Felix Salmon

Unemployment: Strucs vs Cycs

Felix Salmon
Aug 25, 2010 04:33 UTC

Brad DeLong places himself squarely in the camp of the Cycs rather than the Strucs when it comes to Jim Ledbetter’s distinction between economic unemployment theorists. The Cycs think that unemployment is cyclical and will fall as demand grows; the Strucs think it’s structural, and the result of a mismatch between the jobs available and the unemployed workers looking for employment.

DeLong reckons that there can’t be much of a mismatch, because there’s precious little evidence of excess demand for labor in any industry. But this ignores, I think, globalization: companies which can’t fill jobs domestically simply outsource them, or set up shop abroad. Rather than looking just at U.S. employment figures, it would be helpful to look also at the total number of people employed by U.S. companies, and see whether that’s showing a different trend.

I also think it makes sense to break the Struc argument down into its component parts: the inability of the unemployed to find work, on the one hand, and the inability of employers to find good employees, on the other. The first part seems to be undeniable, and it’s surely getting worse as the length of time that people have been looking for work rises inexorably. The longer you’ve been without a job, the harder it becomes to get one, until you become unemployable.

Meanwhile, just because it’s hard to find good employees doesn’t mean that your business is booming and that there are lots of incentives for the unemployed to join your industry. The Cycs could well have a point here — if we get an uptick in total demand, then that might help increase employment in the parts of the economy with tight labor markets. But for the time being, employers who can’t find the employees they want seem to be resigned to simply keeping on going with the employees they’ve got: dreams of expansion have given way to grim survival and a refusal to take on extra debt or risk. And they certainly don’t want to risk raising their prices in this economy, even if they suspect they could get away with doing so.

And then there are all the stickinesses in the labor market: people like to stay where they are, rather than moving to where the jobs are. (This fact is only exacerbated by high homeownership rates.) They tend, certainly in the first instance, not to even look for jobs which pay much less than they were last earning: if you used to be a high-producing subprime mortgage originator, it’ll take a while before you consider training to be a yoga instructor. And then, by the time that you capitulate to the new economic reality, you’ve been unemployed for so long that your chances of getting any job at all have dissipated significantly.

Empirically, there’s no doubt that the Cycs have been proved wrong in their forecasts: unemployment now is significantly worse than the Obama administration forecast even without the benefit of the stimulus package.

Yes, at the margin, government stimulus can create jobs. Especially if its carefully targeted towards things like small-business lending and arts subsidies. But job creation is more of an art than a science, and there’s always a chance it’ll fail. Especially if you attempt it in the face of full-bore Republican obstructionism in Congress. So the political reality is that high unemployment is going to be with us for the foreseeable future. Which is something that I’d guess both the Cycs and the Strucs would agree with.

(Via, and for, Heidi)


Economists seem to think that structural unemployment is entirely about mismatch. What if jobs are simply being eliminated entirely? This has certainly been happening in manufacturing. The US is still the world leader in manufacturing output; we just don’t have the jobs because manufacturing has automated. Globalization can have nearly the same impact as technology, especially in cases like service offshoring.

A second point is that structural unemployment will CREATE cyclical unemployment…because if you lose your job because of technology (or skills mismatch) then you obviously will buy less coffee and less yoga….right?

Check out this book: The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future. (Free PDF at http://www.thelightsinthetunnel.com)

This book explains what economists seem not to understand. The impact thus far may be difficult to detect, but I think in the future it will become very obvious. Almost every sector will be hit heavily in the future.

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Why the housing report presages lower prices

Felix Salmon
Aug 24, 2010 21:10 UTC

Stephen Gandel finds an interesting theory for why home sales plunged so much last month, even as prices remained steady:

What’s going on here? I called Celia Chen who covers housing at Moody’s Economy.com and she had this interesting take: It might not be the housing credit that is wreacking havoc on the housing market. Another government program might be doing the trick: HAMP. For the past year or so, the government’s program to help people refinance their mortgages into affordable loans has been slowing the pace of foreclosures. But the key word is slowing. Most of the those foreclosures are likely to happen anyway, because statistics from HAMP show that most people who get trial modifications end up dropping out of the program or not getting approved for the actual loan modifications. So for the past few months the number of distressed sales, or sales of homes by banks that are just trying to unload properties as fast as possible, has dropped or remained stable. That has hurt sales, but helped prices. And the result is what we saw today.

