Felix Salmon

Chart of the day: Stocks vs unemployment

Felix Salmon
May 25, 2009 16:32 UTC


Received opinion has it that stock prices are a leading indicator of economic conditions — they price in expected future events — while the unemployment rate is a lagging indicator, since it reflects the outcome of decisions made in the past, and businesses only just beginning to come out of a recession are generally hesitant to start hiring again.

Looking at this graph, however, it seems that the two indicators are much more coincident than you might think, and it’s pretty hard to look at that uptick in stock prices over the past couple of months and see compelling evidence of “green shoots”. Especially given the absolute magnitude of the unemployment rate, which is now so high that it’s seriously hurting consumption.

If and when the recovery does take place, we won’t just move cyclically back into a period reminiscent of the last boom. Rather, the new economy will look very different from the old economy: it will be much less reliant on personal consumption expenditures than before, and especially on expenditures which were financed by debt, be it on credit cards or the proceeds of home equity withdrawals.

A glance at the chart shows that stock prices are very volatile these days, and that you extrapolate from short-term countertrends at your peril. It’s the red line which really charts the state of the economy, not the blue line. And although there’s the vaguest hint of a suggestion that the red line might just be leveling off, it’s worth remembering that it’s pretty hard to paint a picture of economic recovery with the unemployment rate at current levels.

When unemployment starts to drop — then, and only then, will I start to believe that a rising stock market might be telling me something. Of course, I’m not a stock-market speculator, so I’m not worried about missing out on the market rising further — in fact I’d love to see stocks roar upwards, and the attendant inrush of liquidity help to kick-start the economy. But I’m not holding my breath.

(Update: The chart shows U6 underemployment, which is a broad measure of the number of people looking for more work than they have right now. But just about any of the unemployment ratios would show much the same thing.)


1929-1932 reveals a stark correlation to today?

Have a look at the two graphs below.. To me it’s clear that during the period 1929-1932; as unemployment rose the DJI fell… if the period we are in now is quasi-reminiscient of 1929-1932 then we are in February 1930 now.. Watch out below…

Dow Jones Industrial Average 1929 – 1932


Unemployment Rate 1929 – 1932

If this is like 1987 then we’re OK…

My thoughts are this “feels” like Structural change and we are heading for a quasi 1929-32 type scenario albeit with less civilian pain because China will “buy” America’s knowledge and assets in return for forebearance of debt. This will ease the populations’ initial herdship but the net result will be the confirmation of the shift of economic power from US to China.

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Twitter poll: The results

Felix Salmon
May 25, 2009 15:27 UTC

On Friday I asked, both here and on Twitter, whether I should auto-publish my blog entries to my Twitter feed. The results, where “no” includes people who say “start a new Twitter account for that”:

Should I auto-tweet? Commenters Tweeters Total








(Midas Oracle got counted twice, once as a yes and once as a no; dctag, on the other hand, seemed so diffident I didn’t count him at all.)

Maybe the thing to do is to start off manually, picking and choosing the blog entries to link to and maybe linking to more than one at a time. But to do that easily I’d want a Firefox plugin where I can right-click on a hyperlink, select “shorten”, and have a bit.ly address or somesuch automatically copied into my clipboard. Otherwise tweeting more than one URL at a time is a bit of a pain.


I previously voted for you integrating these blog posts into your existing Twitter feed.

If there is so much hostility to that, isn’t the simple solution simply to set up a separate Twitter feed for this blog?

Personally, I would have integrated the two feeds (the blog’s post and your normal twittering) into one feed without consulting anyone, but now that you have let that genie out of the bottle and people seem afraid at having to see your blog posts Twittered, why not just create a separate Twitter feed for them, make everyone more or less happy, and move on?

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Something else which was meant to rise forever

Felix Salmon
May 25, 2009 14:54 UTC

Another company defaults on its obligations because its chairman thought his market would simply rise forever:

“In my 30-plus years in the business there’s never been a year that was down versus the prior year,” he said. “This is a first.”

