Opinion

Ben Walsh

from Counterparties:

Chart of the day: Goldman’s shrinking FICC

Ben Walsh
Apr 17, 2014 16:00 UTC

Goldman Sachs released its first-quarter earnings this morning. Reuters' Lauren LaCapra reports that profit was down 11% compared to last year and revenue from fixed income, currency, and commodities (FICC) was down 11% compared to last year. LaCapra writes that "since 2009 - when markets flourished briefly in the aftermath of the financial crisis," Goldman's FICC business has been declining steadily as a portion of its overall revenue.

Quartz's Mark DeCambre charts the post-crisis decline in FICC's contribution to Goldman's overall revenue. In the first quarter of 2014, FICC accounted for $2.85 billion, or 30%, of Goldman's $9.33 billion in total revenue.

 

Addressing FICC's performance on this morning's earnings call, CFO Harvey Schwartz said, "we don't look at it on a quarter by quarter basis. We look at it on a multi-quarter basis." Different businesses within the unit will be up some quarters and others will be down, so, Schwartz said, "if you are going to be in these businesses, you really need diversification."

Diversification may be helping to smooth out volatility in Goldman's FICC revenue, but it's smoothing out a decline. On the multi-quarter time-frame Schwartz referenced, FICC revenue seems to be idling at around 25-30% of total revenues.

from Counterparties:

The housing density is too damn low

Apr 16, 2014 21:11 UTC

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Your rent really is too damn high.

Kim-Mai Cutler has a long, detailed explainer on San Francisco’s real estate crisis inTechCrunch. To begin with, she says, there’s just not enough supply: “San Francisco has a roughly 35% homeownership rate. Then 172,000 units of the city’s 376,940 housing units are under rent control”, a number equal to a remarkable 75% of the city’s rental units. That doesn’t leave much for the rental market. As a result, any rents which can rise, will rise. (Marc Andreessen notes that tech has been driving up prices in the area for at least 30 years, and population boom cycles have been part of the city’s history since the Gold Rush.)

Tech companies keep creating jobs in San Francisco and Silicon Valley without building more housing to accommodate the extra workers. As computer programmers flood in to the existing housing stock, the working class is pushed out completely. A big part of this problem, says Ryan Avent, is San Francisco’s restrictive zoning requirements. The city’s longtime residents are very good at keeping new construction out of their backyard. “However altruistic they perceive their mission to be, the result is similar to what you'd get if fat cat industrialists lobbied the government to drive their competition out of business”, he writes.

While the tech industry (and San Francisco’s zoning laws) exacerbate the situation in California, it’s really part of a greater trend in urban housing affordability. Urban populations around the country, Cutler points out, have been rising since the 80’s. A report from the real estate website Zillow found that “nationally, renters are spending more of their income on rent than they have at any point in the past 30 years”, especially in urban centers. In quite a few cities, the average person has shot past the generally accepted 30% of income on rent guideline, and is now paying nearly 40% of what they make on housing.

from Counterparties:

Explanatory journalism

Ben Walsh
Apr 11, 2014 21:45 UTC

Something troubling is happening in the stock market. Not only are markets are down – the Nasdaq and the S&P 500 are down 3.1% and 2.6%, respectively, this week – but no one has come up with a convenient, compelling (and misleading) reason why. Never mind, says Matthew Klein, that US stocks are up 30% since the start of 2013. We need to know why they are down this week, as Barry Ritholz writes, because we crave meaning in a random world.

Perhaps it’s all tech stocks’ fault. They have, FT Alphaville’s Dan McCrum drolly commented, “become a little bit more modestly priced”. The Nasdaq is down 7% in the last month. Over the past two and a half months, Twitter, Facebook, Amazon, and Netflix are down 31%, 7%, 21%, and 16%, respectively.

