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

Draghing on

Aug 7, 2014 22:13 UTC

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The EU mess slogs on. The European Central Bank met today and left interest rates unchanged, as the economic situation in Europe (well, France and Italy) looks to be worsening. ECB president Mario Draghi said during the press conference today, “the recovery remains weak, fragile and uneven.” The big news from the euro zone earlier this week, of course, was that Italy has unexpectedly fallen into a triple-dip recession. Ambrose Evans-Pritchard writes that Germany’s economy is also weakening, and certainly isn’t strong enough to make up for its southern neighbors.

Inflation in Europe is almost non-existent — it was just 0.4 percent in July, far below the central bank’s 2 percent target, though core inflation, less food and energy, is at a somewhat higher 0.8 percent. “Policy makers seems to be in denial that falling prices are a threat,” writes Mark Gilbert. Draghi today blamed low inflation on energy prices, and said he expects it to rise in the next year or two.

Matt O’Brien, however, argues that low inflation could lead to Europe’s own lost decade. He looks at breakeven rates (inflation-protected bonds minus non-inflation-protected ones, which roughly estimates expected inflation) and finds that they indicate there isn’t a lot of confidence in higher inflation coming in Europe. Why? Keeping inflation low is the ECB’s raison d’etre. “For all Draghi’s done getting the ECB to be more aggressive, it’s still a central bank that cares about low inflation über alles,” writes O’Brien.

The good news is that the value of the euro is falling. At the ECB press conference today, Draghi spent a bit of time talking about exchange rates — a somewhat unusual move for a central banker. Since a recent peak around $1.40 in the spring, the euro was down to $1.34 today. The WSJ reports that Draghi “offered a long list of reasons why the euro has cheapened, which in addition to raising inflation should provide a boost to the bloc’s fragile economic recovery via stronger exports.”

What’s wrong in Europe? Well the Russian sanctions aren’t helping, but the euro zone has plenty of other problems, writes Sober Look. The Economist says that the euro zone has “an excess of debt, which in turn is causing banks, companies and households to be cautious about lending, investing and spending.” What Europe needs, both argue, is QE from the ECB. Consensus on the likelihood of that, though, seems to be “don’t hold your breath.” — Shane Ferro

On to today’s links:

Please Update Your Records
New data shows that hedge funds are boring – Alexandra Stevenson
Paul Singer is an exception – Max Abelson and Katia Porzecanski

Study Says
The 1% may be richer than you think (what do you think?) – Bloomberg

How California could power itself with nothing but renewables – Pacific Standard

Germany, where labor unions have the power to overrule McKinsey – Reuters

M&A bankers think now is a great time for companies to merge and/or acquire – Bloomberg

How the Tea Party became part of the self-dealing D.C. system it set out to destroy – Michael Dougherty

Old man Murdoch snatches food valued at $420 million from bankers’ children’s mouths – Bess Levin

“The importance of men leaning out: leadership positions are nearly zero-sum” – Shane Ferro

Please Update Your Records
Actually, there isn’t really a widespread backlash to the tech industry – Kevin Roose
But there should be a very pointed backlash against this app – Crain’s

Europe’s debt woes

Jul 10, 2014 22:57 UTC

The parent company of Portugal’s Banco Espírito Santo suspended trading this morning after shares fell 17% (its market value has declined 32% in this week alone). The bank — the country’s second-largest lender — missed interest payments on some short-term securities to “a few clients” earlier this week. Things haven’t been great for the Portuguese bank since December, when an audit revealed serious accounting irregularities in its parent company.

“Lisbon needs to sort out Banco Espírito Santo – fast,” say Breakingviews’ George Hay and Neil Unmack. “The Espírito Santo group has managed to create a national crisis out of a family drama,” they add. Specifically, Portuguese regulators need to keep a closer watch on the bank, which has traditionally been run by the Espírito Santo family, and step up to manage the fallout of what’s already done, “pushing through an orderly restructuring, and making sure it is equitable for creditors,” they write. However, Bloomberg View editors say that “Portugal can’t easily afford to support the bank, should support be needed.” This is a problem, they say, because while recent reforms in Europe were supposed to break the ties between bank finances and sovereigns, it hasn’t really happened yet, leaving the Portuguese government on the hook.

The bad news from southern Europe wasn’t contained to Portugal today. From theWSJ:

In Spain, a bank and a construction company each called off planned bond sales. In Italy, a drug company pulled its stock offering. In Greece, a government-bond sale came in smaller than expected. And stock markets across the continent fell, along with the euro.