It’s a wonder he didn’t go into mortgage securitization, really.


How can people be so ignorant?

And get paid a CEO salary to boot?

The NYT ombudsman’s blogophobia

Felix Salmon
May 24, 2009 17:34 UTC

The good news: the NYT’s ombudsman, Clark Hoyt, has weighed in with uncommon speed on l’affaire Andrews. But he’s done so in a most peculiar way: he spends 11 paragraphs on whether or not Andrews should be covering his own personal housing crisis at all, given his job, and then moves on to Megan McArdle’s bombshell with one final tacked-on graf, in which he can’t even bring himself to mention McArdle by name. (She’s first “a blogger for The Atlantic”, and then just “the blogger”. You’ll excuse me for reading that language pejoratively: if a newspaper columnist had written the same thing, I doubt they would have just been “a columnist” and “the columnist”.)

Here’s Hoyt’s conclusion in full:

Andrews is an excellent reporter who explains complex issues clearly. There are plenty of them to cover without assigning him to those that could directly affect whether he keeps his own house. He is too close to that story.

He can’t be too cautious. On Thursday, he came under attack from a blogger for The Atlantic for not mentioning in his book that his wife had twice filed for bankruptcy — the second time while they were married, though Andrews said it involved an old loan from a family member. He said he had wanted to spare his wife any more embarrassment. The blogger said the omission undercut Andrews’s story, but I think it was clear that he and his wife could not manage their finances, bankruptcies or no. Still, he should have revealed the second one, if only to head off the criticism.

“He can’t be too cautious” carries with it the clear implication that the next bit of criticism is largely unwarranted — an implication which is reinforced by Hoyt’s inability to name McArdle. And the way he talks about Andrews being “under attack” from this anonymous blogger also naturally puts the reader on Andrews’s side.

Eventually, Hoyt decides that Andrews’s wife’s bankruptcies really aren’t germane after all, on the rather peculiar grounds that since Andrews is open about his inability to manage his finances in any event, the news of the bankruptcies doesn’t really add anything. Huh? There’s a world of difference between a couple who can’t manage their finances and who are sucked into the subprime bubble, on the one hand, and a couple with two bankruptcy filings in the space of 8 years and 4 months, on the other. (You’re not allowed to file for bankruptcy within 8 years of your last filing.)

The reason why Andrews should have revealed both bankruptcy filings (not only the second one) is that they’re highly relevant to his family’s finances, and he’s written an entire book about his family’s finances. The reason is not just “to head off the criticism” he might end up receiving from the blogosphere.

As for the whiff of latent blogophobia which wafts through the whole thing, it’s worth noting that although Hoyt has a blog, he hasn’t written a substantive blog entry there all year — all the content from 2009 so far has been written by others and simply posted by Hoyt. What’s more, the NYT has broken links to his predecessors’ blogs: Dan Okrent’s blog used to be here, while Barney Calame’s used to be here. Neither link works any more. Clearly, if you want to make an impression on the public editor, it’s best to avoid any hint that you might be a blogger. It seems that McArdle should have mailed Hoyt an official complaint, on Atlantic letterhead, signing herself the Business and Economics Editor of The Atlantic: Hoyt would probably have taken that more seriously. It’s very sad that he still hasn’t moved on from that credentialist world.


Doesn’t Salmon misstate the point of the “11 paragraphs” he criticizes? Hoyt wasn’t saying that Andrews shouldn’t have been covering his own story; he was saying that Andrews shouldn’t have been covering the foreclosure crisis.

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Credit cards: An exchange

Felix Salmon
May 24, 2009 05:37 UTC

I got a very smart email from Zoltan, one of my readers, yesterday, on the subject of credit cards:

In the recent past, I worked as a management consultant for some major credit card issuers. I can tell you that internally, these companies have a common term for customers who pay off their entire balance every month: “freeloaders”.

