.  In this volume:

  1. A guy makes a fortune on Lawsuit Futures before putting his brain into a TRex!
  2. Some people are fighting to bring about a Khmer Rouge quality future for many people so they can be slightly richer!
  3. A man is offered a new job at a company that animates dead people who work for free, and thinks:

“I thought of the millions who were never going to hold a job again. I thought of how they must hate me – me and my kind – and how helpless they were against us. And yet. There were so many of them, and so few of us. If they were to all rise up at once, they’d be like a human tsunami, irresistible. And if there was so much as a spark of life left in them, then that was exactly what they would do.
That was one possibility. There was one other, and that was that nothing would happen. Nothing at all.

God help me, but I didn’t know which one scared me more.”

If you haven’t see Watson in action, you should.  Expert knowledge just got significantly devalued. I’ll have more on Watson when I get a few minutes.

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Tyler Cowen: Weak Opinions, Strongly Held, and blind in real-time

December 16, 2010 2 comments

I hate to write this about Tyler Cowen.  He seems like a nice guy, and he is certainly very smart.  But this article about inequality is a train wreck, and his real time record is nearly propagandistic.  Cowen is part of the problem, like Hoenig is part of the problem.  (Kudos to Matt to calling Hoening out – he has been wrong for 20 years)

He just wrote an article that has the blogging world aflutter, talking about the “inequality that matters”:  Wall Street captured the political process, and does not fail when it loses all of its money.  Wall Street rips off its customers.  Wall Street plays short volatility. Wall Street deliberately exposes itselt to systemic risk.  This is not news to anyone in 2010.

In real time, Cowen was MIA.  This would have been a prescient article to write in 2003 or 2004.  Or a strong article in 2005, 2006, 2007, or even 2008.   But in December 2010, please.  Don’t bother searching through his blog archives from those years.  You’ll find interesting articles about food, but not much real time information on the greatest wealth transfer in human history.

And the remedy?  “Throw up your hands, we are powerless against this system – we just have to pay the price, and let these rich financial institutions destroy our economy, over and over again.”  I will call this Bullshit now, and get to the reasons why later.

Please, please remember: Nearly everything that went wrong in the most recent crisis happened in financial products specifically created to avoid the laws passed after the first Great Depression.  The entire shadow banking system grew up to evade these laws – that is the reason it is called the shadow banking system.

But lest we get lost, let’s examine the two different ideas, one, that Cowen was MIA when it counted, and two, he is totally wrong about the remedy.

Cowen: The real time record sucks

Look closely at his Slate review of Taleb’s Black Swan.  Yes, The Black Swan is a flawed book – the author is full of himself, it dismisses all risk management as always useless, it claims that the Black Swan idea is nearly all Taleb’s.

But it is also a book that:

  • devotes a significant number of pages to discussing how the banking system fails over and over again and gets bailed out by the government;
  • shows how banking is designed to systemically fail;
  • talks extensively about how short volatility strategies blow up financial institutions and enrich bankers – and the clean up is paid for by governments and ultimately taxpayers.

In addition, The Black Swan makes a startling claim about banks – that banks are not net profitable over our entire history of banking, but rather survive only because of repeated government bailouts.

Cowen does not mention these issues in his review. Cowen does mention finance. Choice quote from the June 2007 Slate review:

“Oddly, Taleb’s argument is weakest in the area he knows best, namely finance. Only on Wall Street do people seem to give proper credence—not too much, not too little—to very unlikely events.”

Just fifteen months later, the U.S. is handing $200bn to AIG.  Treasury Secretary Hank Paulson issues a one page note asking for $1,000,000,000,000 to bailout Wall Street Banks, because they are all broke.  “Proper Credence”, indeed.

Wall Street  – and any bank  – has a massive incentive to underprice the risks it faces.  It can make more money when it does.  This is why we passed the Securities Act of 1933, Glass-Steagall, and the Securities Exchange Act of 1934 – to prevent banks from underpricing risk and misleading their customers about that underpriced risk.  Much of Minsky’s work is devoted to this idea: Banks face perverse incentives to pile on risk in good times, even if they know bad times – where they will not be able to suppor that risk – are just around the corner.