John Jansen points out that southern European bond spreads are a lot wider against German bunds than they were a month ago. Toward the core of the eurozone, things aren’t great either. Sam Ro reports that Pantheon Macroeconomics’ Claus Vistesen said today, “we are running out of downbeat adjectives to describe the data in France,” after the news that industrial production is down 3.7% year-over-year.

“It’s ‘Groundhog Day’ for those who remember 2011′s European debt crisis,” writes Barron’s Brendan Conway. However, Simon Kennedy at Bloomberg says this definitely isn’t a return of the euro crisis. “Even Greece sold bonds today, though at yields higher than some analysts predicted amid the skittishness,” he writes, suggesting that Mario Draghi’s promise that the ECB will do “whatever it takes” to save the euro may be keeping the market relatively stable. Blonde Banker says it’s just another day in Europe. “High debt – both sovereign and personal. High unemployment. Weak economic growth. Deflation… Carry on.” — Shane Ferro

On to today’s links:

Meet Steven Mandis, a small business loan shark and former Goldman Sachs banker, who “describes his career as a search for meaning” - Zeke Faux and Max Abelson

The Fed
An overhaul of the Fed funds rate could be coming - Robin Harding

Everything you possibly wanted to know about Marc Andreessen’s Twitter habits (and more) - Dan Frommer
What is CYNK? - Myles Udland

Black Market
Sex, drugs, and the proper measurement of economic activity - Nick Bunker

Stuff We’re Not Linking To
“When you marry for money, you work for it every day” - Amanda Gordon

MORNING BID – Be not afraid of more bond-market rallies

Jun 6, 2014 13:38 UTC

After the world’s most boring jobs report in history (seriously, misses consensus by 1,000, unemployment and wage growth in-line with expectations, and revisions over the last two months amount to a total decline of 6,000 jobs, which is a pittance), the bond market is catching a bit of a bid again. That shouldn’t be a surprise given the way this market is still taking its cues from the European bond market, which is soaring on what would otherwise be a quiet Friday. (Those of you who read Richard Leong’s story yesterday noting the likely rally in bonds post-jobs would have been all over this – just sayin’.)

It’s not going to be long before Spain’s 10-year yield falls through the U.S. 10-year yield – the spread has narrowed to about 6-7 basis points and at one point was around 3 basis points before the jobs figures. Even though the in-line figures could argue for higher rates, the report doesn’t change the consensus on the economy all that much and allows fixed income to concentrate on supply and relative valuation issues – and those point to yields remaining under pressure. Mark Grant of Southwest Securities lays it out well on a lot of issues in a comment this morning, but very specifically, he points out that “money from Asia and the Middle East is going to come pouring into the American market because of the yields here versus all of Europe. When the French 5 year yield is 304% less than the American one something is going to give and the ECB will not permit that answer to be a higher French yield.”

Lower European yields are pressuring U.S. yields.

Lower European yields are pressuring U.S. yields.

Supply and demand remains part of the equation as well. Headed into this week, issuance of U.S. debt was down 14 percent from this time a year ago and overall worldwide debt issuance was down 5 percent; US corporate debt issuance has been relatively steady, down 2 percent from this time a year ago. Couple that with the big run for yields coming from banking institutions around the world, other funds and insurance institutions worldwide, and U.S. private pension funds, and that imbalance is also contributing to an ongoing bull move in the bond market. (BofA-Merrill notes that first-quarter private pension fund purchases did slow from the second half of 2013.)

Treasury issuance is down, municipal bond issuance has declined, and the Federal Reserve is still holding a lot of debt overall. “Higher prices and falling yields can be caused by a number of things and this time around the cause is not a financial debacle,” Grant writes, and it’s hard to disagree on this one. Merrill notes that for the year-to-date, fund flows into all fixed income come to about $55.6 billion, about on a par with the $58 billion into equities – so the “everything is awesome” rally continues.

Where’s that leave other markets? Well, savers are going to continue to get hit on this – which encourages more risk taking, be it in stocks, real estate, credit or what-have-you. The lower rates may help offset some of the softness that the housing market has endured over the last few months, seeing as how it takes mortgage rates lower. Then again, several more strong economic reports are going to create a bit of a conundrum – it’s hard to see how real growth of 5 percent (that is, nominal growth of about 3 to 3.5 percent in the second quarter, plus inflation in the range of 1.7 to 1.8 percent) supports a 2.5 percent 10-year yield, but we may be about to find out.