These “freeloaders” aren’t necessarily unprofitable; some are, most aren’t, on average the group is mildly profitable, but not nearly as profitable as those who carry a balance. If you’re wondering how a “freeloading” customer can be unprofitable, there are several factors. For one, about 0.8% of the 2%-3% interchange fee goes to rewards, but a diligent customer can push that to 1.5% or more by optimizing the collection and redemption of rewards points. Beyond that, the credit card issuer finances everything the “freeloader” buys on the card for 15 to 45 days. Finally, there are the various expenses a customer costs: printing and mailing cards and statements, call center service, various card benefits, etc.

The result is that roughly 20% of a credit card issuer’s customers are unprofitable (this can vary tremendously, depending on the company and calculation – for instance, allocation of fixed costs). This isn’t particularly remarkable, I suspect the number might be similar for Safeway or Best Buy. But this legislation is going to increase that percentage, by either increasing the number of unprofitable customers (the numerator) or decreasing the total number of customers (the denominator).

The legislation changes credit card economics fundamentally, making it less profitable. The issuers will try to restore some of the lost revenue by playing with their pricing, rewards, and servicing. A pricing structure built on a revenue model of 30% fees, 40% interest, and 30% interchange, will have to change when the revenue model is shifted overnight to 25% fees, 35% interest, and 40% interchange (these numbers are just theoretical examples).

One company may just raise the basic interest rate. Others might raise annual fees or reduce rewards. Many will do a combination of things. But the point is that some companies will make changes that will definitely disadvantage customers who don’t carry a balance (i.e., “freeloaders”), while other changes will be neutral. Eventually the issuers will settle at a competitive equilibrium or develop their respective niches. However, as someone who knows how these decisions are made, I can’t think of any fruitful changes they could make that would improve things for “freeloaders”. So on average “freeloaders” will lose out. Will they lose out as badly as the industry implies? No way, but they will still lose out.

I responded:

I guess where I don’t follow you is where you talk about when “the issuers will try to restore some of the lost revenue” — aren’t they trying to maximize their revenue already? Aren’t they basically trying to maximize the profitability of the freeloaders in the face of known competition?

The analogy I have in mind is health care reform, where people ask how the health insurers will be able to make as much money as they do today — the answer is that they won’t. And the same with credit cards — why can’t they simply become less profitable, like, I dunno, video rental stores?

It strikes me that if freeloaders, as a group, are profitable right now, then at least some credit card companies will be content to continue to make money off them as they do right now. And if other credit card companies start raising fees etc, those customers will just defect to those companies which don’t, no?

And I got this back from Zoltan:

Yeah, that “restore lost revenue” part wasn’t as clear as it could have been. What I meant is that the current pricing and service structure has been optimized (or ostensibly optimized) for a certain type and level of revenue. Once that revenue changes, they will reconfigure things to maximize profitability under the new conditions. The profit-maximizing pricing structure of January 2009 won’t be the same in July 2009. I can’t conceive of any way that the new profit-maximizing pricing structure will have lower prices for anything. I can’t say it’s impossible, but I don’t see it.

I think health care is a great example. Of course, insurers will make less money if there is health reform. But they will also change the structure of their plans (beyond merely what’s required by legislation) to adjust to the new reality. Certain types of policies or benefits will become less profitable, even unprofitable, and be phased out. Others will be more profitable and be pushed. Many (mostly well off) people will be worse off than they are now, in that they’ll have to pay more (through premiums or taxes), or have less benefits. The idea that some have that the entire cost can be borne by the insurers is a fantasy. Even if it weren’t, the idea that everyone will be better of, as opposed to, say, 80% being better off and 20% being worse off, is also wrong. (I’m Canadian, so I don’t really have skin in the U.S. health care game, although I think the U.S. status quo maximizes our sizable free rider benefits).

There are tradeoffs for everything. If hotels were banned from charging $8 for a minibar beer and $2/minute for phone calls and $25 for breakfast, the hotel chains would have to reevaluate their pricing structure. The result would probably be higher room rates and some closed hotels. If airlines had a price limit put on their business class seats, you can bet coach tickets would go up in price and the number of flights would go down.

