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.

Case-Shiller Index shows modest growth in home prices

Mar 26, 2014 15:00 UTC

The housing recovery continues, albeit modestly. The S&P/Case-Shiller composite index of house prices in 20 metro areas rose 0.8% in January (seasonally adjusted), according to a report released yesterday. Economists had predicted an 0.7% rise. On an year-to-year basis, home prices are 13.2% higher than they were in January 2013.

It’s not all good news, though. Unadjusted prices actually fell by 0.1% from December to January, according to ReutersBill McBride sees signs of a slowdown in housing prices coming:

I’ve been hearing reports of a slowdown in house price increases (more than the usual seasonal slowdown), and perhaps this slowdown in price increases is finally showing up in the Case-Shiller index. This makes sense since inventory is starting to increase.

According to Trulia chief economist Jed Kolko, asking price increases have slowed down recently, and Kolko expects that price slowdown will “hit Feb sales prices and get reported in April index releases”.

It might take a few months, but I also expect to see smaller year-over-year price increases going forward.

Here’s McBride’s chart on nominal house prices over the last 40 years, using several different indices: 

Why you should start saving for retirement at 25

Mar 21, 2014 15:51 UTC

JP Morgan reminds the world this morning that compound interest is a beautiful thing. The bank recently released its 2014 guide to retirement. One of the slides shows the benefits of starting saving early:

Sam Ro at Business Insider explains:

Intuitively, it makes sense that Chris would end up with the most money. But the amount he has saved is astronomically largely than the amounts saved by Susan or Bill.

Interestingly, Susan, who saved for just 10 years, has more wealth than Bill, who saved for 30 years.

That discrepancy is explained by compound interest.

You see, all of the investment returns that Susan earned in her 10 years of saving is snowballing — big time. It’s to the point that Bill can’t catch up, even if he saves for an additional 20 years.

Of course, if Susan saved like Chris … well, if you haven’t noticed, Chris’ savings are just the savings of Bill and Susan combined.

The longer you wait to start saving for retirement, the more you miss out on the benefits of the incredible power of compound interest.


America’s job market: still not good enough

Ben Walsh
Mar 11, 2014 21:23 UTC

On Tuesday morning, the most recent Bureau of Labor Statistics Job Openings and Labor Turnover (JOLTs) data showed that the rate of hiring, turnover, and the number of open jobs was basically flat.

A little explanation: The hiring rate is the number of peopled hired as a percent of total employment. The JOLTs report also tracks the quits rate, which is the number of people who have voluntarily quit as a percent of total employment. Taken together, the quit rate and the hire rate represent a good proxy for the level of choice workers, particularly the already employed, have in the job market.

This chart shows that the level of choice in the job market within the workforce plummeted during the Great Recession. It has gradually improved over the last four years, but is still at right around 2008 levels. And this is likely still not fully representative of the job market: because it tracks quits, and there is a bias to hire the already employed, this chart more accurately reflects job choice among the employed than the unemployed.

Job growth is showing much the same pattern. Looking at the data since late 2011, the NYT’s Neil Irwin concluded that the “jobs recovery in the United States is astonishingly consistent, astonishingly resilient, and astonishingly underwhelming”, holding steady at an annual rate of just over 2 million:




Charting the Malaysian airliner disappearance

Mar 10, 2014 14:53 UTC

For the third day, search and rescue operations from 10 different countries failed to find any trace of the missing Malaysian plane that disappeared about an hour into a flight to Beijing. Here’s a map of the plane’s last known location: 

There are numerous theories as to why the plane disappeared, but nothing concrete. Here’s Reuters with one scenario:

A senior source involved in preliminary investigations in Malaysia said the failure to find any debris indicated the plane may have broken up mid-flight, which could disperse wreckage over a very wide area.

“The fact that we are unable to find any debris so far appears to indicate that the aircraft is likely to have disintegrated at around 35,000 feet,” said the source.

Asked about the possibility of an explosion, the source said there was no evidence of foul play and that the aircraft could have broken up due to mechanical causes.

Reuters also reports that two passengers on the flight used stolen passports to board, but that may not have any connection to the disappearance. From Reuters:

A European diplomat in Kuala Lumpur cautioned that the Malaysian capital was an Asian hub for illegal migrants, many of whom used false documents and complex routes including via Beijing or West Africa to reach a final destination in Europe.

“You shouldn’t automatically think that the fact there were two people on the plane with false passports had anything to do with the disappearance of the plane,” the diplomat said.

“The more you know about the role of Kuala Lumpur in this chain, the more doubtful you are of the chances of a linkage.”

While mid-air crashes are less common than problems during takeoff and landing, they do happen.

And this disappearance notwithstanding, airline technology has gotten safer over time. Here’s a chart showing the number of crashes, and resulting casualties, since 1970:

The worrying (or not) rise of margin debt

Ben Walsh
Mar 3, 2014 22:42 UTC

The FT’s Michael Mackenzie reports that  the amount of money borrowed on margin to buy stocks on the NYSE hit a new, nominal high of $451 billion. That’s up 20% over last year, Mackenzie reports.

The article didn’t have a chart, however. So here it is, real (adjusted for inflation) terms, since 2005:

“Peaks in the use of borrowed money have in the past been a precursor to big bear markets”, Mackenzie reports. Not only does a rise in margin debt, the theory goes, mean that the consensus is worryingly positive, but when that consensus breaks, the use of leverage makes the fall even nastier. Jeff Gundlach thinks rising margin debt is consistent with market highs, but isn’t sure whether it’s a cause or effect of overvaluation.



