This could be a great wine show — SFMOMA
Rumsfeld to Feith: “We also need to solve the Pakistan problem” — Atlantic
Plutocracy now — MoJo
This could be a great wine show — SFMOMA
Rumsfeld to Feith: “We also need to solve the Pakistan problem” — Atlantic
Plutocracy now — MoJo
A couple of weeks ago, Robert Cottrell took issue with my post explaining why the NYT is lagging behind the Huffington Post in terms of reader engagement. Robert is one of the great curators on the internet; he seems to read everything as soon as it comes out. It’s therefore unsurprising that he’s single-minded in how he reads and loathes distractions:
In Felix’s own terms, if you want to do a bit of reading, chances are you’d rather do it in a library than in Times Square. If I have a complaint about the NYT layout, it’s that the page is still too noisy, even now.
I agree that if the purpose of a web page is to facilitate the best possible reading experience with respect to a certain piece of writing, then the NYT is better than HuffPo and there are sites which are even cleaner and better than the NYT. (Robert’s Reader being one of them.) On the other hand, plugins like Readability do a fantastic job of that kind of thing as well. And when you’re designing a sticky, interactive, compelling website, you have to do a lot more than just put up content and hope that people will magically come and read it.
In any case, this disagreement between Robert and me has now been upgraded to a full-scale bet — or rather, two bets. The stakes are, well, steaks: “Loser buys dinner for the winner’s nominated guest. In New York or London, whichever is closer for the buyer. And a decent dinner too. No ducking. No skimping.” And the bets come from this passage from Robert’s post:
Do you seriously think Arianna Huffington will be working diligently at AOL a year from now? Or that the Huffington Post will still be in business, except perhaps as a gibbering wreck, two years from now?
So here are the official terms of the two bets:
1. On February 9, 2012, will Arianna Huffington be working diligently at AOL? If so, Robert loses, if not, Felix loses.
2. On February 9, 2013, will the Huffington Post still be in business? If so, Robert loses, if not, Felix loses. With the proviso that if HuffPo is in business only as a gibbering wreck, Robert will have won the bet and Felix will have lost.
I’m pretty confident that I’m going to win both bets. I can’t imagine that Arianna is going to exit her eponymous publication before the 2012 election campaign is over, especially now that she has more control over it than ever. And with all the resources of AOL at her disposal, HuffPo is surely going to be bigger in 2013 than it is now. Now I just need to start planning my trips to London — it’s been a while since I had a nice dinner at Bibendum.
Ed at Gin and Tacos picked up on a particularly audacious section of the Wisconsin budget-repair bill yesterday: the governor can sell off any state-owned heating, cooling, and power plants he likes, at any price, to anybody he wants, without any kind of auction or bid-solicitation process, and such a sale would be defined as being in the best interest of the state and to comply with criteria for certifying such a transaction.
Ed calls this “a highlight reel of all of the high-flying slam dunks of neo-Gilded Age corporatism: privatization, no-bid contracts, deregulation, and naked cronyism” — but as Yves Smith notes, the sad fact is that all this language is gratuitous: if you’re a state, there are essentially no legal restrictions on how to privatize state-owned industries and franchises if you’re so inclined.
It probably comes as little surprise to note that the most lucrative privatizations have generally been done by parties of the left: I’m thinking in particular of the UK’s auction of 3G licenses, which netted the Exchequer $35.4 billion at the height of the dot-com bubble.
Right-wing parties, by contrast, are more prone to thinking of privatization as something inherently good, and of monies flowing to the government as a kind of taxation which is inherently bad.
And then of course there’s the other spectrum, from clean to corrupt, which is orthogonal to the left-right spectrum — the more beholden the government is to special interests, the more likely those interests are to wind up with sweetheart deals. Sometimes, the special interests in question are public-sector unions, which find themselves able to negotiate the kind of final-salary defined-benefit pensions which are now threatening state solvency and municipal bond markets around the country. At other times, the special interests are large corporations looking to buy up lucrative monopolies on the cheap. In both cases, elected politicians are not the best people to ensure a good deal; non-partisan career civil servants tend to generate much better results.