In these cases and in the case of credit cards, there is tremendous profitability in one customer segment that, to an extent, essentially subsidizes another segment because it is willing to pay ridiculous prices. The difference is that with airlines and hotels, the people paying the ridiculous prices are corporations and rich people, while in credit cards, it’s the stupid and the poor. That may argue in favour of the legislation.

Even if you don’t buy my arguments, it’s pretty clear that the industry will have less revenue per customer, and higher fixed costs per customer (due to the allocation of fixed costs among fewer customers). Economically speaking, this will cause the supply curve for credit cards to shift leftward, increasing price.

You’re definitely correct that the new equilibrium is card issuers making less money. But that isn’t necessarily a good thing for those (like me) who are currently maximizing the benefits and minimizing the costs of our cards. That said, I think the overall effect on “freeloaders” will probably be minor, maybe a few dollars a year in extra fees, maybe a small depreciation in rewards schemes. I think the bulk of the loss will be shared by the credit card companies and by those who continue to carry a balance, in the form of increased interest rates and increases in whatever fees can still be increased and assessed.

Your last paragraph about issuers trying to keep making money off freeloaders is essentially correct. American Express’ charge card (as opposed to credit card) business, for example, is made up entirely of freeloaders, and is very profitable. But they are an exception. Most companies can’t cordon off their freeloaders and charge them a specific pricing structure that makes them profitable (although they do try). They’re often stuck in the same ABC Bank Gold Rewards card as the people who carry a balance. So if they change the pricing for that card, everyone gets hit.

As for your point about “freeloaders” defecting from companies that raise fees, that will definitely occur, but I still believe the eventual equilibrium will be higher pricing.

This is pretty convincing stuff. Yes, those of us who pay our credit-card bills off in full each month might be worse off as a result of this legislation, but probably only by a few dollars a year. On the other hand, all of us will be better off in that we will no longer run the risk, however small, of being egregiously shafted by the credit-card companies.

Think of the credit card legislation as an insurance premium: it might cost a few bucks a year, but it might end up saving you a huge amount of money and hassle. Meanwhile, it’ll certainly help out millions of cardholders who are less assiduous in paying their cards off in full each month. So net-net, the new regulations are a very good thing — unless you, like John Hempton, think that it’s a great public good that banks make enormous profits each year.

Update: Another reader adds:

I have worked for five years in the credit card industry for two major issuers, actually running and developing the financial models (NPV etc) on which the decisions were made to solicit and approve consumers. I am now in b-school, but can shed some light on the consequences of this legislation, in light of your below article. In my five years in the two companies, I have been intimately involved in decisions to lend more than $100B to US consumers through credit card. So, I am talking form reality here, not conjectures.

Credit card industry works on a bar-bell business model. All the profits (mainly through fees and very very high interest stretching into 30% or more) are made form people below 650 FICO, all the assets (loans or balances) are from people from above 700 FICO. The industry is just a giant wealth transfer mechanism from poor people to wealthly people. The profits from below (subprime) serve to subsidize the interest rate and rewards cost of people in the ‘super prime’ category. You can bet that that will disappear soon. The discussion about ‘transactors’ (thats the industry term, not freeloaders) is a side distraction, not relevant at all. At best, transactors are mildly profitable, at worst they breakeven. The interchange rate is 1.87%, not 2 or 3%.

The subprime people need to be saved from themselves, no doubt about that. I couldn’t myself stomach the usurious 35% interest rate charged on them by my companies on a $500 credit line, in addition to the varying forms of fees, while a superprime customer had a $30K line at 5% interest rate.

I ran multiple simulations last fall in my previous company on behalf of the CFO in anticipation of these new laws and I can tell you that we were deeply unprofitable in every scenario. Considering my knowledge of the business model of other card issuers, I wouldn’t be surprised if they are in the same position too.

Welcome to the new age of credit cards, when they will actually be used as a convenience service, rather than as an ATM. This can only be a good thing.


