The credit score divide

Today's WSJ has a report on how individuals with middle to low credit ratings are unable to refinance their mortgages.  On the one hand, this means that we are not getting as much economic bounce from 3-4% mortgage rates as we did in earlier recoveries -- and this is the main focus of the article which plays this an equity issue.  Expect to hear more of this in the election.

My take -- sure the stimulus from the Fed is being muted.  But didn't we got into this mess because too many people with low credit ratings got into houses they could not afford?  I don't think the real estate bubble worked out too well before, so why start another one?  Oh, there's an election. 

Our tax dollars at work

Good news today for Roger Clemens, found not guilty in his second trial on charges of lying to Congress regarding his personal use of performance-enhancing drugs.  Of course, Clemens has faced  astronomical legal bills to fight the charges. 

But these cases keep continuing; Lance Armstrong now is being hauled up by yet another agency on charges that he doped while competing in the Tour de France and other events.  Did you know we had a federal Anti-Doping Agency, funded partially through a federal grant? 

Don't get me wrong -- I do not condone the use of performance-enhancing drugs.  But both from a fairness perspective (how many times should one be prosecuted for the same offense?) and a scarce resources perspective (can't the feds go after folks who have committed more heinous crimes?), this still puzzles me. 

The truck driver shortage

Today's N&O runs a story about how hard a time trucking firms are having filling open positions for truck drivers.  Economic logic would make one skeptical of this claim: unemployment remains over 8% and trucking jobs pay relatively well ($38-40k plus benefits for entry level) for work with low educational requirements.  Given the massive loss of construction jobs (compared to five years ago), one would think trucking would easily absorb some of the surplus labor from that sector. 

The article says one cause of the surplus is that prospective truckers are unwilling or unable to pay the $4-6k cost of learning to drive a truck.  Another is federal regulations requiring clean safety records of all new truckers.  But the real mystery to me is why pay is not rising to attract even more people into the field. 

Contrarian Advice for Businesses Serving the Poor

C.K. Prahalad argued in his classic HBR article that companies trying to serve the bottom of the economic pyramid must be high volume, low price and low margin operations.  Cornell prof and HBR blogger Erik Simanis questions this widely accepted wisdom.  Noting that operating costs in low income overseas markets often run well above expectations and that getting to scale takes much longer, Simanis argues that higher profit margins are absolutely necessary to build up the capital needed to take on the challenge.

Companies and those that criticize their efforts are not doing D and E consumers any favors by clinging to the low-margin philosophy, which is unable to generate economic returns that are competitive with alternative uses of a company's capital — the true benchmark of business success. Precious few of the ventures that failed to generate such profit levels have survived, leaving low-income consumers without access to products and services that could have improved their lives and stimulated economic activity in poor areas.

Today's immigration news

President Obama announced today that the US would no longer deport illegal aliens age 30 who came to the country before they were 16, as long as they do not pose a security threat.  Republicans called it a political move, although you have to wonder where the votes are on this (unless I underestimate vote fraud).  Economically, the main impact will be to encourage young illegal aliens to make further investments in their own human capital, since they need not be as concerned about deportation.  But the odds of deportation now are not especially high, so the even lower odds are unlikely to be a game changer. 

California voters OK pension cuts

The botched gubernatorial recall campaign in Wisconsin got all of the headlines last week, but equally noteworthy were two elections in California.  Voters in San Diego and San Jose approved cuts in pensions for local government employees.  The NYT report indicates that new employees will be converted to defined contribution plans, whereas continuing employees would contribute more and see smaller payouts.  Retirees would not be affected.

If voters in California and Wisconsin support pension cutbacks, the writing appears to be on the wall for many other states.  Voters see government employees getting better benefits than they can get in the private sector.  They also see the loss of public services, including rotating closures of firehouses in San Diego and laid-off teachers and police.

The story is not over, as there will be court challenges.  I find it ironic that California and Wisconsin voters have way more courage to face long term budgetary imbalances than our elected officials of both parties in Washington DC.