These ideas are well known, and were well known in June 2007.

On inequality, look through his blog archives.  See if you can figure out what his opinion is on inequality.  He doesn’t even think it really exists, but I could be wrong.

Short Volatility Strategies?  Not mentioned as far as I can remember.

How about banking bailouts as a long term fact of the world financial system?  Not mentioned on his blog, prior to 2009.

Overall – where was he in real time on what he seems to think are the most important issues facing us today.  Nowhere to be found.  In fact, he spent much of his time shilling for EMH, or maybe not – I cannot always figure out what side of an issue he is on.  He has weak opinions, strongly held – the very reason why Harry S. Truman asked for a one-handed economist.

Despair, for Cowen does not understand risk adjusted returns

Currently, we run our economic system as though the natural path is the optimum path.  But what does optimum mean?  Does it mean highest returns?

Any trader worth their salt knows about risk adjusted returns. What are the risk adjusted returns of our current approach to banking?  We do not seem to get much better returns, and the risks seem very, very high right now.

I think much of the despair of the article comes from this one line:

For the time being, we need to accept the possibility that the financial sector has learned how to game the American (and UK-based) system of state capitalism.

He forgets that we had an excellent solution after the first great depression – make broad based rules that limit banks to specific functions.  In this specific area of human existence, follow “rule of law” based regulations: everything not specifically allowed by the rules is banned.

We use this method with other extremely dangerous substances, like plutonium. We have laws like “reckless driving”, which essentially ban everything not specifically allowed by the rules.

Why not with something that has proven itself to be dangerous over and over again – unregulated banking?  Remember the S&L crisis? That was “only” $200bn or so. Is it possible that some people looked to the S&L crisis as a trial run?

I find it odd that humans can: Put people on the moon; design, build, and program computers; improve traffic patterns; run profitable businesses; create and run the internet; raise ever more intelligent kids.  But for many economists, their most sacred principle is that even the smallest deviation from unfettered natural systems reduces economic performance.

The idea of maximizing economic performance instead of maximizing the risk adjusted returns of our economy is probably flawed.   Brad Delong points to an interesting chart that shows how much volatility we have taken out of our economy with active management.   But the long term growth rate has remained largely the same – we’ve just cut off the lower tail.

This is similar to the return curve that most Long Term Trend Followers have, and why they insist on using the Sortino Ratio, instead of the Sharpe Ratio. Downside return volatility is far more devastating than upside volatility, even though you need to monitor both.

It does not make coherent sense, on some basic level.  Either humans can figure stuff out to make it better, or they cannot.   There isn’t some vast, cosmic, “un-figure-out-able” off-limits sign on economic activity, just the ones we put their ourselves.  I am not claiming it is easy, only that the natural order isn’t likely to deliver what we want.

I find it even odder: We had a banking system that produced massive prosperity for most Americans, and then dismantled it.  We can change the risk of our banking system.

Hoeing And Cowen do not deserve any accolades

Matt wrote this incredible article about how Hoenig has been wrong for the last 20 years, and doesn’t deserve any praise at all.   Actually, it has been longer than that, but Matt is correct – Hoenig has been wrong for a vast majority of his career.

With Cowen, the problem is a bit more pernicious.  It isn’t that he has been wrong, but that you cannot tell.   What does Cowen strongly support?   I think he does not like government meddling – ok that might be one.  However, when I read his posts, I frequently cannot tell what his position might be on the topic.  He is the reason Harry S. asked for a one handed economist.

Even worse is that this guy missed the worst economic debacle of our lifetime in real time, and his solution  – well, he does not have a solution.   Where is his wisdom?  Where is his Strong Opinion, Weakly Held?  Is it “we are powerless against the banks?”

It seems like it comes down to support and enable the status quo.  He doesn’t see a way to change anything, because the markets have naturally evolved to put banks and financial companies at the top of the food chain.  By his philosophy, he does not want to meddle, so he cannot do anything about it.  Dude, it isn’t that we are powerless, it is that you tie your own hands behind your back.  We’ve changed the laws dramatically to favor capital and financial firms – just look at the tax code on how hedge fund managers are taxed.

I however, remain unfettered.

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