It’s a cute theory, but I don’t buy it. There are more than enough seriously delinquent homeowners who aren’t in HAMP for the banks to be foreclosing on — and selling — as many homes as they like. The rate of bank repossessions is limited not by HAMP, but rather by banks’ appetite for repossessions and the capacity of their foreclosure pipeline.

On the other hand, Gandel is absolutely right that the drop in home sales presages a coming fall in house prices. With mortgage rates at record lows already, and unemployment remaining high for the foreseeable future, it’s hard to see what could possibly drive home prices higher. This market isn’t clearing at present levels, even with vast amounts of artificial support from the government in the form of Frannie guarantees. That support can’t last forever, and neither can current mortgage rates. So if and when we see an uptick in home sales, it’s pretty reasonable to assume they’ll be at lower prices.


main reason as far as i understand is that the housing price numbers lag by a few months plus they are in and of them selves moving averages. so if the prices go down this month we won’t see that in the case schiller until at least october for instance.

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Urban traffic datapoint of the day

Felix Salmon
Aug 24, 2010 17:21 UTC

Beijing has a 62-mile traffic jam which is currently moving at one third of a mile per hour, and which is likely to last until mid-September. And that’s not even the really scary bit:

The mega-jam on the city outskirts comes as officials warn that downtown traffic in Beijing is steadily worsening. State media on Tuesday reported that average driving speeds in the capital could drop below nine miles an hour if residents keep buying at current rates of 2,000 new cars a day.

Here in New York, we literally haven’t seen rush-hour driving speeds of nine miles an hour in living memory. The average speed during the morning rush between 6am and 9am is 7.03mph; in the six-hour-long afternoon rush between 2pm and 8pm, it’s just 6.78mph.

The answer in both cities, of course, is the combination of better public transport with congestion charging. In Beijing, that’s going to happen. In New York, I’m not holding my breath.


Traffic conditions can get rather horrendous these days. I remember reading about a driver in Essex who received a parking fine while being stuck in a traffic jam. It does make me wonder whether our cars need to go for servicing more often if we drive regularly in such start-stop situations since I drive to work every morning and face the same jam day after day. Any one has any idea or any BMW specialist who can answer this question for me? Thanks in advance!


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America stops buying homes

Felix Salmon
Aug 24, 2010 14:33 UTC

Earlier this month, talking about a housing market unsupported by Uncle Sam’s billions, I said that “the entire housing-finance business in the U.S. would come to a screeching halt. No one could buy, no one could sell, and home values would be entirely hypothetical.” What I didn’t realize was that we were plunging towards that state of affairs even with the vigorous and active involvement of Fannie Mae and Freddie Mac.

The National Association of Realtors said sales dropped a record 27.2 percent from June to an annual rate of 3.83 million units, the lowest level since May 1995.

This number is the lowest that the NAR has ever reported, and I can see why it spooked the markets, sending 10-year Treasuries breaking through the 2.5% level: we’re seeing less housing market activity now than we were even during the depths of the crisis. According to the NAR, there were 4.94 million existing homes sold in 2007, 4.34 million sold in 2008, and 4.57 million sold in 2009. The latest annualized number in that series, for July 2010, is just 3.37 million. That’s a 26% fall from last year’s rate.

The number is so low that it looks like a statistical aberration: let’s hope it is. Because if it isn’t, the news is gruesome. It means that despite record-low mortgage rates, people aren’t able to buy houses: essentially all the benefit from those low rates is going to people who already own their homes and are taking the opportunity to refinance.

The news also means that there’s a big gap between buyers and sellers: the market isn’t clearing. Sellers are convinced that their homes are worth lots of money, or will rise in price if they just hold out a bit longer; buyers are happily renting, waiting for prices to come down. And entrepreneurial types, whom one would expect to arbitrage the two by buying houses with super-cheap mortgages and renting them out at a profit, don’t seem to have found those opportunities yet.