MBA jobs in fashion and luxury

MBAs have long had a reputation for spending on BMWs, yachts and high end fashion.  BW reports that MBAs now see these sectors as good employment opportunities.  The luxury sector has historically ignored MBAs, but this has changed in recent years thanks to technology, social media, and big data.  Also there has been a surge of high end startups that want MBAs to develop and execute growth strategies.

NC State's Jenkins Graduate School of Management is teaming with the College of Textiles and SKEMA Business School to start a one year's masters program in Global Luxury Management.  Students will spend the fall in Raleigh taking courses in consumer behavior, entrepreneurship, brand management, textile and apparel technology, and creativity.  They will then spend the spring in SKEMA's campus in Sophia Antipolis France (outside Nice), followed by an internship.  The program, designed to leverage NC State's strengths in innovation and its partnership with SKEMA, launches this fall.

Big data's biggest user -- finance

At least that's what WP says today.  Traders track tweets for signs of optimism or lack thereof to anticipate where the stock market is moving.  Analysts now gauge sales performance from Amazon comments; why wait for the monthly or quarterly sales figures from the government or corporate reports?

The article makes another important point that anyone who has tried to do economic or financial forecasting has known for some time: your analysis is only as good as the data and big data does not necessarily mean better data.  The stock market always has been subject to herd behavior, but at least the herd had to buy or sell to move the market before.  Now hedge funds are making the same bets in an attempt to guess which way the herd might move.  Investor beware. 

NC State MBA and Master of Accounting students are starting to get training in how to harness big data, but we are focusing on marketing, technology commercialization and risk management.  These are areas where data-driven decision making has a history of allowing managers to make more informed judgments about how to create value. 

Bye bye to supersized beverages in NYC

There is an obesity epidemic in the US.  There are numerous causes, including sedentary lifestyles, more meals eaten away from home, creative innovations that make food fatter and tastier (why not a Doritos shell on my taco?), and lower prices for processed foods.  

How to turn things around?  One would do well to look at how we have dealt with tobacco products.  Through a combination of taxation and education, the percentage of people who smoke in the US has dropped from 44 to 21 percent over the last 60 years.   Textbook economics would indicate that a calorie tax combined with exercise subsidies would be the way to go.  Food retailers could make information about caloric content more accessible so that consumers could make more informed choices.  Examples: Panera Bread posts calories on menus; Cheesecake Factory introduced a Skinnylicious menu with all entrees below 590 calories.

How not to do it?  Consider NYC Mayor Michael Bloomberg’s proposed ban on large sugary drinks.  It fails every conceivable benchmark of economic rationality.  It will be hard to enforce; anyone who wants 32 ounces of soda will still have plenty of options, albeit with slightly increased transactions costs.  It singles out beverages while ignoring chips, ice cream, ribs and all the other goodies that help us gain weight faster.  A tax on large drinks would do just as much to discourage their consumption and, as a bonus, give the good mayor more money to serve his constituents.  No wonder a food industry group ran a full-page ad in NYT depicting Mayor Bloomberg as Nanny Bloomberg, with the text asking "What's next? Limits on the width of a pizza slice, size of a hamburger, or amount of cream cheese on your bagel?"

This does not look good

Today's jobs report for May is a total disaster.  WSJ reports that employment grew by a mere 69k and unemployment inched up to 8.2%.  Stock market dropped 2.5% in reaction to this and the even worse news coming out of Europe.  Ouch!

Changing job market for MBAs

Worthwhile Financial Times piece on how the job market for full-time MBAs has changed over the last couple of years.  A few of the more interesting trends:

• Gaming companies such as Zynga and Electronic Arts are starting to recruit MBAs
• The hot skills: communications (as always) and analytics
• Hiring and salaries are up a little bit from a year ago
• Finance and consulting down; "consumer goods, pharmaceutical, media, technology and industrial companies" up; social media also hot
• Students are more likely than ever to be directing their own job searches: "Even at Harvard, the master at on-campus recruiting, almost 50 per cent of students now find a job via a different route."