Really so insightful stuff! There are so many points which makes your stuff more informative and interesting too.

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Friday links don’t look very encouraging

Felix Salmon
May 22, 2009 22:29 UTC

A long-overdue tab dump which will make me feel much freer over the long Memorial Day weekend:

$400 billion of Lehman Brothers assets (“at nondistressed prices”) are being valued at $45 billion.

Rick Bookstaber: The Flight to Simplicity in Derivatives

Models Didn’t Bring Down Wall Street; People Brought Down Wall Street: I basically agree with this, although it’s couched as though we disagree. (I’m the “author who has been widely published on the subject of Wall Street’s use of mathematical models” the blog entry is talking about.)

U.S. Household Deleveraging and Future Consumption Growth: The future’s not pretty. Yet another case where a very long boom is likely to be followed by a similarly long bust, and yet another reason not to get too bullish right now.

An interesting question from Willem Buiter: “interest on money is forbidden by the Quran. I don’t know what Sharia scholars would have to say about negative nominal interest rates.”

Ryan Chittum sees “Hints of an Explosive Wall Street Story from FT’s Tett” — he may be right, but I don’t smell the same smoking gun that he smells. On the other hand, if there really are banks which have positioned themselves to benefit from a bankruptcy, only to then push that borrower into bankruptcy, Chittum is right that all hell would break loose — especially if they turned out to be US banks. Banks have a lot of power to decide who gets to roll over their loans and who doesn’t. They should never abuse that power for their own speculative profit.

Google drops idea to buy newspaper: Unless there’s “some massive, massive set of corporate bankruptcies”. Which isn’t all that unlikely.


Thom, I got a haircut on Saturday. So short it doesn’t even need to be combed!

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Why academics make better bloggers than journalists

Felix Salmon
May 22, 2009 21:54 UTC

I just found this, from Brad DeLong:

One reason that we academics tend to judge journalists harshly is because of their… excessive claims of originality. We tend to believe strongly that situating your work and your contribution in the ongoing discussion is one of the very first duties of a writer–and a duty that is absolutely essential to any attempt to inform or educate readers.

Journalists act differently. They try to make their readers as ignorant as they can about where the information is coming from. In my view, this is both unethical and ineffective: it tends to lead to great suspicion of American journalists, and a discounting of what they write.

“Situating your work and your contribution in the ongoing discussion” is exactly what bloggers do — and it’s something that journalists find very difficult. Being original (the fetishization of the “scoop”, even if it’s only by five minutes) is vastly overpraised in journalism, and journalists as a group tend to imbue everything they do with an incredible amount of secrecy. Try asking a magazine writer what she’s working on: she probably won’t tell you. After all, you might scoop her!

I think Brad’s insight helps explain to a very large extent the reason why academics took to the blogosphere with so much more alacrity than journalists, and why journalists-turned-bloggers can be pretty stingy with links and hat-tips, at least when they’re starting out. And of course it helps explain the otherwise inexplicable decision by Bloomberg to bar its reporters from even discussing “media competitors”, let alone linking to them.

One of the things I dislike about many of the big for-profit blogs is that they seem to be much more likely to internalize this kind of competitive mindset, where they become obsessed with their “competition” and tend not to link to them. It’s silly, and it helps to poison the helpful and positive-sum spirit of the blogosphere; it’s also one reason I think why Twitter, with its re-tweets and nobody really caring who got something first, feels a bit like the blogosphere circa 2003, which is increasingly feeling like some kind of halcyon golden age.

On which subject: a question, if I may. Should I automatically link to my blog entries from my Twitter feed? I tend to get annoyed when people do that, but I also appreciate that many people are using Twitter as an RSS substitute. Let me know on Twitter or in the comments!


Interestingly I am a journalist who has a background in academia and a degree in science journalism. I think the distinction is that a journalists job is to find out what’s “going on.” An academic’s job is to figure out what’s “true.” Journalists often do include some kind of analysis in their reporting and writing but it is not to the same level as an academic analysis. And as other commenters have pointed out, this type of analysis is not something that journalists have the time to do.

