The cost of not laboring for a day

Aug 29, 2014 19:31 UTC

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It’s Labor Day weekend in the US. We assume you have already left the office and are on your way to wherever it is that you have chosen to soak up the last rays of the summer sun. As such, we decided to look into what the holiday weekend will cost you. This is what FRED tells us (for comparison, the latest Consumer Price Index shows a 2% increase compared to last year):

Gas prices have been falling — although they haven’t fallen by as much as they did at this time of year last year.

gas prices.png

The pace of price increases for beer, wine, and other alcoholic beverages has been slowing. Slowing too much, perhaps — there are reports of a rosé shortage in the Hamptons this week. (There is a market-based solution to this crisis.)


The things you want to grill have been getting more expensive more quickly than anything else in the typical Labor Day budget.


The recent price change in propane is far less insulting than the judgement that you’re likely to earn from barbecue purists when you use it to grill.


Staying and eating somewhere other than your house is also far from galloping toward anything resembling worrying levels of inflation.


Shane Ferro and Ben Walsh

Edit note: Today is Ben’s last day! We’re sad to see him go, but look forward to lots of great links from him at his new gig at the Huffington Post Biz section.

On to today’s links:

“Strait-laced government officials and the lawyer with the radical agenda beat the most expensive legal talent Wall Street could assemble” – FT

Why you need a healthy amount of uncertainty in an economy – Allison Schrager

“There was always work in Syria for a freelance journalist, if you wanted it” – James Palmer

BREAKING: Economy Continues to Stagnate – Kevin Drum

How letting women fail can help them succeed – Shane Ferro

“I’m not actually sure if anyone knows whether [ISIS's money] is in the formal financial system” – WSJ

Lake houses are superior to beach houses – Michelle Dean


Market Basket: When labor loves private equity

Ben Walsh
Aug 28, 2014 21:39 UTC

The feel-goodish story of the summer has arrived. Arthur T. Demoulas, the CEO of the northeastern US grocery store chain Market Basket, is back in his job. And he owes his job to his workers. Demoulas was fired June in as part of a family struggle over the direction of the company.

But in July, new management, which owned 50.5% of the company and was lead by cousin Arthur S. Demoulas, fired eight employees for protesting the decision. Market Basket workers responded by going on strike and organizing a boycott. Truckers joined in, refusing to deliver to stores, and the company was estimated to be losing $70 million a day. The sole demand was that “Artie T.” be put back in charge.

It looks like the workers have won. Arthur T. reached a deal with the family that fired him weeks ago to buy the rest of the company. That 50.5% will cost $1.5 billion. Fortune’s Dan Primack reports that private equity firm Blackstone is funding the purchase, putting up “more than $500 million.” (The full structure of the deal is still unclear). Private equity committing half a billion dollars to meet workers’ demands is an rarity, and judging by how they greeted Arthur T. earlier today, employees couldn’t be happier.

Justin Fox says the outcome is an outlier in our current economy: employees’ interests were more important than shareholders’. Noting Blackstone’s role, Fox writes that “it’s not as if financial interests aren’t going to have a say in the company’s future,” however, “now Arthur T. is back in the saddle, and he clearly owes this status to forces other than shareholder rights.” The company has a long tradition of employee stewardship. Hopefully Arthur T. will ensure that continues and return the favor his employees did for him, in the form not just of verbal gratitude, and continue the company’s policy of good pay, benefits, and stability. — Ben Walsh

On to today’s links:

“Computers need not be just like humans to do human jobs” – Cardiff Garcia

The US is “enforcing laws differently based on race, but also based on class” – Noah Smith

New Normal
When Do We Start Calling This “The Greater Depression”? – Brad DeLong

Long Reads
Trying to live the American dream as an undocumented immigrant – Suzy Khimm

Cats 4 mortgages: what could go wrong? – Quartz

MORNING BID – European Deflation

Aug 28, 2014 14:16 UTC

Never say the Europeans aren’t cautious. The dollar has been on a roll of late, in part because of the market’s growing expectation for more stimulus from the European Central Bank before long that would include some kind of larger-scale quantitative easing program after a speech last week from Mario Draghi that European markets seem to still be reacting to several days later. Reuters, however, reported that the ECB isn’t quite likely to do move quite so fast (heard this one before) and that took some of the wind out of the dollar’s sails and boosted the euro a bit.