Right on the euro

May 30, 2014 21:54 UTC

The EU has finally wrapped up its parliamentary election results. Discontent in Europe runs high, mostly because of the persistently terrible economy. To the horror of many, populist euroskeptic parties continent-wide — nationalist, anti-immigration, anti-EU, and often openly racist — scooped up roughly 140 of the 751 seats, up from about 60 in 2009. (Here’s a decent rundown of six of the parties).

Voters are tired of austerity, high unemployment, and stagnation. “After five gruelling years, many of Europe’s citizens must wish they could dispatch the entire political class to hellfire and torment”, writes the Economist. Since that isn’t an option, most didn’t bother to turn out for the elections. Many of those who did came to back extremist candidates. Anatole Kaletsky calls it “a perfectly predictable — and justifiable — upsurge of populist anger after the euro crisis”. He says the varied extreme parties are unlikely to work with each other, anyway. Tyler Cowen predicts Europe doesn’t have the political coordination to keep itself from imploding.

Noah Millman thinks results mostly just mean voters in Britain, France, and to a lesser extent Germany, are freaking out about losing more sovereignty in the name of the European project. But Francesco Daveri at VoxEU says this goes back to economics, too. He says there is a correlation between countries with high trade deficits with Germany and countries where the euroskeptics are popular, particularly France and Austria. (See here if you are interested in going down the trade-imbalance rabbit hole.)

At the European central banking forum (like Jackson Hole, but more euro) taking place in Portugal this week, European Commission president José Manual Barroso said European leaders are worried about the outcome of the elections. However, according to the WSJ, Barroso refused to blame austerity policies for the result. Paul Krugman, who was at the ECB forum, thinks European policymakers are “deep in denial”. It’s all about the euro (and the austerity following the euro crisis), he says: “Sorry, but depression-level slumps didn’t happen in Europe before the coming of the euro”. Further, he writes in a separate post, “at least part of the blame rests with officials who seem more interested in price stability and fiscal probity than in democracy”.

The one thing keeping Europe together seems to be Mario Draghi’s pledge to do “whatever it takes” to protect the euro. Last month, Cullen Roche noted that the yield on Spanish 10 year government bonds has been falling consistently for the last year (the trend has continued since his post). The same is true, generally, of Greek, Italian, and Portuguese debt. “It looks like European debt of all types is once again becoming indistinguishable to a large degree”, he writes. Michael O’Sullivan and Eleni Panagiotarea at Project Syndicate worry that this development has caused European leaders to become complacent. “As the distressed countries’ bond yields have fallen, reforms have become increasingly unambitious”.

Tina Fordham, chief global political analyst at Citi, sees the vote as part of global “vox populi” movement, which is measurably intensifying. While financial markets have largely ignored the growing number of populist “risk events” (voting for extremists in wealthy countries, protests and violence in poorer ones), she says, “history suggests markets have trouble pricing in paradigm shifts”. Her message is clear: economic and political instability are on the horizon. Pay attention, and be afraid. — Shane Ferro

On to today’s links:

Our Society Is Doomed
“The transformation of your job into your social life is largely a one-way street” – Noah McCormack

EU Mess
Spanish real estate is back: “People are starting to overpay on certain assets” – Jenny Anderson

“A company as successful as Vice should be paying decent wages”, but it isn’t – Hamilton Nolan

New Normal
Most new manufacturing jobs are in low-tax, “right-to-work” states – WSJ

“Many companies have strong jock cultures, particularly in their sales departments” – Harvard Business Review

Data Points
Compared to actual writing, readers don’t really like native ads – Lucia Moses
Inflation rises! (to the still very low and beneath Fed target level of 1.6%) – Josh Mitchell

Billionaire Whimsy
Zuckerberg gives $120 million to Bay Area schools – AP

Sobering Reminders
“Everybody’s getting paid, but Raheem still can’t read”: what happened when Zuckerberg gave $100m to Newark schools – Dale Russakoff

No Apologies
“This is a fascinating and important debate”: The FT’s accusations against Piketty end with a whimper – Chris Giles

“They can be taken out of the system”. Siemens is cutting 11,600 jobs – Reuters

MORNING BID – Europe and the bond market

May 16, 2014 12:43 UTC

The markets are in a bit of an odd spot right now, with the biggest quandary that of the bond market, where U.S. yields have gone into a dive in recent days to touch their lowest levels since October.

What’s unclear is how much to attribute to fears of a slowing economy, changing dynamics like reduced mortgage securities issuance or increased pension fund liability-driven purchases. There are also technical factors like the rallies in sovereign debt markets like Spain, Italy and Ireland, none of which have the credit profile of the United States, big short positions among those who still believe this can’t continue much longer, and the overarching “quantitative easing forever” stance out of the European Central Bank and Bank of Japan, to say nothing of a few other central banks that are still on an easing path. (Really, it’s not as if the U.S. Fed is all that stingy right now when it comes to stimulus. Yes, it’s pulling back, but it’s pulling back from negative territory, basically.)