Hiring of Jenkins MBAs at NC State is tracking close to last year.  Employers include American Airlines, Caterpillar, Chevron, Cisco Systems, Lenovo, Novartis, Red Hat, Siemens, Simmons, and Wells Fargo, among others. 

Why we have more manufacturing jobs

One of the few bright spots in today's economy has been the growth in manufacturing jobs, up 4.3% over the last two years.  Today's WSJ reports a key reason for the growth: wage growth in the U.S. has been flat since 2000 (adjusting for inflation), whereas wages have been rising rapidly in China and moderately in Mexico.  With unemployment running high, it seems like a safe bet for manufacturing wages to continue to be flat for at least the next year or two.

Many people continue to cling to the belief that the U.S. needs more manufacturing jobs to compete globally; that we need to make "stuff" to survive.  Some governments are actually subsidizing manufacturing companies in an effort to keep good jobs (see this NYT piece for examples in case you think the auto bailout was an isolated case).

This was not a totally crazy idea 50 years ago when manufacturing wages were relatively high compared to the rest of the economy.  But how good are those jobs in today's knowledge-based economy? Why would anyone would want to subsidize a sector where the mean hourly wage is $18.94 (private sector average is $19.47)?  Pay is significantly higher in mining, construction and most parts of the service sector.

Looking for a guaranteed 8% return?

Me too, especially in today's market where long term bond yields are at historic lows.  Where might one find such an investment?  We need to ask the advisors of state and local government pension plans.  Researchers at Boston College have calculated that the average plan assumes it will get an 8% return and adjusts its annual contribution accordingly, reports today's NYT.  The hitch, of course, is that pension plans are highly unlikely to see such returns, so in future years taxpayers will have to kick in more to cover obligations to retirees.  So some political leaders such as NYC major Michael Bloomberg have pushed plan managers to lower the interest rate assumption to something more realistic. 

Although this looks like basic good government, public employee unions are not happy.  They realize that if governments have to kick in more dollars for future pension obligations, there will be fewer dollars to spend on raises and there might even need to be cutbacks in state services. 

In the private sector, the average plan assumes it will earn 4.8%.  Although I am not the sort who usually looks for ideas for new regulations, would it be unreasonable to ask state and local pension plans to use the same interest rate as plans in the private sector? 

Upheavel in the newspaper business

Two noteworthy items this week: First, the New Orleans Times-Picayune has decided to cut back to three days a week: Wed, Fri and Sunday.  The paper will cut back on staff as well.  It will continue to provide free news on its website.  Puzzle: nationwide newspapers get over 80% of their revenue from print ads.  One has to wonder if newspapers are on a death path.  

But that brings us to news item #2:  Bloomberg reports that Warren Buffett is thinking about buying more newspapers.  Buffett is not known for getting into a market too late.  So how is he going to make money?  Presumably he will have to change the business model, including the ongoing practice at most papers of providing online content for free.

Newspapers could cut costs tremendously if they could shift customers to online.  The trick is that they would then need to get additional revenue online -- both ads and subscription fees.  Getting people to pay for something that they have had for years is no small feat.  TV stations provide local news on their websites (in print and video), which complicates matters even further. 

The heart of the matter, in my view, is what content can today's newspapers companies create that no one else can?  If you look at your typical newspaper, you see a wide range of material: national news, state and local news, human interest stories, comics, sports, movie reviews, recipes, obits, and more.  Some of this stuff is done better on specialized websites such as ESPN.com.  Do not be surprised to see newspapers ditching non-local content and perhaps even forming strategic alliances with the local TV stations. 

Will Google be EU's next antitrust target?

NYT thinks the odds are high, according to today's front page story.  The euro-trustbusters are concerned that, for any given search string, Google gives its own services priority over those of rivals.  Google's advertising business also is a focus of the investigation. 