Some of the move in the euro will depend on the trend in European yields, where everything is going down – German Bunds continue to make their way rapidly toward zero, and Bund futures remain in an overwhelming bullish trend, per data from Bank of America-Merrill Lynch. Analysts there also anticipate the dollar is going to experience some kind of medium-term correction – but remains in rally mode otherwise. There’s a headwind there for equities from that – rising greenback makes U.S. goods more expensive, but the gains are still only in earlier stages, and haven’t pushed into territory that would otherwise indicate surprising strength that we haven’t seen in some time.

What’s happening in part is that there’s been a definitive change in how bond markets are viewed – even the peripheral markets like Spain and Italy are less favorable as investments when compared with the United States; Merrill analysts foresee more of a move into U.S. fixed income assets after several months of seeing European funds garner strong inflows (the count is $158 billion to $86 billion, favor the Europeans so far this year). So what’s going on here? Many investors have been perpetually frightened of “catching a falling knife,” and the number of big-name bond managers who have shied away from Treasuries on the assumption that the Fed was going to declare the party over in due course are a great many. “The perceived tail risk associated with Eurozone bonds is lower than that for U.S. bonds,” they write.

Then again, this year has been a class study in foiled expectations, particularly in the bond market. Rates have remained stubbornly low; the bullish investors in the government market have reaped big rewards, and even if the U.S. dollar creeps higher, the ongoing interest out of pension funds for higher yielding credit will continue to pressure yields. And Merrill sees more buying in the bond market from foreigners, an increasing percentage of that from Europe and other investors. That should again benefit the dollar, which is expected to stay near where it is.

Tax King

Aug 27, 2014 21:14 UTC

Burger King is moving to Canada. The American fast food chain is buying Tim Horton’s in an $11 billion cash-and-stock deal and will incorporate over the border. It’s an obvious tax inversion move. Or is it? According to Burger King’s CEO Daniel Schwartz, “We don’t expect there to be meaningful tax savings or a meaningful change in our tax rate.”

Or not. Matt Zeitlin reports that while that’s technically true today, “the company could reap significant tax savings if it continues to grow overseas.” The consensus is that this is definitely a tax inversion deal. Matt Levine says it’s an “immaculate inversion,” and writes, “the result is that Burger King will do an inversion where a majority of its U.S. shareholders won’t owe taxes.”

However, one of the arguments against tax inversions is that they are economically unpatriotic (if there is one thing that characterizes companies, it’s patriotism over profits). But on this point, Timothy Noah writes that “Burger King is only nominally an American company now. It was bought in 2010 by 3G Capital, a Brazilian-owned private equity firm.”

The thing about this deal is it has surfaced debate about corporate taxation more broadly. In a strange pairing of interests, Dean Baker and Greg Mankiw make arguments for abolishing corporate taxes. Mankiw thinks we should replace the corporate tax (and some personal income taxes) with a “broad-based tax on consumption.” Baker says that high corporate taxes have just created a huge tax-avoidance industry and it’s worth abolishing the former to destroy the latter.

Meanwhile, Jared Bernstein worries that by cutting the corporate tax “we’d lose a lot of needed revenue that would have to be made up somewhere else, either through larger deficits, spending cuts, or tax hikes on the non-wealthy.” Baker replies that there’s “$230 billion of potential income for the tax avoidance industry” floating around that could be put to better use in the economy. Like potentially giving the world a King Horton’s donut burger. — Shane Ferro

On to today’s links:

Carl Icahn is going to get to the Ice Bucket Challenge soon, but right now he’s busy making money – Carl Ichan

Climate Change
Leaked UN report on climate change: “severe, pervasive and irreversible impacts for people and ecosystems…” – Bloomberg

“The family is not liable for the debts, something we informed them of — that is, if they asked” – Vox
Venezuela will “introduce a rationing system using mandatory fingerprinting in supermarkets” – FT