Among those factors, rallies in overseas markets are an interesting part of this, and relates to the QE stance as taken by the ECB that’s likely to result in lower rates and extra stimulus in June and further on from that bank. April car sales were lousy in Europe, yet another data point supporting lower yields on the continent.

At one point on Thursday, Spain’s 10-year was only about 35 basis points higher than the U.S. 10-year, as that 10-year yield has dropped by more than 40 percent in the last year. That changed in the morning after some saber-rattling out of Moscow again, causing a quick selloff that widened the spread between the U.S. and peripheral European debt.

But it’s fair to say that many are confounded by the moves in bond markets, and the opinions vary between those who believe the sharp fall in long-dated yields speaks to increased concern about the economic outlook (with Appaloosa’s David Tepper on Wednesday night even saying the ECB is behind the curve), those who see it as supply and demand related, and those who think it’s an anomaly that will correct before long.

The opportunities in this market are varied for bond-fund managers, then, and a bit difficult to suss out. Long-dated Treasuries have been winners of late, of course, while the five-to-seven year area hasn’t been so much, but with yields dropping in the face of reduced Fed stimulus and economic data that would seem to suggest rates should be higher, expecting lots of people to pile into government debt at this point seems far-fetched.

A Citigroup survey conducted earlier this week showed their clients are looking to make money through roll-downs (when you buy one part of a yield curve to see yields fall and prices rise as they “roll down” in maturity to become shorter-dated debt; this works well when the yield curve is shaped pretty much as it is) and also in credit (where investors have been making hay for some time) and stocks.

Those ways – along with more dynamic hedging, if possible, depending on who you are – have been cited as more popular choices than simply going long, or worse, going short.

How this shakes out is unclear.

The U.S. economic figures are still on the mixed side – inflation does seem to be picking up, however modestly, but industrial production figures were weaker than expected and housing has become more of a thorn than a helping hand in the economy right now.

Retail sales aren’t all that exciting, unless you’re counting big auctions of art at the major New York houses, and that’s not exactly indicative of a broader economic upswing but ongoing stratification that usually ends with market debacles (in the U.S.) or heads on lances (in Westeros).

If the improvements noted in some indexes does prove to have staying power, then, as Heather Loomis of J.P. Morgan Asset Management told us, yields will go higher from here – though she now sees a 3.25 percent 10-year yield by year-end instead of 3.50 percent. For her part, Loomis said: “I do believe every round of quantitative easing has had a more diminished impact,” and if that holds true for the ECB, then those rallies in peripheral countries aren’t really something to hang on central bank largesse.

Europe’s easing growth

May 15, 2014 23:05 UTC

European growth is weak. As a whole, eurozone GDP grew just 0.2% in the first quarter, and no individual economy grew more than 1.1% (Poland and Hungary). Germany, the UK, and Spain all reported modest growth, but Portugal, Italy, and the Netherlands all saw negative growth while France was completely flat. The latest OECD report on the global economy, noted that the euro area is expected to grow by 1.2% this year, but “monetary policy needs to remain accommodative” and “ interest rate reduction is merited, given low and falling inflation”.

At yesterday’s annual SALT conference of hedge-fund investors and managers, David Tepper said the ECB is “really, really behind the curve”, and there is a risk to the global economy if the ECB doesn’t take drastic action. Jennifer McKeown wrote in a note for Capital Economics that she expects “more significant action, including small cuts in the refinancing and deposit rates and quite possibly a full blown QE programme, to come next month or soon after”.

But it’s unclear how far Europe’s central bank is willing to go. Reuters reports that the ECB is preparing to loosen its monetary policy at its upcoming June meeting, possibly going as far as cutting the deposit rate into negative territory. The package includes “stimulus for the euro zone economy but falls short of the large-scale effect the ECB could unleash with a major program of quantitative easing“.

DBS research note from April says that QE would be fundamentally more challenging in Europe’s bank-based system than it is in the U.S.’s capital markets system. First, policymakers would have to choose what kind of assets to buy. Then, they would have to make sure the purchases were actually legal — a hurdle after the difficulty the ECB has had with its outright monetary transactions program.