Manufacturing and consumer spending edge up

Mar 3, 2014 16:41 UTC

Two reports out today suggest economic growth has been moderate in the US since the beginning of the year. Consumer spending rose more than expected in January, according to the Commerce Department, likely because of high demand for heating.

Additionally, the Institute for Supply Management reported that its manufacturing index rose to 53.2 from the previous month (anything above 50 indicates expansion). Here’s what recent manufacturing growth looks like:

While the February manufacturing number was higher than expected, Reuters points out that “there were some cautionary notes, as the production subindex sank to 48.2 from 54.8, notching its third straight month of declines and falling below 50 for the first time since August 2012. The employment index held flat at 52.3.”

US consumer spending, meanwhile, rose by 0.4%, while personal income rose 0.3% in January. Here’s more from Reuters:

January’s increase in spending was driven by a 0.9 percent jump in services, the biggest gain since October 2001. That likely reflected a increase in demand for utilities as Americans tried to keep warm during an unusually cold spell.

With households spending more on utilities, outlays on goods fell 0.6 percent in January.

Despite the services-driven rise in spending, inflation pressures remained muted.

Excluding food and energy, the price index for consumer spending edged up 0.1 percent, rising by the same margin for a seventh straight month. Core prices were up 1.1 percent from a year ago, after rising 1.2 percent in December.

Is China’s red-hot housing market finally beginning to cool down?

Feb 24, 2014 16:17 UTC

In China’s housing market — just like in its overall economy — any signs of slower rates of growth are notable. Thanks in part to action by China’s central bank to curb lending, home price growth slowed for the first time since 2012, Reuters reports:

Here’s Reuters with more:

 China’s home price rises eased for the first time in 14 months in January, the latest sign that the government’s more than four-year campaign to rein in property risk may finally be starting to bite.

Average new home prices in China’s 70 major cities rose 9.6 percent in January from a year earlier, easing from the previous month’s 9.9 percent rise, according to Reuters calculations based on data released by the National Bureau of Statistics (NBS) on Monday..

House prices in China have surged in the past year but the market began to show signs of losing momentum at the end of 2013 as local governments took further tightening measures at the prompting of a central government worried about the risk of an asset bubble.

In the past few years, it’s been increasingly popular to call China’s housing market a bubble. In October, the FT’s Simon Rabinovitch  wrote For the economy, wrote that “the fear is that China is in the middle of a property bubble that will eventually burst and trigger a financial crisis.”

Beyondbrics compiled the below chart, which is a good indication of the sheer pace of the property price increases that China has seen in the last year or so. The below compares year-over-year price growth in March and September 2013. The September numbers, Beyondbrics suggests, likely reflects the impact of a July effort to boost the economy by China’s central bank:



What we know about income inequaliy: America’s disappearing ‘middle-skill’ jobs and falling wages

Feb 12, 2014 19:30 UTC

There are a lot of things that “explain” inequality. Technology, finance, societal, and cultural changes have all played their part. In this series, Counterparties takes a look at the various things that correlate with rising income inequality in order to ascertain how we got to this economy and where we might go from here. For story tips/comments/complaints email us

America is losing middle class jobs — and middle class pay. Not only are “middle-skill” jobs disappearing as routine tasks become computerized (think everything people do in the television show “The Office”), but that job loss has contributed to stagnating wages, according to a recent paper by Michael Boehm of the University of Bonn.

This chart shows the changes in US employment shares by type of occupation since the end of the 1980s. The paper used two different measures, the National Longitudinal Survey of Youth (NLSY) and the comparable years and age group in the more standard Current Population Survey (CPS):

For this chart, the high-skill occupations comprise managerial, professional services, and technical occupations; middle-skill occupations are things like sales, office/administrative, and production occupations; and low-skill occupations include food, cleaning, and personal service occupations.

What Boehm found is that this erosion of middle-skill jobs is correlated with a similar erosion of middle-skill pay. This chart shows how wages were expected to grow back in 1980 (blue line), and how wages actually grew (red line):

Here’s what Boehm says this mean:

What emerges unambiguously from my work is that routinisation has not only replaced middle-skill workers’ jobs but also strongly decreased their relative wages. Policymakers who intend to counteract these developments may want to consider the supply side: if there are investments in education and training that help low and middle earners to catch up with high earners in terms of skills, this will also slow down or even reverse the increasing divergence of wages between those groups.


Previously in this series:

What we know about income inequality: Better marriages may mean more inequality

The end of the boom in emerging markets reserves

Ben Walsh
Feb 10, 2014 18:15 UTC

One bit of collateral damage from the recent emerging markets mess:  the area’s strong foreign currency reserve growth is slowing, or even dropping off, Reuters reports.

Central  banks can use foreign reserves can be used to stabilize their local currency, an increasingly important function as emerging market currency volatility increases.There’s a real debate about just how big these “war chest” reserves should be for emerging market countries, John Plender writes in the FT. 

While emerging market reserves increased 5% last year, that’s actually a small rise “compared to the 20-30% annual increases seen between 2003-2007 or even the 10-20% year-on-year rises between 2009-2011,” Reuters writes.

Reuters’ Vincent Flasseur has the chart:

Flassuer also breaks down central bank reserves by country, showing that “reserve accumulation is starting to stall or at best, become less broad-based”:

CrossBorder Capital’s Michael Howell, who helped Reuters compile the data, thinks “the peak of reserve accumulation in emerging markets has already been seen. There is not a great likelihood of big capital inflows for some time”.

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