EU Mess
Can Mario Draghi save the euro again? – Matt O’Brien
BlackRock will advise the ECB on an ABS purchase program – Bloomberg

Tax Arcana
Dean Baker vs Jared Bernstein on ending the corporate income tax – Center for Economic and Policy Research

“Among both the Barclays bankers and their guests, not a single participant was female” – Sujeet Indap

More sensible homes

Ben Walsh
Aug 26, 2014 21:38 UTC

U.S. housing prices fell 0.2% in June from May, the latest data from the Case Shiller index shows. Compared to June last year, prices were up 8.1%, but the pace of the increase is still slowing down. May’s numbers showed a year-over-year change of positive 9.4%.

Cullen Roche noted that the yearly growth in housing prices was nearly 15% earlier in 2014. Calculated Risk’s Bill McBride says he’s “been expecting a slowdown in year-over-year prices as ‘For Sale’ inventory increases, and the slowdown is here!” June’s yearly increase was the smallest since December 2012 and June was the third-straight month of inflation-adjusted declines in housing prices.

Evan Soltas thinks the “recovery in the housing market is not slow. It’s nonexistent. It has been since July 2013.” Soltas sees in the housing market all the more reason for a “slow exit” from the Fed’s unconventional monetary policy (read: QE plus near-zero interest rates).

The NYT’s Neil Irwin sees something positive happening. The slowdown is a “sign the housing market is starting to move past the boom-and-bust cycle of the last dozen years toward a market where sensible prices driven by local economic conditions prevail,” he writes. “[It offers] hints that a disastrous era for housing may be ending.”

Irwin references research by Trulia’s Jed Kolko showing that price increases are being driven by a fairly reasonable factor: people getting jobs. Employment leading to income leading to increased purchasing power is a more desirable reason for asset price rises than the rubber band-like impact of cheap credit, low lending standards, outright fraud and speculation.

Elsewhere, U.S. consumer confidence is at its highest level since October 2007. “Improving business conditions and robust job growth helped boost consumers’ spirits,” said the Conference Board, which conducts the survey. That’s perhaps more evidence that how people feel about the U.S. economy increasingly has to do with the job market rather than their home’s value. If that’s true, it’s a shift for the better. — Ben Walsh

On to today’s links:

Must Reads
Burger King’s not really tax inversion foreign merger, explained – Matt Levine

Good Luck With That
Kill the corporate tax, kill the corporate tax avoidance industry – Dean Baker

Frank Quattrone is back! (doing tech M&A) – Matt Lynley

“I was just on Avenue A where I had a lovely tasting menu. I’m part of the problem” – Matt Buchanan

Wow. Just Wow
The Cubs forfeited a game because they tried to get around Obamacare – Sun Times

Primary Sources
You can’t use pretax dollars to buy a Citibike pass because it’s “not a mass transit facility” – IRS

Turf Wars
Operation SLOG: Uber’s Lyft sabotage playbook – The Verge

Meet the 36-year-old banker France just appointed to be economy minister – Reuters

Austerity bites (again)

Aug 25, 2014 21:16 UTC

Europe is in trouble. “The combination of zombie banks, a rapidly aging population and, most importantly, too-tight money have pushed it into a ‘lowflationary’ trap that makes it hard to grow, and is even harder to escape from,” wrote Matt O’Brien, analyzing some of the most recent eurozone economic data earlier this month. The situation in Europe, he says, is worse than during the Great Depression. At Bruegel, Jérémie Cohen-Settonsays that “Europe appears stuck in a never-ending slump.”

This was the backdrop for Mario Draghi’s Jackson Hole speech on Friday on the state of unemployment in Europe. The ECB president urged a move away from austerity. “This could be done by a greater use of aggregate fiscal policy (having a common eurozone budget), and by looking at opportunities to substitute spending for tax cuts…” says Joe Weisenthal.

Draghi also noted that inflation expectations across the euro zone are very low. “Mr. Draghi appeared to be hinting at renewed concerns about deflation in the euro zone,” say Pedro da Costa and Jon Hilsenrath. They also think Draghi’s speech “appeared to be laying groundwork for a bond-buying program” (that is, quantitative easing).