The advantage of privatization in cases like the Chicago parking meters is that it removes the utility from political meddling — in that case, from local aldermen who would always agitate for parking rates well below the optimal level. (Relatedly, if you haven’t read it yet, go read Ed Glaeser’s Atlantic essay on the massive economic cost of urban zoning regulations.)
But in the case of Wisconsin-owned energy plants, such considerations don’t come into play. There’s no reason to believe that the private sector will run those plants in a way that is better for the public, and every reason to believe that they will run the plants in a way that is worse (ie, more expensive) for the public. If the state wants to cut such a deal in return for a one-time check, that check had better be enormous. And there’s absolutely no reason to believe that it will be.
(Crossposted at CJR)
An important paper by David Miles concluding “that the amount of equity capital that is likely to be desirable for banks to hold is very much larger than banks have held in recent years and also higher than targets agreed under the Basel III framework” — Bank of England
Penguin Group will deliver galleys digitally. About time too — NetGalley
Finances Could Sink Seaport Museum. Not surprising when 2009 revenues were $280k on a $5.2m budget — NYT
Mohamed El-Erian on how emerging economies are terrified of the money dropping from Bernanke’s helicopter — FTTilt
NYC’s searchable map of 311 calls — Lo-Down
Dan Chiasson on Keef. This wonderful book has generated an astonishing number of equally brilliant reviews — NYRB
“The problem is that when politicians have absolute power to name things, they name them after other politicians” — TNY
Gina Trapani on Why and How I Switched to a Standing Desk — Smarterware
Ivory Coast Seizes Four International Banks — WSJ
John Paul II did his official miracle after he’d already died. Does that make it a miracle-squared? — Reuters
After I appeared on All Things Considered this weekend, I got an incredibly gratifying email from a listener in McLean, Virginia, who’s moving to Jupiter, Florida:
You were talking about the fact that taking your money out of one house and putting it into another means you’re still stuck in one place – just a different one – and trapped into an economic nightmare in which you work and work just to sustain a lifestyle you’ve faked yourself into because you now own a house. You’re so right, and something else that struck me was that I’ll never have cash to do the kinds of things I enjoy – travel, mostly… I have always felt stifled by a mortgage, condo fees, taxes, and basically, that “stuck” feeling…
I am going to continue renting my little place by the beach down here for a while, and continue to keep my very nice Mclean condo rented out, so that mortgage is paid, and give a little more thought as to why owning a house is really anything more than a self-imposed prison of bricks and sticks!
It’s easy to glorify the wonders of homeownership because of all the psychological reasons for wanting it — the place to call one’s own, the nesting instinct, the desire for stability, the feeling that it’s silly to put lots of work and love into a place if it ultimately just ends up benefiting the landlord. But at the same time, the downside of homeownership can be truly enormous and devastating, and renting carries with it a very American sense of freedom, I think, and a world of opportunities.
Richard Florida likes to talk about how it will take decades to reshape the American psyche into something where renting an apartment in the city is considered even more desirable than owning a house in the suburbs. I’m hopeful that one consequence of the housing bust will be an increase in the number of nice suburban houses being rented out, like my correspondent’s in McLean. Which means that it might not be necessary to re-architect the national lifestyle to one which is much denser and more urban before we can start seeing renting becoming increasingly prevalent in white, middle-class neighborhoods. After the renters move in to the place in McLean and their neighbors start getting friendly with them, perhaps the stigma associated with renting might start to erode.
Wade Pfau has a fascinating paper out called “Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle”. It’s really just the bones of such an approach: the details need to be fleshed out a lot. But I love the idea that we should get away from thinking about “the number” we need to be able to live comfortably in retirement. The effect of the number is to break life into two — pre-retirement and post-retirement: your goal pre-retirement is to reach the number, while your goal post-retirement is to spend it down slowly enough that it doesn’t run out before you die.