But Larry Elliott thinks QE is eventually inevitable because of the eurozone’s long list of economic problems:

Tension in Ukraine is eating into business and consumer confidence. China’s slowdown will have an impact on Germany’s export-dependent economy … The commercial banks are still weak following the losses made in the 2008-09 recession. Credit taps have been turned off and, unlike in the UK or the US, there has been no attempt at off-setting action by the European Central Bank … This lack of finance is making it hard for the recovery to get traction.

Then again, it’s probably worth pointing out that the effectiveness of QE on the economy is still an open question. — Shane Ferro

On to today’s links:

Housing segregation is holding back the promise of Brown v. Board of Education -Emily Badger

The Internet
How the recent European internet privacy ruling makes the web a more unequal place -Izabella Kaminska

The NYT has some serious issues with its digital strategy - BuzzFeed

Droughts in California and Texas are causing burritoflation - Matt Phillips

Why salaries shouldn’t be secret - Felix Salmon
A lament on the axing of Jill Abramson - Shane Ferro

The Chinese housing market is going bust (again) - Matt O’Brien

L’affaire demande

Jan 17, 2014 23:00 UTC

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“L’offre crée même la demande”.

With those five words François Hollande set off his second scandal in as many weeks. A French president having an affair is one thing, but for a European Socialist leader to state that “supply creates demand” is another entirely, particularly in the econoblogosphere.

In the same speech, Hollande said he will push for tax and spending cuts. The WSJ notes that, “market watchers appreciated the efforts, but bemoaned the lack of details”; his plan does reportedly include at least €30 billion in tax breaks. This is the man who ran on a platform of equality and controversially pushed through a 75% tax on salaries above €1 million, which caused Gérard Depardieu to give up his French passport and move to Russia. Hollande is also one of the least popular French presidents ever.

The New York Times writes that Hollande made “proposals to take France in a centrist direction”. However, Dean Baker takes issue with that characterization, accusing the NYT of “acting as a mouthpiece for the agenda of the right-wing in Europe”. Baker goes on to say, “the consensus view within the economics profession is that Hollande’s program will slow growth and raise unemployment”.

Francesco Saraceno points out that the French Statistics Office actually tracks whether French companies are having issues with supply, demand, or both. He writes, “The message seems to be clear: since the beginning of the crisis the trouble for French firms came from insufficient demand. Keynes: right; Say (and François Hollande, and the Commission, and Angela Merkel): wrong”. Here’s the chart:

Paul Krugman, meanwhile, wonders why the French seem so panicked when, in his words, “the numbers, while not good, just aren’t that dramatic”. Krugman has several charts showing France is in the middle of the European pack when it comes to growth and competitiveness. He adds that to the extent there is a major economic problem in France, it’s being caused by austerity, and thus probably won’t be fixed by more.

Kevin O’Rourke thinks that Hollande’s statement is evidence that the European left has been decimated. Ambrose Evans-Pritchard says Europe’s left is “so compromised by ideological defence of monetary union – a Right-wing project, or ‘bankers’ ramp’ as the Old Left used to say – that it cannot muster any articulate policy”. O’Rourke’s bigger worry is that Europeans let down by both the political left and the right will turn to the extreme. So far the evidence is on O’Rourke’s side. — Shane Ferro

On to today’s links:

No more monoliths: The average value of a tech company is decreasing – Tomasz Tunguz
Increasing income inequality, animated GIF chart edition – Center on Budget and Policy Priorities
Energy is decoupling from economic growth – Izabella Kaminska

Goldman moves to Utah: “They call us ‘high value,’ but what they really mean is ‘low cost’” – Lauren Tara LaCapra

Wealthy CEO Is deeply concerned about budget deficits – Josh Barro

Must Read
Our historically unprecedented, unsustainable corporate profits bubble – Chris Brightman

“You make your own luck? Success is never accidental? Bull!!” – Howard Marks

Right On
Work is better than not-quite-work – Sam Altman

Financial Arcana
Banks are being cagey about their mortgage legal reserves. Too cagey – Peter Eavis

FINRA keeps data on shady brokers to itself – Jonathan Weil

The depressing reason women are gaining labor market share – Shane Ferro

After just 15 months at Yahoo, the departing COO may get a $109 million payout – Brandon Bailey

Crime and/or Punishment
“Apple must refund at least $32.5 million to parents on the brink of disowning their children” – Lily Hay Newman

Burn Unit
“People upset with David Brooks include” – Mark Thoma
“In which we learn that that Ross Douthat has never understood Plato’s Euthyphro” – Brad DeLong

Faith/Humanity Etc.
When it’s bitterly cold, New Yorkers tip more for delivery – New Yorker

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