Houses are rarely a liquid asset; they were, briefly, during the housing boom, but now they’re more illiquid than ever. America is a country where two generations of homeowners have learned to consider their houses an asset; they’re rapidly learning that at times like these, a house can look much more like a liability. (And refinancing your mortgage is just liability management.) The enormous repercussions of that change in mindset are only just beginning to be felt.


I know nothing of the housing game, really its all gobelydegook. Which is one reason for me to stay out of it all.

I do know what the word value means, and that it has nothing to do with dollars, and ultimately thats what confuses me the most. You mean all these folks are in this kind of tizzy because of what we are THINKING about the economy and the housing market?

What I see is a bunch of folks who, for whatever reason, believe thier homes have value but that value no longer exists.

The “value” I associate with buying a home has to do with security, how likely am I to become homeless by making the choice to buy?

What Im seeing is that I am less likely to become homeless if I rent because these days, the rental managers are a lot better behaved, and have a better sense of customer service than the home dealers.

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Vine talk: Not all wines get better with age

Felix Salmon
Aug 24, 2010 10:05 UTC

You probably know, or think you know, that fine wine gets better with age. But how do you know that? It is probably not by tasting a large number of fine wines of various vintages.

Instead, you’re just taking it on trust, often from the kind of wine snobs who will sniff and swirl and spit a wine, but now swallow it, and declare with all the puffed-up authority they can muster that it will be “drinking well from 2017 through 2027.”

Such proclamations tend to be extremely unhelpful except for people who aspire to become wine snobs. Even if wine really does get better with age, you can only benefit from being told such things if you can a) find the wine now; b) afford to buy it without drinking it; c) store it indefinitely in carefully temperature-controlled conditions; and d) somehow be able to cross-reference your wine collection with a database which tells you when the perfect drinking years finally roll around so the wine isn’t forgotten.

Fine old wine is drunk every day, by people who are very happy that it has been aging for a decade or two. But for every bottle that fits that description, there’s another bottle which has been gathering dust for far too long.

If it’s drinkable at all, it’s flat, uninspired, and likely to taste of nothing in particular, especially after 10 minutes in contact with air. There are millions of these bottles, all of which should really have been drunk years ago, and many of which are being treasured by owners who have delayed gratification for so long that it has disappeared entirely.

Meanwhile, the world of vintage wine is becoming more out of reach for the middle-class, with fine Burgundy and Bordeaux now an international commodity beloved of wine investment funds. No longer can such wines be bought for relatively modest prices when young, with the expectation that they would appreciate just as modestly over time.

Once upon a time, colleges, clubs and restaurants would barely change over decades, and would happily replenish the old wine they were drinking now with new wine they intended to drink in many years’ time. Something similar would take place within families: wine-loving patriarchs would drink the bottles bought by their fathers and grandfathers, while building up their own collection for their sons and grandsons.

But we’re living in an increasingly high-velocity world, where clubs and restaurants and hotels come and go quickly. They haven’t had the opportunity to build up a spectacular cellar and probably never will.

But the financial realities are even more important. Few of us have the good fortune to be able to drink bottles bought in the 60s, 70s, or 80s by our fathers or grandfathers — but even when we do, we feel that we need to do so in a special, ceremonious way, if only because those bottles, if they’re any good at all, are now so valuable.

Only a fraction of all wine produced globally will age well over 20 years or more. That tiny fraction of the world’s global wine production has appreciated enormously in price, even when it’s brand new. To drink vintage wine on a regular basis, you have to be able to afford to replace it with the same wine from the most recent vintage. That was something middle-class wine lovers could do, back in the 70s and 80s; it’s almost impossible now.

At the same time, the quality of wine which won’t age well has improved immeasurably over the past 30 years. A technological wine-making revolution which began in Australia has long since swept the entire world, to the point at which even the cheapest wines are dramatically better than their counterparts of a few decades ago.