In another post, Weisenthal says that the most important part of Draghi’s speech was an unscripted tangent on low inflation, which he says can’t just be explained by temporary issues anymore. “Draghi is done making excuses for low inflation,” says Weisenthal. He also quotes Lorcan Roche Kelly, who thinks that Draghi’s spontaneous comments shouldn’t be taken lightly: “you must remember that this is a tactic that Draghi has used before to spectacular effect — his ‘whatever it takes’ speech in London in July 2012 was unscripted.”

Of course, after Draghi’s (careful and measured) criticism of European fiscal policy in Wyoming, the French economy minister, Arnaud Montebourg, resigned Monday after “delivering a blistering attack on what he called ‘absurd’ austerity policies,” according to the Financial Times. Simon Wren-Lewis says that he was “effectively sacked” by the French President Francois Hollande. Whatever the political motivations, it is silly for either Hollande or Draghi to stand behind austerity even a little bit, Wren-Lewis says. Why, he asks, “has the European left in general, and the French left in particular, not learnt the lessons of the 1920s and 1930s?” — Shane Ferro

On to today’s links:

(Rural) America needs more lawyers - WaPo

Giving money to disease-specific charities is a bad idea - Slate contributor

Nobody knows anything, geopolitical risk edition - Dan Drezner

So Hot Right Now
The race to turn jeans into yoga pants that look like jeans (RIP denim) - Kim Bhasin

Facebook’s odd definition of clickbait is “more circular than subjective” - John Herman
What happens when NYT digital subscription growth slows? (Hint: nothing good) -Edmund Lee

Tax Arcana
PE firms don’t need inversions. They’ve already got a foreign-domiciling tax strategy -Bloomberg

Income inequality in sports: tennis really is for the 1% - WSJ

MORNING BID – I was dreaming when I wrote this…

Aug 25, 2014 14:37 UTC

The move by Roche to buy biotech company Intermune for $8.3 billion at a 38 percent premium isn’t going to make Janet Yellen happy, given her thoughts on the valuation of certain biotechnology and Internet retailing names. Still, with the Fed chair on board for low rates for some time given the slack situation in the labor market that the Fedsters keep talking about (basically, the unemployment rate, like the old grey mare, ain’t what she used to be), the long march to 2,000 on the S&P looks like it’s probably going to be over before long (it’s been done on an intraday basis, and now we’re just waiting on a close above that level), representing a tripling in that average in a bit more than five years and raising again all those questions about whether this all makes sense and if anyone cares anyway.

On the first point, well, nobody knows anything – earnings were generally strong in this most recent quarter, particularly when one expands the universe to the Russell 1000, where Credit Suisse points out more companies that are beating analyst expectations are growing sales, a sign of improved demand.

About 70 percent of the Russell 2000 beat on earnings estimates (about 62-65 percent if you exclude the ones that only beat due to reducing share counts through buybacks), and of that group, 84 percent did so while growing sales, pointing at least to some hope on improved demand. But there’s always weakness out there somewhere, and it appears to be among the true small-caps – the Russell 2000, which has been trailing the S&P and yet still looks overvalued based on a number of measures and has been seeing more negative revisions even as the stocks struggle.

The weakness in those names, along with some lackluster stock performance out of consumer discretionary stocks, explains in part why hedge funds are once again struggling, up less than 1 percent for the year compared with about an 8 percent gain in the S&P 500 for the year (after 2013’s ridiculous rise, of course, when hedge funds wouldn’t have been expected to keep up in the first place).

Still, it’s been a rough outcome this time this year – heavy overconcentration in a lot of the social media names early in the year dampened performance when those stocks went belly-up, and after that heavy exposure to discretionary shares did them in, so just kind of an uphill battle ever since – which actually suggests the desire to catch up may result in more gains for the rest of the market throughout the rest of the year. To wit – Credit Suisse’s most recent data shows health care becoming a net overweight position among hedge funds, with long exposure increasing in the last few months.