Maybe biotech stocks are the culprit. They are down 4.5% in the last week, and 16.8% in the last month. But even analysts, people paid to draw conclusions from just about anything, aren’t sure: “Biotech Stocks' Rout Perplexes Analysts”, the WSJ said on Thursday. The article explains the problem: biotech specialists, who know a lot about specific companies, are bullish, while generalist investors, who think 36 times earnings is worrying, are bearish. But just a day earlier, on Wednesday, tech shares were ‘leading’ stocks higher, as “biotech stocks attracted buyers in search of bargains”.

from Counterparties:

Capital raise

Ben Walsh
Apr 9, 2014 21:59 UTC

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US banks need $95 billion more capital by 2018. A new federal rule will raise the leverage ratio – a bank’s capital versus its total assets – to a minimum of 5%, while all FDIC-insured banks will see their ratio rise to 6%.

When the rule takes effect, the US will have a higher capital requirement than theinternational Basel III agreement's 3%. Dealbook’s Peter Eavis says the leverage ratio is a “more straightforward tool that will be harder to evade and easier to enforce than many of the new regulations covering the sprawling, complex businesses of banking”. The FT’s Gina Chon and Tom Braithwaite point out that the rule “does not allow banks to use their own models” (cough, risk-weighted rules, cough).

Matt Levine digs into the method for calculating leverage ratio and finds it’s actually more than just capital divided by total assets. But he thinks that’s a good thing, because bankers should be continuously confronted and terrified by the inchoate, contingent businesses they are trying to manage.

from Counterparties:

Euro we go again

Ben Walsh
Apr 7, 2014 21:40 UTC

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The bond markets finally have something nice to say about Greece and Spain. Or at least Greece and Spain are reaping the benefit of ECB president Mario Draghi’s recent comments. Last week, Greek bond yields fell to pre-bailout levels, and the Spanish government sold $7 billion of debt at the lowest rates since the crisis -- lower, in nominal terms, than the US government is paying to issue Treasury notes.

After keeping rates unchanged last week, Draghi told the press that the central bank “talked about lower interest rates, we talked about a lower deposit facility rate, we talked about prolonging the fixed-rate full allotment, we talked about QE”. The central bank is fighting falling inflation across the region, and deflation has already hit at least five eurozone countries.

Bloomberg View’s Mark Gilbert tries to make sense of the fact that “Spain, where more than a quarter of the nation is unemployed, is paying less than the world's biggest economy, which also happens to own the global reserve currency of choice and the deepest and most liquid bond market anywhere”. The only explanation he thinks makes sense is that the “bond market is telling us that it thinks quantitative easing is coming to the euro region”.

from Counterparties:

Environmental balance sheet

Ben Walsh
Apr 4, 2014 21:27 UTC

Want to sign up for the Counterparties email? Click here. Climate change, the latest UN report finds, is very bad already – and it’s getting worse.

The NYT condenses the study’s gloomy findings: ice caps and sea ice are melting; droughts, heatwaves, and heavy rainstorms are intensifying; the ocean is acidifying; “fish and many other creatures are migrating toward the poles or in some cases going extinct”. The Economist says climate change can no longer be seen as a stand-alone risk. Instead, it is already interacting with social, political, and economic risks. All of which means, Philip Bump writes, “more violence, less food”.

The report – which assesses the state of climate research – puts an increased focus on the need for "resilience and adaptation to inevitable climate change", says Fred Pearce. Nevertheless, the final 48-page summary of the report excluded, due to objections from the US and other rich countries, a World Bank estimate that developing nations need $100 billion a year to deal with climate change's effects. The estimate was included only in the rarely read text of the full, 2,500-page report.

No one – neither governments nor markets – is doing a good job putting an accurateprice on carbon. The Environmental Defense Fund, National Resources Defense Council, and the Institute for Policy Studies put out a report criticizing the US government’s $37 a tonne estimate of the costs of carbon as too low. The largest carbon market in the world, the EU Emission Trading Scheme, prices a tonne of carbon at between €6 to €7, but Ken Arrow and his co-authors argue that the cost of of a tonne of carbon could be as high $64:

from Counterparties:

Watching for bubbles like a hawk

Ben Walsh
Apr 3, 2014 21:57 UTC

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Fed governor Jeremy Stein, the central bank’s resident bubble cop, is resigning effective May 28. He will return to Harvard’s economics department, which he left in 2012.