Pfau’s insight is that thanks to mean reversion, the number you need at the end of a bear market is actually lower than the number you need at the end of a bull market — if the market’s about to head up, your retirement savings can grow even post-retirement, while if the market is about to fall, you’re liable to lose much more than just your annual expenditures. Instead, says Pfau, stop thinking about stock, and just think about flows. Save a set percentage of your salary every year, stick to it, and, it turns out, you’ll be fine:
Starting to save early and consistently for retirement at a reasonable savings rate will provide the best chance to meet retirement expenditure goals. You don’t have to worry so much about actual wealth accumulation and actual withdrawal rates, as they vary so much over time anyway. But the savings plan should be adhered to regardless of whether it seems one is accumulating either more or less wealth than is needed based on traditional criteria.
What’s the percentage? That’s the crucial question. Pfau makes a very basic calculation that for someone on a constant real wage, saving for 30 years and then living for another 30 years on 50% of their final salary, saving about 16% of your salary each year into a portfolio of 60% stocks and 40% bonds will put you into safe territory.
Of course, real wages aren’t constant over time, and all the other figures are highly variable too. But the bigger message certainly resonates with me: spend less effort on trying to boost your annual returns, when you have very little reason to believe in your alpha-generation abilities, and spend more effort on maximizing your savings every year.
Investing can be exciting, especially when it’s done wrong. You follow the markets rising and falling, you obsess about your retirement-fund balance, you rotate out of this and into that, you read books and magazines and blogs to try to learn more about what to do. You might even, in a moment of weakness, find yourself watching CNBC. Budgeting, by contrast, is like going on a diet: it’s a drag, and it’s hard to get any pleasure or excitement out of it. But the latter is much more likely to get you well-set in retirement than the former.
Update: Matt Yglesias has a this-thing-looks-like-that-thing moment.
A clear narrative emerged pretty quickly in the wake of last week’s LCD Soundsystem ticket fiasco. Annie Lowrey tried and failed to get tickets when they went on sale at 11am on Friday, but was foiled:
Had something gone awry? I quickly checked Twitter. Nobody—really nobody, it seemed—had gotten through. Perhaps there was a problem with the site?
No. As it turned out, the show had sold out within seconds. It is just that professional ticket resellers, otherwise known as scalpers, had scooped up the bulk of the seats. Within minutes, hundreds of them were available on StubHub and other secondary markets where sellers can charge whatever they want. Tickets with a face value of $49.50 were going for 12 times that—with some coveted spots in the general-admission dance area going for thousands of dollars.
How did they do it? With bots. Computer systems—not particularly sophisticated ones, either—submit tens of thousands of requests for tickets the very instant they go on sale, crowding regular folks out.
This story seemed to be confirmed by LCD Soundsystem itself, with a profanity-laden posting blaming scalpers for the problem and presenting new shows at Terminal 5 as the solution. As Lowrey puts it, frontman James Murphy “realized he had an ace up his sleeve. He flooded the market, adding shows, upping ticket supply, and hopefully pushing prices down.”
For anybody who loves both music and teachable moments in microeconomics, the subject was irresistible. Lowrey’s post was followed up by Matt Yglesias, who drily declaimed that “optimal allocation of LCD Soundsystem tickets requires demand-responsive ticket pricing” if scalpers aren’t going to end up collecting rents. And Rob Cox, after looking into the matter, concluded similarly that what we’re seeing here “offers a strange insight into the laws of supply and demand”.
But in fact the story of these shows is much murkier than all this pop-economics punditry would have you think. Bob Lefsetz, who has real-world experience of how tickets are sold in practice, says that far from selling out 13,000 tickets at the public on-sale date, LCD Soundsystem in fact only sold 1,000. He notes:
James Murphy could publish exactly how many tickets go on sale to the general public, but he doesn’t want to. No act wants to, they’re afraid of the public outcry. This information is available to acts, but they don’t want to disseminate it.