Back in the 1970s, the choice between cheap California jug wine and good French Bordeaux was an easy one. The French wine was significantly better and still affordable while the cheap wine tended to be far too sweet, perfectly capable of ruining an otherwise-excellent meal.

Today, entry-level mass-produced wines like Yellowtail or Ecco Domani are eminently drinkable and for the same price or just a couple of dollars more it’s possible to find excellent wines from France, Spain, Chile and many other countries. That first-growth Bordeaux, by contrast, is utterly out of reach: only millionaires can afford to drink it daily.

It used to make a lot of sense for many people to drink half the wine they bought and lay down the rest. But almost none of the wine that most of us buy and drink is going to get any better with age.

The problem is that winemakers and wine retailers are loathe to admit it, because they know that the ability to age well is universally perceived as a sign of quality.

It can be a lot of fun to drink older wine, if you don’t have too much emotionally or financially invested in it. Recently I poured a 1998 Chianti down the drain without regret: I bought it cheap and the gamble didn’t pay off. But it’s very hard to throw away wine with nonchalance when you’ve paid $50 or $150 or even $500 for it.

So if you find a wine that you love, drink it. And if you want to start exploring the world of older wines, make sure you have a fat wallet and expect to run into some very expensive disappointments along the way.


Isn’t this exaggerated in an important way? Keeping Bordeaux 20 years is one thing but in my experience many New World wines are sold quite young and benefit from say 3-5 years after purchase. A 30 dollar Penfold red for example but Chardonnay and Rieslings too.

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Felix Salmon
Aug 24, 2010 06:44 UTC

Will IndyMac unnecessarily foreclose on a church? Looks like it — Shame the Banks

The bogusity of the NYT story about how technology leads more national park visitors into trouble — Slate

Clearly it can pay not to cooperate with a story: Fortune’s piece on Trader Joe’s couldn’t have been more gushing — Fortune

Build tall, yes. But don’t build ugly, if you can avoid it. 15 Penn Plaza is a monstrosity — Archpaper

“I don’t just think outside the box, I stand on top of it. I aim to appease my employer.” — Gawker

I might not have a house of worship or a community of faith, but I’m 100% behind this — War on Prayer

Expected inflation over the next 30 years: 1.9% — SA

Markets in everything: Blagojevich autograph, $50 — Politico

Why would a housewares store like Rejuvenation accept credit cards but not debit cards? Weird — WSJ

How one driver can stop traffic jams — Eskimo

Baruch vs bonds. Compelling — Ultimi Barbarorum

One of the most dangerous phrases in finance: “It’s free money.” — Aleph


15 Penn Plaza is very similar to another Pelli project in shanghai, the international financial centre. You may remember it from the movie the dark knight where batman jumps off the building. It is a handsome builidng in shanghai where most of the tall buildings are recently built. putting that type of building in new york i think is less successful. also, I think the rendering of 15 penn plaza doesn’t help it much.

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Replacing Frannie with a new bond guarantee

Felix Salmon
Aug 24, 2010 06:36 UTC

Donna Borak has found an upcoming paper from Fed economists Wayne Passmore and Diana Hancock proposing a government backstop for asset-backed securities. This sounds very much like Gary Gorton’s paper back in May, which was a very bad idea back then, and is just as bad of an idea now.

The Fed paper doesn’t go quite as far as Gorton, since it’s based more on an FDIC model where the insurance is paid for by the issuers. But the fundamental problem remains the same: from an investor perspective, the bonds would become risk-free. And we don’t want to create risk-free bonds: we want investors to price risk. If they think they’re buying risk-free paper, in fact what they’re doing is pushing risk out into the tails, where it can explode unpredictably and disastrously.

There is something new and interesting here, though: the idea that this guarantee be used specifically for mortgage bonds, and specifically to replace Fannie and Freddie. Since the government is already guaranteeing Frannie’s bonds, this new scheme can’t be any worse than we’ve already got, from a systemic perspective. So I’ll be very interested to read the paper, when it comes out.


Did the bandwagon for “Covered Bonds” just never get going? I seem to recall a few sessions scheduled at an ASF conference (in those halcyon times, at Vegas) on that topic; to me, the funding & accounting for the issuance of these just would not seem to mesh well for a large bank like JPM or Wells Fargo.