The NYT’s Binyamin Appelbaum writes that Stein “helped to provide an intellectual rationale for the cautious evolution of the Fed’s stimulus campaign”; he has also spoken with precision on ending the problem of too-big-fail banks and argued that how crowdfunding could be directed towards community investment.

Despite below-target inflation and and high unemployment, Stein has focused on worries that quantitative easing will promote excessive risk-taking, potentially causing bubbles, and leading to another financial crisis.

from Counterparties:

Multiplication nation

Ben Walsh
Apr 2, 2014 22:14 UTC

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“You can't legislate demographics”, says Derek Thompson, surveying the economic drag of America’s low birthrate. Blame, in part, the world-record cost of giving birth in America, and the recession, for the decline of babies. Reihan Salam and Matthew Klein don’t want to legislate for demographics, but they do want to tax incentivize for them. Here’s Salam’s solution:

Who should pay more? Nonparents who earn more than the median household income, just a shade above $51,000... We all benefit from the work of parents. Each new generation reinvigorates our society with its youthful vim and vigor. As my childless friends and I grow crankier and more decrepit, a steady stream of barely postpubescent brainiacs writes catchy tunes and invents breakthrough technologies that keep us entertained and make us more productive. The willingness of parents to bear and nurture children saves us from becoming an economically moribund nation of hateful curmudgeons.

Not everyone is ready to write a rejoinder to Rust Cohle-esque anti-natalism into the tax code. Matt Yglesias wrote in 2009 that a focus on the economic consequences of the birth rate is a vestigial agrarian impulse. His preferred policy is essentially fertility neutrality: “To deliberately constrain people from having large families would be abhorrent, but it’s not clear to me that we should be going out of our way to encourage them to do so”.

from Counterparties:

Guilty Motors?

Ben Walsh
Apr 1, 2014 22:08 UTC

Want to sign up for the Counterparties email? Click here. In the first three months of 2014, GM has recalled 6.3 million cars. Among those recalled are all 2005-2010 Chevy Cobalts, whose ignition switches have been faulted for 13 deaths so far.

GM CEO Mary Barra told Congress today that she “cannot tell you why it took years for a safety defect to be announced”.

Heidi Moore thinks the reason lies in the company’s sclerotic and hubristic corporate culture. The company never really changed after its 2009 bankruptcy, Moore says, and “all of that talk – of the reborn American automaker, of bets paid and dollars won – seems like a hollow spectacle”. James Pethokoukis agrees: “There is not much a $50 billion government check can do about a dysfunctional corporate culture except temporarily paper over it”.

GM’s internal safety and quality control procedures certainly look inadequate. The company knew about the ignition switch problem in 2001 and decided not to fix it in 2005 because it would have cost too much. GM was also aware of numerous other other problems with the Cobalt, the NYT reports based on state data. Before the ignition issues became public, “it was already seen as a lemon”: owners reported problems as farcical as windows falling out.

from Counterparties:

Flash mob

Ben Walsh
Mar 31, 2014 22:08 UTC

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“The US stock market... is rigged.” That was Michael Lewis’ one sentence summation of his new book Flash Boys on last night’s 60 Minutes.


In an excerpt of the book in the NYT, Lewis writes that around 2007, one of the Royal Bank of Canada’s stock trading teams began seeing odd market behavior: quotes vanished as soon as orders were entered. Other big banks and hedge funds were having the same problem. In trader-talk, the market kept moving away from them, no matter what they bid or offered. High-frequency traders were milliseconds ahead, buying, selling, and, perhaps most importantly, canceling quotes faster than RBC. The market wasn’t fair, and speed was the reason why.]


“High-frequency trading is a tax on investors”, says Barry Ritholtz. Institutional investors pay a “skim” to HFT shops on every trade. Just how big the skim is is unclear – Lewis puts the daily gains from US HFT trading at $160 million, or about 0.07% of average daily volume of $225 billion – but its very existence is, to Ritholtz, “prima facie proof that something is amiss”.

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