Yellen stays on course

Ben Walsh
Aug 22, 2014 21:23 UTC

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Janet Yellen gave a much-anticipated Jackson Hole speech on the job market today, and the stock market barely moved. That, says the NYT’s Binyamin Appelbaum, was exactly the the outcome the Fed chair wanted. She said the job market was improvingbut not quite improved enough. The true amount of slack in the labor market is uncertain, and therefore, interest rate policy cannot be prescriptive. The Fed, in other words, is still waiting to see when it will change its wait and see approach on interest rates. (Privately, Jon Hilsenrath and Pedro da Costa report, the Fed is strongly hinting it will raise rates in the summer of 2015.)

One item where Yellen was clear: she is not a fan of Congressional Republicans’ calls for the Fed to follow pre-set guidelines, like the Taylor rule, when it sets interest rates. “Monetary policy,” Yellen says, “ultimately must be conducted in a pragmatic manner that relies not on any particular indicator or model, but instead reflects an ongoing assessment of a wide range of information.” The NYT’s Binyamin Appelbaum said that portion of the “speech is a direct rebuttal to GOP/Taylor proposal for Fed  to announce a rule. She’s arguing life is far too complicated.”

Business Insider’s Myles Udland connects the speech’s intensely measured tone on monetary policy with its comparatively direct rebuttal of Congressional oversight of the Fed: “Yellen… remains focused on giving herself and the FOMC as much flexibility as possible with respect to when and where interest rates go, and part of this flexibility also likely depends on the Fed maintaining its current relationship with Congress: independent.”

Barry Eichengreen says “this yearning for an idealised past in which central bankers could focus on moving rates by a notch or two” is dangerous in the current context. Central bankers, he argues, should not eagerly raise rates just because they’re currently at zero. Nostalgia is not a sound basis on which to make monetary policy. —Ben Walsh

On to today’s links:

The Singularity
Why robots might not take your job: “both a toilet and a traffic cone look somewhat like a chair” - Joe Weisenthal

Must Read
The hedge funds who bailed out Mugabe - Bloomberg Businessweek

Data Points
HBO could earn around $100 million from subscribers who currently pay nothing -Peter Lauria

“Sleep is not leadership! The optics of sleep are terrible” - John Herman

The App Economy
Push for Pizza is exactly what it sounds like - Brooklyn Magazine

The Fed
Light weekend reading: All of the Jackson Hole papers - Kansas City Fed

The Keynesianism of the BP oil spill - Jim Tankersley

A long look at Bustle, a basically terrible website - Amanda Hess

A Dollar here, a Dollar there

Aug 21, 2014 22:06 UTC

Things are a little crazy in the dollar store M&A world. Back in June, Dollar General (from here, General) thought about trying to buy its rival, Family Dollar (from here, Family). For various reasons, this didn’t happen. Instead, Dollar General’s other rival, Dollar Tree (from here, Tree), submitted a bid to buy Family for $8.5 billion several days after the meetings with General. Family accepted this, even though General came back with a $9.7 billion cash offer.

“Aside from offering all cash and a bigger, 29 percent premium to Family’s undisturbed share price, General may be a better fit with Family as both companies offer goods at various prices whereas Tree sticks with items that actually sell for $1 or less,” writes Kevin Allison. And yet.

The official story is that Family’s board rejected General’s better offer because of antitrust concerns. But General isn’t too sure. In a letter dated yesterday, General says that the two companies chatted in June, General floated a tentative price, and Family seemed interested. According to the letter, “at no time during this meeting did [Family CEO Howard] Levine indicate that there was a process, that there was any urgency to act or that there were discussions with another potential buyer.” But just a few days later, Family started exclusive negotiations with Tree. According to the letter, this may have been because Levine wanted to continue to be CEO of the combined company — an offer than Tree left on the table but General did not.