Asset-backed securities can function well enough for shorter-dated receivables like Cards or Autos, since money-funds can buy up all those 1yr Fixed / Floater pieces.

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China eyes the Black Swan Protection Protocol

Felix Salmon
Aug 24, 2010 05:22 UTC

Jenny Strasburg misses the point of the Black Swan Protection Protocol:

Clients don’t hand over their entire account for the firm directly to manage. Instead, clients designate a certain pool of assets, a notional value, that they seek to hedge, or protect against extreme losses.

For example, a client with a $100 million account with Universa would pay the firm a flat annual fee of 1.5% on that amount, or $1.5 million. The client would transfer to Universa typically less than 10% to fund its account in the strategy…

The goal is for the value of the puts to pay off 60% if the market drops by 20% or more in a month…

“The biggest home run would be if we went into ’70s-style or worse inflation,” Mr. Spitznagel said. “If I had a gun to my head, right now I’d fall on the deflation side, but that’s going to flip at some point.”

The Black Swan inflation strategy has less than $1 billion in client assets. Clients might have to tolerate steady losses in order to reach a hoped-for bonanza.

In fact, it’s the other way around: clients hope for steady losses on their protection protocol (down 2% this year, down 4% last year), because that means that they’re living in Mediocristan and the rest of their investments are happily and steadily performing more or less as they’re meant to.

If the clients reap a bonanza on their protection protocol, that means that the global economy has gone in a very nasty direction, people are losing jobs and wealth all over the world (including the clients themselves, quite possibly), and we’re entering another era of unpredictability and chaos. I’d hardly characterize any of that as “hoped-for”.

Note that even the fund manager, Mark Spitznagel, reckons that deflation is more likely than the inflation that the protection protocol is hedging. The point isn’t that inflation is hoped-for, or even that it’s likely. But the bet can still make sense as an insurance policy on the rest of the portfolio blowing up. And it can even make sense on its own, if the payoff is large enough: the most successful fund managers, just like the most successful gamblers, tend to be the ones who intuitively understand that it often makes sense to bet on something with a relatively low probability of happening, just so long as your return is high enough in the event that it happens.

The thesis of the Black Swan Protection Protocol is that the risk of chaotic inflation is underpriced, so it makes sense to hedge that risk now, when doing so is cheap. That doesn’t mean that anybody is hoping for chaotic inflation. It just means that clients — who might soon include China’s sovereign wealth fund — sensibly want to be able to protect their portfolios across a wide range of possible outcomes, even if none of them rises to the level of being a probable outcome. And even if — especially if — many of those outcomes are things you devoutly hope will never happen.

It’s possible to quibble about probabilities here. Nassim Taleb and Mark Spitznagel reckon that the probability is actually pretty high, given the complexity of the global financial system, that there will be some kind of blowup sooner rather than later. Does that mean they think that the probability is higher than 50%? The question is silly: it presumes some kind of mathematical model of the world, with various calculable probabilities applicable to various specifiable outcomes. And even if the world does blow up, can one be sure that it will do so in such a way that the BSPP will make lots of money for its clients? Of course not. But at least the BSPP is trying its best to profit from the characteristics of Extremistan. If, and when, they manifest themselves.


This is getting very complicated – may I suggest to read Elie Ayach’s “The Blank Swan: The End of Probability” or an older book by Vovk and Shafer before considering global strategic games we all play.

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Lies, damned lies, and equity mutual fund statistics

Felix Salmon
Aug 23, 2010 22:21 UTC

The lead story in Sunday’s NYT was by Graham Bowley, and it was quite alarming:

Renewed economic uncertainty is testing Americans’ generation-long love affair with the stock market.

Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year…

If that pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked.

Small investors are “losing their appetite for risk,” a Credit Suisse analyst, Doug Cliggott, said in a report to investors on Friday.