Google has about four-fifths of the search market, so it definitely meets the numerical standard for a monopoly case in the US (where a parallel investigation is taking place).  The EU can charge Google a fine of 10% of its global revenue, a fine that would be twice as much as the London Whale lost for JP Morgan.  Google's defense will be that its dominance is due to having a superior product. 

Antitrust cases typically take many years to settle.  In industries subject to rapid technological change, the issues that launched the case may be moot by the time it is resolved (e.g., IBM, Microsoft).  It is hard to imagine a world without internet searches 10 years from now, but what if someone comes up with a better way of doing it than Google?

Consequences of a shrinking labor force

WSJ's David Wessel devoted his column last week to why the labor force is shrinking and what this means for the recovery.  The labor force participation rate for men has been trending downward for some time, as a result of youth staying in school longer (and being less likely to take part-time jobs) and older men retiring earlier.  The rate for women had been steadily climbing from 1950 to 2000, but has since leveled off.  It has taken a big drop since the Great Recession.

The big question is what will happen once the unemployment rate starts coming down significantly.  Will workers return to the labor force once opportunities improve?  If so, then we must accept the likelihood that the current 8.1 percent number vastly understates the true degree of excess supply in the labor market.  On the other hand, what if the labor force participation rate does not recover?  In this case the upside of any recovery will be compromised by labor shortages and tax revenues will be permanently reduced, exacerbating government budget deficits even more. 

J.P. Morgan can happen to any of us

So says SmartMoney columnist Brett Arends in his latest piece.  He cites five huge mistakes that financial institutions continue to make:

• Too many people still don't understand what "risk" really is.
• They rely far too much on dangerous computer models.
• They aren't prepared for the unexpected.
• They put too much faith in "experts."
• People have all the wrong incentives.

I emphasized incentives in my previous post, but this fleshes it out a bit more.  Arends claims

The entire world of investing -- including your 401(k) -- is now being operated on pretty much the same lines as JP Morgan's "synthetic credit portfolio." And everyone is making the same mistakes, even if for most, it's on a smaller scale.

And people wonder why large companies and many individuals park their money in low interest bearing accounts?  Maybe it's because they are secure they will not lose their money.  

Agency theory and JPMorgan

Nice WSJ blog post pointing out the real reasons why JP Morgan Chase lost $2b on derivatives trades.  It has nothing to do with regulation and everything to do with incentives.  The traders stood to land massive bonuses if the trades went well and stood to lose relatively little (at least compared to JP Morgan's stockholders) if the trades went sour.  MBA 505 veterans will instantly recognize this as a basic agency problem: heads we rake it in, tails someone else gets stuck with the loss. 

My own take: this has been very embarrassing for JP Morgan and very costly to them financially.  But the costs have been limited to the shareholders, not to mention the fired employees.  JP Morgan was big and lost a lot of money, but did not need any help from the Treasury or the Fed.  Which is a good thing because it would have been very damaging for the Obama administration to have had to step in during an election year.

I am amused by all of the politicians using this incident to make a case for more stringent financial regulations.  If Morgan CEO Jamie Dixon could not prevent this from happening (and he had every incentive to do so), what are the odds that a band of federal employees could prevent it?

Resumes and reality

Former Yahoo CEO Scott Thompson's resume said he had a double major in accounting and computer science at Stonehill College.  In fact he had not completed the requirements for a computer science major and was found out.  That is why he became a former CEO.

This seems to happen with depressing regularity.  Cases in recent years include a former CEO at Radio Shack (David Edmondson), a vice dean at the University of Pennsylvania (Douglas Lynch) and a former football coach at Notre Dame (George O'Leary). 

Remember what Forrest Gump said: "Stupid is as stupid does."  

Austerity in the EU

Insightful graphic on the well-known econ blog Marginal Revolution about government spending in five European Union members which have been following the austerity path.  As you can easily see, spending in France and the UK has continued to increase every year, whereas spending moved from rapid growth to flatline in Italy.  Government spending has actually fallen in Greece and Spain over the last two years but remains well above where it was 10 years ago.  And these are countries with little to any population growth.