After publishing his analysis, Lefsetz then mailed out a letter he received which lays out an intriguing counternarrative. What if the MSG show has not, in reality, sold out at all? The conspiracy theory goes like this: LCD Soundsystem’s promoter, Bowery Presents, owns Terminal 5. By holding back most of the MSG tickets, secondary-market prices would be sure to skyrocket. The way that MSG is structured, the coveted general-admission area in front of the stage is actually pretty small, which means that it’s quite easy to generate a handful of headline-grabbing offers of tickets for sale at $10,000 apiece or more. If they wanted, LCD’s promoters could even put those offers up themselves, and then encourage the band to complain in public about the exorbitant prices.
After getting everybody’s attention by artificially clamping down on the supply of MSG tickets, LCD’s promoters can then easily sell out four or more shows at their own venue, Terminal 5, which by coincidence just happened to be unbooked in the run-up to the MSG gig. Given all the buzz that this activity creates, the unsold MSG tickets can then be quietly disposed of on StubHub and other secondary-market sites.
I suspect that there’s more than a little truth in the conspiracy theory. For one thing, the number of tickets available on StubHub did not actually increase appreciably after 13,000 tickets were purportedly sold out in seconds. On top of that, we’re in mid-February already; it’s definitely weird that Terminal 5 was set to be completely dark from March 20 through March 31, with the exception of a single show on March 25. And it’s even weirder that no one — no one at all — got public tickets for the MSG show when they supposedly went on sale en masse: the only people who have gotten tickets in the primary market did so on the pre-sale dates or through tickets allocated to American Express.
The fact is that concert promoters, like art dealers, are fiercely protective of the asymmetric information advantage they have over the general public. Bowery Presents, the promoter of these shows, knows full well how many tickets were sold to the MSG show, and when. But they’re not releasing that information, because it’s very much in their interest for everybody to believe that 13,000 tickets sold out in a matter of seconds.
I don’t think that’s possible. Bots are sophisticated, to be sure, and anybody familiar with high-frequency trading on stock exchanges knows how quickly financial transactions can take place electronically. But Ticketmaster is not set up as a high-frequency exchange, and indeed puts up obstacles designed to make it harder for bots to buy lots of tickets quickly.
On top of that, bot-wielding scalpers had no particular reason to believe that LCD tickets would become hugely valuable on the secondary market, given that the band had never played a show of remotely MSG’s size in the past. I can see them buying a few hundred tickets over the course of 15 minutes or so; I simply don’t believe that they bought more than 10,000 tickets in the space of less than 15 seconds. I don’t believe they wanted to, and I don’t believe they’re capable of doing that even if they did want to.
People sympathetic to the band, like Rob Cox, claim that LCD Soundsystem and its promoters didn’t understand the economics of scarcity when they put the MSG tickets on sale. I, by contrast, think they understood the economics of scarcity all too well — and successfully used it to generate buzz and publicity. What really happened here, I think, is akin to the IPO of theglobe.com back in 1998, where the supply of new shares was so tiny that the price soared from $9 to $97 on the first day of trading. In turn, that generated lots of headlines, and ensured that the number of people who had heard of the website increased by orders of magnitude.
Supply and demand for concert tickets aren’t static numbers which then get reflected in prices. There are complex feedback loops here too: scarcity and price mechanisms can feed back into increased demand for tickets. Certainly this story has meant a large increase in the number of people who know that LCD Soundsystem is playing its last-ever gig at MSG in April. It’s surely naive to think that all the second-order effects here were completely unintended.
Michael Hiltzik has a fantastic column on Boeing’s outsourcing disasters in the LA Times; it’s well worth reading the whole thing, complete with a link to a prescient 2001 paper by Boeing technical fellow LJ Hart-Smith.
Hiltzik’s point, which is undeniable, is that Boeing’s outsourcing mania has cost it billions. It’s not a new idea (Reuters ran this special report in January), but it’s rarely been this well expressed:
Boeing’s goal, it seems, was to convert its storied aircraft factory near Seattle to a mere assembly plant, bolting together modules designed and produced elsewhere as though from kits.