The story was picked up by Josh Brown, who said that in fact things were even worse than Bowley made them appear:

This has absolutely nothing to do with “risk appetites”…

What you’ll find is that people are now eating into their portfolios and living on their investment capital, they would prefer to pay bills (ar at least keep bills at bay) than worry about speculating in a market that makes little sense to them anyway (rallies on bad news, anyone?).

The men and women behind these outflow stats have been burned twice in a 7 year period and now there are taxes to pay and small company payrolls to meet and credit card bills to reconcile. There are car leases and financing payments to be dealt with and, oh would ya look at that, the roof done sprang a leak again…

The people are making withdrawals from their portfolios because they are starving for cash.

It’s as simple as that.

Except, it’s not remotely as simple as that. On the same day that Bowley’s article appeared on the east coast, Tom Petruno was writing a very different article for the LA Times:

In the first half of this year, redemptions of stock funds by people who needed or wanted their money were large enough to nearly offset the $724 billion in gross purchases by new buyers. The result was a net cash inflow of just $9 billion to the funds, according to the Investment Company Institute, the fund industry’s trade group.

By contrast, redemptions of bond funds were much less than new purchases, leaving those funds with a hefty net inflow of $156 billion in the half.

So bond fund assets are growing rapidly, but they’re still significantly less than what’s in stock funds. Bond funds held $2.4 trillion as of June 30 compared with $4.6 trillion in stock funds.

What’s going on here? Are mutual fund flows negative, as Bowley has it, or positive, as Petruno has it? The fact is that Petruno is much closer to the truth, and Bowley seems to have cherry-picked the worst number he could find. And Brown doesn’t seem to be right at all.

All of the numbers being cited here come from ICI, whose statistics you’re welcome to browse yourself. But they don’t cover the period through July, which Bowley is talking about: Bowley’s only using estimated July figures, and the official ones won’t come out until next week. Petruno is using the official figures, which run through June.

But even so, they don’t seem to add up. Were equity-fund flows positive through June, as Petruno has it, only to turn sharply negative in July, as Bowley would have you believe? No. The key word to note in Bowley’s piece is the word “domestic” — if you look only at funds investing in domestic equities, they have seen net outflows this year. But if you look at all stock-market funds, including those investing in the rest of the world, the outflows were positive through June; if you add in estimated flows through July, they’re modestly negative to the tune of less than $5 billion.

So really, equity mutual-fund flows are more or less flat so far this year: inflows are roughly the same as outflows. And remember that all of these figures are the difference between two large numbers: in the first half of the year, for instance, $724 billion flowed into equity mutual funds, and $716 billion flowed out. Which numbers help put Bowley’s $33 billion number in some perspective.

What’s more, equity mutual-fund outflows are largely a function of retired people withdrawing their money from the stock market. They would normally be offset by the flows of working people who are putting their money into the stock market. But those people are increasingly moving away from mutual funds and towards ETFs. And if you look at the ETF data, there was positive net issuance of another $38 billion in the first six months of 2010 — significantly more than Bowley’s $33 billion figure. Sure, some of that will have gone into bond and commodity funds. But most of it will have gone into equities.

So the big picture is clear, although you’d never guess it from reading Bowley’s story: people are still putting more money into the stock market than they are withdrawing from it.

And the bigger picture is even clearer: people are saving more and more money, and investing it in the market more broadly. ICI was good enough to send me the estimated year-to-date figures for all mutual funds — not just equities but bond funds and hybrid funds too. Add them all up, and you get a whopping net inflow of $208 billion. Which would seem to put the lie to Brown’s assertion that “people are making withdrawals from their portfolios because they are starving for cash”. In fact, they’re investing their cash to the tune of hundreds of billions of dollars, and they’re withdrawing money from their risk-free money-market funds to do so. (For the first half of the year, money-market funds saw net outflows of $509 billion.)

As Petruno says, people still have a lot more money invested in stocks than in bonds. So if they want to balance things out a bit more, then their marginal monthly investments are likely to be weighted more towards bonds than towards stocks. That’s going to make bond funds see lots of inflows, compared to stock funds. But it doesn’t mean that people are pulling their money out of the stock market. They’re not.


Wow! What a great writing style? I really appreciate your blog.. Well done


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