Another important point is that academics often have a very narrow field of expertise, where as journalists are trained to become “instant experts” in an entire field like business, science, politics, etc. They do that by finding the experts in the field, interviewing them, pulling together the pertinent information and figuring out where the consensus is.

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The next asset classes to default

Felix Salmon
May 22, 2009 20:16 UTC

I had an interesting lunch with Vipal Monga of The Deal this afternoon, and he came out with a rather startling datapoint: apparently there’s roughly $500 billion of leveraged loans out there which mature between 2012 and 2014. Is there any conceivable way those loans will be able to be refinanced?

But now go back and read your Lucian Bebchuk: he says that under the stress tests, Treasury didn’t even try to guess the value of assets on banks’ books which mature after 2011. Let’s say I’m a bank with a $10 billion portfolio of leveraged loans maturing in 2012. Under Treasury’s adverse scenario, that portfolio will be worth a lot less than $10 billion in 2010 — and if they’d run a solvency calculation using a reasonable value for that portfolio, the results might well have been very ugly. But under the stress tests, Treasury just ignored any drop in value of those assets. Yikes.

Is this the mechanism behind a coming W-shaped recession? Just as today’s fabled green shoots start growing into something viable, we’ll be hit by a massive new spike in defaults in newly-toxic asset classes: not just leveraged loans but also munis, sovereigns, and other things which have yet to blow up enormously. And of course the banks will be hit all over again, and will require yet another round of monster bailouts. If the crisis in structured finance grew to become a broader economic crisis, then the economic crisis might well yet swing around to bring down asset classes on the finance side which have been largely default-free to date, if only because they’re long-term loans which got locked in at low interest rates at the height of the credit bubble.


WWB: Remember the boomers are the first generation to pay their ENTIRE working lives into the TRUST FUND of Social Security UP FRONT. Sucking indeed. What sucks is that trust fund morphed over time into nothing more than another scheme congress has utilized to fund their endless games through delusional equations of structured finance there too; 1 really didn’t equal 10 but is -10 now. Lets put sucking in the right place and not on an entire generation that paid, paid and paid only to discover its spent by those ‘public servants’ who abandoned their fiduciary responsibilities going back over two decades.

Also remember, we paid during this time for our health care by private insurance. Now thanks to a delusional traders market, many who planned and prepared for retirement have lost, no recourse to stay up with the ever increasing inflation as real wages declined other than Wall Street to fund ordinary lives. Those wages and SAVINGS PROVIDED the ENDLESS liquidity for those masters of the universe to RISK without their skin in the game. THANKS!

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Bloomberg’s webophobia

Felix Salmon
May 22, 2009 19:15 UTC

Ryan Tate is quite right that there’s no way Bloomberg is going to be able to enforce the attempted ban on its journalists so much as linking to a news story from their Facebook page — although the ban is entirely in line with the company’s longstanding webophobia. Bloomberg killed its RSS feeds as long ago as 2006, and Mike Bloomberg told me as far back as 1995 that he had no interest whatsoever in going onto the web. He was always much happier being in complete control of the Bloomberg space, banning rude words on the messaging system, and so forth.

I’m sure this memo is making a lot of people at Reuters very happy, since it makes it much easier for us to compete with Bloomberg for journalistic talent. And it’s certainly not going to stop me from linking to Bloomberg articles online. Even if I risk receiving a nastygram in return every time I do so. (See the update at the bottom of the blog.) How long until Bloomberg Finally Gets It? My guess is that it’ll be a long time indeed — and certainly won’t happen while Matt Winkler is still there. A shame, for the blogosphere and for freedom of expression, but a good thing for my new employer.


more proof of bloomberg’s webophobia

have you noticed that about 1 in 5 news stories open to a blank page?

it seems that they are deliberately making a percentage of their stories unavailable on the net.

from what i can tell, they didn’t announce this, and instead just introduced it on the sly.

anyone else had similar troubles opening stories?

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