Ben Walsh

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com. The latest apparent victim of the London Whale has a slightly less memorable name: portfolio hedging. The WSJ reports that the final version of the Volcker Rule won't contain language allowing the practice of hedging broad portfolios of assets against economic shifts. Treasury Secretary Jack Lew says the “rule prohibits risky trading bets like the ‘London Whale’ that are masked as risk-mitigating hedges”. The Volcker Rule is tantalizingly close to finalization, clocking in at some 950 pages, after a more than three-year drafting process, but how it will be implemented is an open question. At the five largest Wall Street banks, the rule could threaten business units that accounted for $58 billion in revenue over the last twelve months. That’s 18% of their collective revenue, Bloomberg writes. Still, Guggenheim Securities’ Jaret Seiberg thinks regulators are intentionally overstating the actual strength of the rule. “The vast majority of banks” will be exempt from having to demonstrate compliance with the portfolio hedging portion of the rule, says Seiberg. KBW’s Brian Gardner and Fred Canno fear enforcement of the rule might end up being more important than the text itself: “A broad definition of prop trading (with narrow exemptions) that is aggressively enforced could be the worst outcome for the largest banks”. Matt Levine points out that removing a phrase is not the same as prohibiting a practice. Given the current language of the rule, portfolio hedging by another name may be permitted:

Eliminating the words "portfolio hedging" is not the same as eliminating portfolio hedging. The rule allows hedges "designed to reduce or otherwise significantly mitigate … one or more identifiable risks," as long as they don't create "any significant new or additional risk that is not itself hedged contemporaneously." So it is not entirely clear to me from that that the rule forbids "portfolio hedging".

-- Ben Walsh

On to today’s links:

Leaders
Vanity Fair profiles Marissa Mayer, includes must-see yearbook photo featuring a propeller beanie - Bethany McLean

Interesting Failures
An oral history of BlackBerry's utter implosion - Bloomberg Businessweek

Primary Sources
Obama on inequality: his best speech to date on the economy - White House

The Chrysler IPO won’t happen this year. There are many not-entirely-straightforward reasons, which Antony Currie details. But there’s also the relatively simple issue of time: there are only three full calendar weeks left in 2013, and the company apparently ran into issues it couldn’t resolve in short order.

But if you look at the data, the end of the year is actually a very busy time for IPOs.

This chart uses Thomson Reuters IPO data from 2002-2012 to show each week of the year’s median percent contribution to the number of IPOs (blue) and the proceeds raised from those IPOs (red). For instance, a typical sixth week of the year, a/k/a mid-February, accounts for 3% of the year’s number of IPOs, 2% of the proceeds raised.

Bloomberg's Michelle Jamrisko reports that the Americans are holding onto things like appliances and furniture for longer periods of time. The average age of consumer durable goods -- a category that also includes items such as cars, electronics, and jewelry --  is 4.6 years, as tracked by the Bureau of Economic Analysis. Jamrisko notes this is the highest its been since 1962. The average age of jewelry and watches was 5.3 years, the highest since 1942.

A longer time frame makes this data a bit easier digest, and thankfully the BEA has consumer durable goods data going back to 1925, plus an easy-to-use charting tool. Here's the average age of US consumer durable goods since 1925:

In the post-war era, the age of consumer durable goods moves within a fairly tight range, and we are now towards the top-end of the range.

US home prices rose 0.7% in September and are up 13.3% over the same period last year, according to new data from the S&P Case-Shiller index. The index, which measures single-family home prices in twenty metro areas, showed the highest year-over-year gain since February 2006, Reuters reports.

Reuters breaks down the gains by metro area. Las Vegas leads the way with a remarkable 29% jump over last year:

Here's Case-Shiller's longer-term view of US housing prices, charting the index back to 1988:

The most important jobs report you've probably never heard of was released this morning by the BLS. The "Job Openings and Labor Turnover Survey" demands your attention if only for its acronym, JOLTS. Janet Yellen pays close attention to it, and with good reason.

The survey tracks the number of job openings and hires in the US, which are fairly obvious indicators of the strength of the labor market. It also tracks an important, if slightly more subtle, indicator: turnover. The BLS calls these "separations," and the number measures people who've quit jobs, been laid of, or otherwise left involuntarily.

The JOLTS numbers released this morning showed "3.9 million job openings on the last business day of September, little changed from August", and the hiring and separations rates were essentially unchanged as well. More people getting laid off is bad news, of course, but more people quitting their jobs is actually a very good sign. People tend to quit their jobs when they feel more economically secure or positive about the job market.

The number of Americans filing new claims for unemployment benefits is at a two-month low, data released by the Labor Department this morning shows.  From the report:

In the week ending November 16, the advance figure for seasonally adjusted initial claims was 323,000, a decrease of 21,000 from the previous week's revised figure of 344,000. The 4-week moving average was 338,500, a decrease of 6,750 from the previous week's revised average of 345,250.

Reuters writes that the new data suggests "some strengthening of labor market conditions". However, "while layoffs have slowed significantly to normal levels, there has not been a rapid acceleration in hiring as domestic demand remains lukewarm".

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In a new speech at the IMF Economic Forum, Larry Summers said the US may be in a near-permanent slump -- an assertion Peter Coy calls “deeply pessimistic”. What the US faces, Summers warns, is secular stagnation. The problem: nominal interest rates can’t go any lower, because they’re already near the zero lower bound, but the economy may need real interest rates of negative two or three percent to get back to full employment. Here’s Summers:

We may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity, holding our economies back, below their potential.

On Friday, China announced its intention to relax its one-child policy, after more than 30 years. Reuters' Sui-Lee Wee and Li Hui report that the shift has been under consideration for the last five years. The complex set of family planning policies, they write, are "now regarded by many experts as outdated and harmful to the economy", due in part to an aging population.

Here's a Reuters chart showing China's dependency ratio, which compares the number of China's young and old citizens (its dependents) to the size of its working age population. A higher number means fewer working-age adults to support the young and the old.

You can also see above how big a social and economic trend urbanization has been over the last 40 years. Labor shortages have recently become a concern for Chinese leaders. It's important to note that the one-child policy change will be gradual, and that any increase in birthrates in the next few years won't lead to an increase in working age adults for at least a decade and a half.

When Nick Lemann’s New Yorker profile of SEC chair Mary Jo White came out, Felix took issue with this assertion:

In 2000, the S.E.C. permitted stocks to be traded in pennies or fractions of pennies, rather than the customary eighths or thirty-seconds of a dollar. That made it easier for traders to make money by placing very large orders for very small variances in the price of a stock.

Decimalization, Felix said, meant stocks traded in penny increments, not fractions of pennies.

Yesterday, the Bureau of Labor Statistics Released third quarter productivity and labor costs data. Non-farm worker productivity grew at an annual rate of 1.9% versus a 1.8% increase in the previous quarter, while non-farm labor costs fell at an annual rate of 0.6%. In other words, workers aren't getting much more productive, and, by one measure, wages aren't really increasing either.

First, here's the BLS's chart of the productivity numbers:

Notice that the red line, which is the change in productivity growth from the previous year, is flat. In other words, compared to the third quarter of 2012, Americans haven't gotten any more productive. A 1.8% increase in output, says the BLS, was offset by a 1.8% increase in hours worked.

Reuters' charts the relationship between increases in productivity, labor costs, and GDP growth: