Opinion

Ben Walsh

from Counterparties:

Obamacare’s circuitous path

Ben Walsh
Jul 22, 2014 21:49 UTC

U.S. federal courts don’t agree on whether the federal government is allowed to subsidize health insurance costs. The final decision, which seems likely to be made by the Supreme Court, will have massive political, economic and human impact. Not only does healthcare make up 18% of U.S. GDP, but the idea that the federal government can subsidize insurance is a key to the Affordable Care Act and the health insurance of more than 5 million Americans.

Here’s what happened today: first, the District of Columbia Circuit ruled in Halbig v. Burwell that the subsidies Obamacare has been providing for health insurance in 36 states were illegal. According to the decision, states alone, not the federal government, can provide subsidized health insurance. The court’s reasoning is based on imprecise wording in the law and contains an even worse pizza metaphor. Only 16 states, including California, Massachusetts and New York, have set up markets without the federal government's involvement. Then, Fourth Circuit, which covers a large portion of the Southeast U.S., came to the exact opposite conclusion in King v. Burwell. Any changes in policy are on hold pending appeal of the D.C. Circuit’s decision by the government.

The affordability of Obamacare, for citizens and the government, is at stake here: premiums could rise by more than 76% if states do not create their own markets, depending on the size of the subsidy currently provided in each state. Generally, the poorer the state, the more premiums will rise. Not only would that mean some people who have already purchased health insurance could no longer afford it, it could make providing care to those who remain in the pool more expensive, as healthy people begin to drop their coverage. In healthcare wonk-speak, this is called a death spiral, and it is indeed as bad as it sounds: when only the sick have any incentive to buy insurance, only the sick are insured. That’s not a good business model.

Mike Konczal takes a look at the argument that Obamacare’s authors actually wantedfederally supported exchanges to be illegal precisely so that states would be coerced into setting up their own exchanges. The problem with that, Konczal says, is that no one let states know this was the intent. As Dr. Strangelove points out, “a doomsday machine only works if you tell others about it.” Based on its actions – the government is appealing the Halbig ruling – there is no evidence that the administration really wanted a doomsday machine. — Ben Walsh

On to today’s links:

Herbalife
Bill Ackman's Herbalife presentation was... underwhelming - DealBook
It's "a lousy business but it is a business in which people have integrated their lives and their families" - John Hempton
Herbalife's pre-response to Ackman. "Spolier: [the company thinks] it is legitimate" -Dan McCrum

from Counterparties:

Bank of Inchoate Sense

Ben Walsh
Jul 18, 2014 21:24 UTC

Brad DeLong is confused. The Berkeley economics professor has read the Bank for International Settlements' (BIS) – often called the central bank for central banks –annual report and he just cannot understand what its positions on the global economy and monetary policy actually are: “It calls for raising interest rates now... It fears activist expansionary fiscal policy even more than it fears monetary ease... It seems hostile to any increase in the demand for risky assets.”

The BIS’s position, DeLong writes, fits with no current understanding of the the crisis, recession, or current economy. It does not buy into the Janet Yellen or Ben Bernanke view that interest rates should be kept low for a long time (we wrote about Yellen’s response here). Nor is it the view taken by Harvard economist Ken Rogoff and Nomura’s chief economist Richard Koo that we just need to wait for the credit mess of the financial crisis to work itself out. Nor is it DeLong’s own view that the government should get things going by borrowing more money.

Paul Krugman thinks the whole thing is actually really simple. “You need to see this in terms of an attitude, not a coherent model,” he says. Like political philosopher Michael Oakeshott said about conservatism: it’s “not a creed or a doctrine, but a disposition.” Since 2010, Krugman says, the BIS has been advocating against stimulus because it would limit the necessary harm of the recession. That may sound odd, but Krugman says it’s a retread of Schumpeter’s good old-fashioned theory of creative destruction. When the facts changed – most research doesn’t support the skills mismatch explanation of elevated unemployment – the BIS just looked for new reasons to support the same policies, which left it, Krugman writes, without “any method at all... I see an attitude, looking for justification.”

from Counterparties:

Losing participation points

Ben Walsh
Jul 17, 2014 22:18 UTC

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Today, the White House tried to answer one of the thorniest questions about the U.S.’s post-recession economy: why, despite the recovery, has the percentage of working-age Americans that are either working or looking for work steadily fallen? At the beginning of the recession in December 2007, what economists call the labor force participation rate was 66%. It is currently 62.8%, the lowest it’s been since the 1970’s.

About half the answer, the Council of Economic Advisors says, is that America’s workforce is getting older and “older individuals participate in the labor force at lower rates than younger workers.” Another third of the drop is due to pre-recession trends like declining participation by so-called prime age workers, plus the particularly nasty but inchoate effects of the Great Recession, like a big rise in the ranks of the long-term unemployed (economists think this pushes down the participation rate but are not completely sure why). Another sixth of the decline is due cyclical factors (the normal ups and downs of the economy).

Business Insider’s Myles Udland points out that the White House is chiming in on a highly politicized debate regarding just how strong the labor market is. The Obama administration is saying, the WSJ’s Josh Zumburn writes, that “only one-sixth of the decline is clearly attributable to the weak economy.”

from Counterparties:

Sanctions mean business

Ben Walsh
Jun 4, 2014 21:26 UTC

BNP Paribas may soon find out the cost of allegedly violating US sanctions: about $10 billion. The US Justice Department is reportedly close to levying the biggest fine ever paid by a single bank against the French financial institution for doing business with countries like Sudan and Iran. The size of the punishment would far outstrip Credit Suisse’s $2.5 billion fine for helping Americans evade taxes. Like Credit Suisse, BNP is expected to plead guilty to criminal charges.

DealBook’s Jessica Silver Greenberg and Ben Protess report that several months ago BNP “thought it had a secret weapon to avoid that fate altogether”: a memo drafted in 2004 by outside counsel. Based on the memo, BNP executed transactions for Sudan, but attempted to exclude any US-based employees from the work. After reviewing the memo, however, US prosecutors determined that it did not cover the charges the bank faced: that it has processed transactions on behalf of Iran and Sudan through its US operations.

The French government’s reaction to the negotiations between BNP and US law enforcement has been rather fluid. Just two days ago, French officials were wary of politicizing the fine, at least publicly. Privately, however, the bank had been enlisting the support of French government officials for some time. Yesterday, that tactic seemed to shift into the media, with French foreign minister calling the potential fine “unfair and unilateral”. And today, the French finance minister called the penalty “inequitable”. French president Francois Hollande now plans to talk to President Obama about the “disproportionate” nature of the fine directly at a dinner commemorating D-Day on Friday. That’s not exactly, Bess Levin notes, a low-key way of raising the issue.

from Counterparties:

FIFA’s fouls

Ben Walsh
Jun 2, 2014 21:59 UTC

Soccer’s international governing body had a really bad weekend. Twelve days before FIFA kicks off the world’s largest sporting event in Brazil, the New York Timespublished details of alleged match fixing in the run up to the last World Cup in South Africa. Then the Sunday Times (paywall: see the Guardian) released the latest and most damningly detailed report of corruption in Qatar’s successful bid to host the 2022 World Cup.

The match-fixing report mixes seemingly amatuer criminal techniques with sophistication and global reach emanating from a Singaporean front company. FIFA’s report investigated a total of 15 games, and the report is remarkably blunt in its conclusion: “Were the listed matches fixed? On the balance of probabilities, yes!” For example, the day of a match between South Africa and Guatemala ahead of the 2010 World Cup, a referee for the game deposited $100,000 in $100 bills in a bank in South Africa. According to the NYT’s Declan Hill and Jere Longman, the referee put in a questionable performance: “Even to the casual fan, his calls were suspicious — he called two penalties for hand balls even though the ball went nowhere near the players’ hands”.

The NYT’s report comes on the back of several high-profile reports of match fixing.Earlier this year, a match fixer claimed his financial backing enabled Nigeria and Honduras to qualify for the last World Cup. In 2013, Europol detailed its suspicions regarding more than 380 club matches. Among those were games in the Champions League, the highest level of European club competition.

from The Great Debate:

What’s a leveraged ETF and what makes it dangerous?

Ben Walsh
May 30, 2014 20:36 UTC

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Larry Fink is sounding the alarm. The chairman and CEO of $4.4 trillion asset manager BlackRock is worried about leveraged ETFs (exchange-traded funds). Fink thinks they could “blow up the industry.” His statement is a little unclear, but the industry he's referring to is probably ETFs themselves, not the global financial system.

Blackrock is itself a huge player in ETFs, but Fink says they'll never get into leveraged version of the financial instruments.

So, what’s the difference between regular and leveraged ETFs?

Regular ETFs are designed to track the price of a specific set of securities, taking the place of traditional mutual funds that focuses on particular investment sectors or classes of stock. ETFs started in stocks, particularly indexes, but now cover all types of assets. In this way they are similar to a mutual or index fund, but can be bought or sold like a stock. Regular ETFs, particularly the ones that track broad indexes like the S&P 500, are pretty vanilla financial products. Sure, an index fund might be slightly better for achieving individual investment objectives, but ETFs generally have much lower fees than actively managed mutual funds.

from Counterparties:

GDFlop

Ben Walsh
May 29, 2014 22:25 UTC

US economic growth has gone negative for the first time in three years. Revisions to the estimate of first quarter GDP, out this morning, put growth for the first three months of the year an annual rate of -1%. The initial estimate, released at the end of April, had the economy growing just barely, at an annual rate of just 0.1%.