The drawbacks of this approach emerged early. Some of the pieces manufactured by far-flung suppliers didn’t fit together. Some subcontractors couldn’t meet their output quotas…
Rather than follow its old model of providing parts subcontractors with detailed blueprints created at home, Boeing gave suppliers less detailed specifications and required them to create their own blueprints.
Some then farmed out their engineering to their own subcontractors. At least one major supplier didn’t even have an engineering department when it won its contract.
Not only was all this forseeable, it was foreseen — not only by the unions, but also by executives. And, of course, the aforementioned Hart-Smith:
Among the least profitable jobs in aircraft manufacturing, he pointed out, is final assembly — the job Boeing proposed to retain. But its subcontractors would benefit from free technical assistance from Boeing if they ran into problems, and would hang on to the highly profitable business of producing spare parts over the decades-long life of the aircraft. Their work would be almost risk-free, Hart-Smith observed, because if they ran into really insuperable problems they would simply be bought out by Boeing.
What do you know? In 2009, Boeing spent about $1 billion in cash and credit to take over the underperforming fuselage manufacturing plant of Vought Aircraft Industries, which had contributed to the years of delays.
The lesson here is that Boeing executives, just like most of the rest of corporate and political America, were incredibly bad at pricing moral hazard and tail risk. Outsourcing is a bit like taking collateral from your repo operation and investing it in subprime credit. Most of the time, you make a small amount of money — and then, occasionally and unpredictably, you lose an absolute fortune. Boeing was picking up pennies in front of a steamroller, and ended up getting crushed.
I do wonder what proportion of corporate “efficiencies” are false ones along these lines. Did Mark Hurd improve HP’s margins by cutting back on R&D expenditure? Or did he sign the company’s long-term death warrant? And of course when Win Neuger’s reach for yield in the AIG securities-lending operation was truly disastrous.
The company now recognizes that “we need to know how to do every major system on the airplane better than our suppliers do.”
One would have thought that the management of the world’s leading aircraft manufacturer would know that going in, before handing over millions of dollars of work to companies that couldn’t turn out a Tab A that fit reliably into Slot A. On-the-job training for senior executives, it seems, can be very expensive.
The sad thing is that this lesson has to be learned the hard way so many times. Can’t anybody else learn from Boeing’s mistakes?
Today’s FT reveals the astonishing amount of money that Irving Picard and other Madoff-related clean-up artists are going to make from the world’s biggest ever Ponzi scheme:
The army of lawyers and consultants helping to recover funds from Bernard Madoff’s $19.6bn fraud stands to earn more than $1.3bn in fees…
The biggest payment is set to go to Baker Hostetler, the law firm where Irving Picard, the court-appointed trustee charged with recouping money for Mr Madoff’s victims, is a partner.
Baker Hostetler has been paid $128m since being appointed in December 2008 and will receive an estimated $603m for its work between 2011 and 2014, according to a letter sent last month by the Securities Investor Protection Corporation to Scott Garrett, a US congressman….
Two other firms, forensic accountants FTI Consulting and restructuring experts AlixPartners, will earn an estimated $334m and $171m, respectively…
The payments to Mr Picard and others have to be approved by a court and will not come from recovered funds but from the SIPC, which is funded by the securities industry.
What’s happening here is that Picard and others are recovering much more money than anybody thought they would, and they’re getting a percentage of their total recoveries. But their money isn’t coming from the Madoff victims, who get all the money recovered. Instead, it’s coming from the SIPC.
This is surely a very welcome development: the numbers are big enough to cause noticeable pain to Wall Street, and maybe encourage banks like JP Morgan to be a bit more forthcoming in future when they start having doubts about fraudsters like Madoff. We can but hope, anyway.
Update: SIPC CEO Stephen Harbeck emails to clarify that the fees are flat fees, based upon time expended; they aren’t based on a percentage of recoveries.