That’s Carl Icahn’s theory, too. While all of this was going on (but before it was public), the activist investor announced he had a 9.4 percent stake in Family. Icahn started pushing for Family to sell itself before it came out that that was in fact what Family was trying to do. As a shareholder, though, Icahn would have preferred Family to take the larger offer from General. “At too many companies in America the hubris of the CEO, supported by a crony Board, costs shareholders billions of dollars,” he wrote in a blog post about the fiasco earlier this week. And it looks like he might be right about that. “Carl Icahn’s theory… is starting to look more credible,” writes Matt Levine.  — Shane Ferro

On to today’s links:

Must Read
“The payment of ransoms and abduction of foreigners must emerge from the shadows. It must be publicly debated” – David Rohde

America’s racial divide: Unemployment – NYT

Junior bankers get a raise! – Dealbreaker

Crime And/Or Punishment
BofA settles another mortgage investigation, this time for $16.65 billion – Reuters
Most of the BofA settlement is tax deductible – David Dayen
Wall Street should be thrilled with the government’s billion-dollar settlements – Dean Starkmen

“The hedge fund structure, a fee schedule masquerading as an asset class” – Dan McCrum

Central Banking
A semi-regular reminder on the value of the Fed giving money to people – Foreign Policy

A six-figure salary still means you’re rich – Dylan Matthews

Strangely Honest
“The cost to defeat ISIL would be very high and would require a multi-year commitment” – Brian Fishman

“Despite Ferguson’s relative poverty, fines and court fees comprise the second largest source of revenue for the city” – Alex Tabarrok

Standard incompetence

Ben Walsh
Aug 20, 2014 21:05 UTC

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Standard Chartered’s compliance department is apparently pretty bad at complying. In 2012, the bank was fined $340 million for hiding transactions with sanctioned Iran. As part of the settlement, Standard Chartered bank (SCB) was required to “remediate anti-money-laundering compliance problems,” Dealbook’s Ben Protess and Chad Bray report, and hire an outside monitor to judge whether the problems were in fact remediated.

They weren’t, and the bank will pay $300 million for “anti-money laundering failings in its United Arabs Emirates and Hong Kong businesses,” Reuters Michelle Price reports. The failures, laid out in a settlement with the New York Department of Financial Services, display an almost comical or willful ineptitude, depending on your perspective. SCB, the settlement says, “created a rulebook with procedures to aid it in detecting high-risk transactions.” But the rulebook was filled with errors that SCB didn’t know about, because it didn’t try to find out if the rulebook was adequate before or after it wrote it. This allowed transactions that should have been closely scrutinized to sail through unimpeded. To top it all off, SCB didn’t properly monitor its own transaction monitoring system. You can see why an independent monitor would be necessary.

As part of its settlement, the bank will also suspend clearing payments in dollars for certain clients, and take even more remedial measures. One of those is extending for two more years the term of Navigant, the independent monitor that caught the latest slip up.

Matt Levine wonders why, given how bad SCB seems to be at understanding and preventing money-laundering, the monitor should content itself with just reporting SCB’s problems: “If the monitor knows so much about anti-money-laundering procedures, shouldn’t it have just designed the procedures? Isn’t the goal to have less money laundering?”

The bank’s management isn’t taking the fall. CEO Peter Sands, Protess and Brayreport, says he has “no other plans” than to remain in his position. Earnings per shareare down, though, and the board is under pressure to make a change. If Sands is ousted, it wouldn’t be the first time a board used scandal as a pretext for a financially-motivated decision.  — Ben Walsh

On to today’s links:

Primary Sources
The full FOMC minutes - Federal Reserve

Generation Debt
“Young borrowers are actually among the least likely to experience a serious credit card default” - Richmond Fed

Correlation of the Day
The richer you are, the more likely you are to think trophies are only for winners - Alex Tabarrok
And another: Colorado has drastically reduced its teen pregnancy rate by giving teens access to long-term contraceptives - WaPo

Regional cost disparities are all about housing - Squarely Rooted

Patent Power
“Patent trolls are emerging as the world’s most nefarious rentier types” - Izabella Kaminska

FYI re: Your Mortality
Mortality spikes on payday: “It’s not the wages of sin that are death. It may be just the wages of wages” - John Carney

Investigating the variation in how much it costs to raise a kid - Nick Bunker

For the Wages
“The fantasy of finding someone who is punctual, productive and willing to be paid a pittance is hard to let go” - WSJ
“If we were brave enough, we’d say our survey data indicate [a] quick wage uptick is ‘unlikely’” - Atlanta Fed

Legal Arcana
“…eventually that hope will turn into lawsuits, as hope does” - Matt Levine