Time to panic? Not really. The Wire’s Ben Cosman has the headline that sums up the reaction: “The economy shrank at the start of 2014, but no one seems too worried”. For one thing, this winter was terrible. The reason to keep calm and carry on producing gross product, says the WSJ’s Steve Russolillo, is that the negative revision is mainly about that bad winter weather and slow inventory growth. (Weather alone could have cut GDP by 1.5%, Reuters reports). Neither should hold back the economy in the second quarter.

The bad inventory numbers may actually help: “Lean inventories mean companies will have to order new goods and supplies to meet any increase in demand”, writes the WSJ’s Kathleen Madigan. After this morning’s bad news, Goldman Sachs’ chief economist Jan Hatzius is increasing his second quarter GDP estimate from 3.7% to 3.9%. Other economists are doing the same. “I expect both residential investment and state and local governments to add to growth soon.  And even investment in nonresidential structures should turn positive”, says Bill McBride.

from Counterparties:

Eating cheap

Ben Walsh
May 23, 2014 21:27 UTC

Whatever you're spending on this year's Memorial Day barbecue, you can expect next year’s to be even more expensive. The USDA forecasts that beef prices will rise between 5.5% and 6.5% by the end of 2014, after already increasing just under 10% so far this year. Overall food prices are projected to rise at between 2.5% and 3.5%.

Blame droughts in California, Texas, and Oklahoma for the rise in the cost of meat. TheCalifornia drought may cause price spikes in other foods foods – think broccoli, lettuce, bell peppers, almonds, and raisins – but it’s unlikely to noticeably alter current projections for broad food price inflation.

The odd thing about rising US food prices is that inflation elsewhere is very, very low. The Fed keeps missing its inflation target and the head of the Minneapolis Fed Narayana Kocherlakota thinks the Fed will keep missing its inflation target until 2018.

from Counterparties:

China’s other internet IPO

Ben Walsh
May 22, 2014 21:40 UTC

The Chinese internet IPO you haven’t been waiting for is finally here. JD.com, whichBloomberg Businessweek’s Bruce Einhorn calls “the closest thing to a Chinese version of Amazon.com”, priced its $1.8 billion offering at $19 a share, above the initial $16 to $18 range. It opened today on the NASDAQ at $21.75 and gained 10% in its first day of trading, valuing the company at approximately $30 billion.

Above-range pricing plus a nice opening day pop is as good a way as any to please both those selling stock in the IPO and those buying it. JD.com’s selling shareholdersinclude the company’s founder and CEO Richard Liu, Chase Coleman’s Tiger Global (best known for 45% returns in 2011), and Yuri Milner’s DST (an early investor in Facebook who helped Goldman Sachs to become a later investor in Facebook).

Interestingly, Alibaba is also probably pretty happy with the reception for one of its main ecommerce competitors. JD.com’s IPO, says Reuters David Gaffen, is seen as a precursor to Alibaba’s offering. The latter is a much, much larger compnay, both in terms of ecommerce – with 47 times the gross merchandise value of JD.com – as well as its sheer range of businesses.

from Counterparties:

Glocalization hits home

Ben Walsh
May 21, 2014 21:26 UTC

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For a select few real estate markets, “location, location, location” is taking on a new meaning. Price is no longer a block by block or neighborhood by neighborhood consideration. There is, says James Surowiecki, an emerging global market for real estate. The case study is Vancouver, which has the median income of Reno but the costly property prices of San Francisco:

Sotheby’s examined more than twelve hundred luxury-home sales in Vancouver in the first half of 2013 and found that foreign buyers accounted for nearly half of sales. In Miami, a huge influx of money from Latin America has enabled the city’s housing market to recover from the bursting of the housing bubble, and has set off a condo-construction spree. Australia has become a prime market for Chinese investors, who Credit Suisse estimates will buy forty-four billion dollars’ worth of real estate there in the next seven years.

These locations are what Surowiecki, quoting urban planner Andy Yan, calls “hedge cities”. Legal, political, and social stability are extremely high. Foreign buyers who can afford to are ready to pay what to locals seem like frothy prices. The calculation is simple: it’s better to lose some of your principal on a condo in a Vancouver housing bubble than to lose everything in a coup.

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