At the end of 1993, Cisco Systems had a market capitalization of $8 billion. At the end of 2010, it was worth $112 billion. It hasn’t paid dividends, which makes things easy: if you want to calculate the amount of shareholder value that Cisco created between 1993 and 2010, you just subtract the former figure from the latter and get an impressive $104 billion. Right? Wrong. In fact, if you go through the history of Cisco’s stock actions year by year, it turns out that the company has managed to destroy $105 billion over the past 18 years. Microsoft and Intel have both destroyed $72 billion, Time Warner managed to destroy $130 billion, and Pfizer destroyed a whopping $188 billion. Four of the top five value destroyers, however, were financial: AIG, GE, BofA and Citigroup between them destroyed a mind-boggling $739 billion between 1993 and 2010, most of it in 2008.
All these numbers come from my new favorite paper, the product of some serious number-crunching at IESE Business School in Madrid. (Update: I missed some small print in the methodology, so while this paper is interesting it’s not quite as interesting as I thought at first. See below.)
Here’s the abstract:
In the period 1991-2010, the S&P 500 destroyed value for the shareholders ($4.5 trillion). In 1991-1999 it created value ($5.1 trillion), but in 2000-2010 it destroyed $9.6 trillion. The market value of the S&P 500 was $2.8 trillion in 1991 and $11.4 trillion in 2010.
We also calculate the created shareholder value of the 500 companies during the 18-year period 1993- 2010. The top shareholder value creators in that period have been Apple ($212bn), Exxon Mobil (86), IBM (78), Altria Group (70) and Chevron (67). The top shareholder value destroyers in that period have been American Intl Group ($-217), Pfizer (-188), General Electric (-183), Bank of America (-170), Citigroup (-169) and Time Warner (-130). 41% of the companies included in the S&P 500 in 2004 or 2010 created value in 1993-2010 for their shareholders, while 59% destroyed value.
How can the S&P 500 destroy $4.5 trillion of shareholder value over a period when its capitalization rose by $8.6 trillion? The answer is that companies issue stock when it’s expensive, rather than when it’s cheap. During the dot-com bubble, Cisco was an M&A monster, going on a massive acquisition spree and nearly always paying in its highly-rated stock. When that stock crashed, it took down with it all the value invested at the top of the bubble, which was many more shares than were oustanding back in 1993. More generally, companies with high-flying stocks are likely to pay their employees with stock or options. That can account for a lot of value destruction if and when the shares fall to earth.
That said, the S&P 500 would have created shareholder value, on a net basis, between 1991 and 2010 were it not for the annus horribilis of 2008, when $5.8 trillion of value was destroyed. In general, the down years are much bigger than the up years: the best year of all was 2003, when $1.7 trillion of value was created, while substantially more than that was destroyed in each of 2000, 2001, 2002, and of course 2008.
This is one of the main reasons why the returns that real individual investors get from investing in stocks are substantially lower than the theoretical numbers that financial advisers love to show you. And why you prefer to get paid in cash rather than in stock.
Finally, I think this paper demonstrates that Apple is a screaming long-term sell right now. No company, bar Apple, has even created $100 billion of shareholder value over the past 20 years, let alone the $212 billion figure that Apple is currently boasting. It’s an extreme outlier, and the downside is enormous: if you buy Apple shares now, there’s $327 billion of downside.
Google, by contrast, is much less of an outlier, having created a relatively modest $5 billion of shareholder value in its time as a public company. Go check out the number for your own favorite stock in the appendix of the paper, which lists shareholder value creation between 1993 and 2010 for all 633 companies which were part of the S&P 500 either in 2010 or in 2004. Most of the numbers — 59%, to be precise — are negative.
Update: Thanks to eagle-eyed commenters for catching something very big here: the paper is measuring risk-adjusted returns, not absolute returns. According to the definitions in the paper, “A company creates value for the shareholders when the shareholder return exceeds the required return to equity”. And the required return to equity is defined as the return of long-term treasury bonds plus a risk premium which seems to fluctuate between about 4% and 5%. Remember that long-term Treasuries did very well indeed over the period in question. So the value-destruction figures here are a bit fictitious: it’s not actual money being destroyed, but rather the hypothetical money that you would have got if you’d invested in instruments yielding about 4.3% over Treasuries. I’d love to see the numbers raw, without the risk adjustment.