Felix Salmon

Perry’s employment record in Texas

Felix Salmon
Aug 15, 2011 20:03 UTC

Paul Krugman has an important column today about Rick Perry’s record of job creation in Texas:

So where does the notion of a Texas miracle come from? Mainly from widespread misunderstanding of the economic effects of population growth…

Texas tends, in good years and bad, to have higher job growth than the rest of America. But it needs lots of new jobs just to keep up with its rising population — and as those unemployment comparisons show, recent employment growth has fallen well short of what’s needed.

The unemployment numbers are interesting, but I thought it would be interesting to look at the employment numbers instead — and to see how employment in Texas compares to employment in the rest of the country. So Nick Rizzo collated the data for this chart, taking employment figures from Google’s Public Data Explorer, and filling it out with population data from the Census Bureau and — for the 2011 population of Texas — the Texas Department of State Health Services. Here’s the result:


The employment-to-population ratio in this chart is lower than the employment-to-population ratio we normally see, because it includes everyone, from infants to convicted felons. According to the figures we have for 2011, 44.7% of the total US population has a job, compared to 43.5% of the Texas population.

And Perry’s record is pretty bad, here: he inherited a ratio of more than 47% in Texas from George W Bush, and has presided over a steady decline ever since — including every year of the Bush presidency bar 2005.

The single most important task facing the US is to turn the employment numbers around and get the employment-to-population ratio rising again. Obama has been bad on this front. But Perry’s decade-long record in Texas is no better.


The chart doesnt take into account the large Hispanic pop which has a higher birthrate and therefor a larger percentage of children who are not in the work force at all but are counted as unemployed for this survey had to look hard to find something to get on perry nice try but no cigar

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Moody’s view of sovereign ratings

Felix Salmon
Aug 15, 2011 19:24 UTC

I’m very late to Adam Ozimek’s interview with David Levey,  the former Director of Sovereign Ratings for Moody’s. Levey makes a couple excellent points about sovereign ratings, starting with this one:

On methodology, things changed in the mid-2000s. Under pressure from regulators and issuers, the agencies were forced to “open the black box” and become much more explicit about their criteria, scorings, weights attached to various factors, etc. There was a tendency to move to a “scientistic”, quantitative, formulaic approach. I tended to resist that (being a great admirer of Hayek). I saw risk assessment as a multidisciplinary, highly qualitative, judgment process involving a varied weighting of factors.

I fear that this is exactly the reason why S&P started coming out with weirdly precise deficit-cutting targets — the “chop $4 trillion over ten years, or we’ll downgrade” phenomenon. Sovereign ratings are always more of an art than a science, and the pressure to become quantitative and formulaic has been deleterious at both major ratings agencies.

Levey also explains how ability and willingness to pay are inextricably intertwined:

Neither willingness nor ability can be defined independent of the other. “Willingness” depends on political calculations of the degree of sacrifice that would be required to make payment, which in turn depends on the financial resources available or easily raised. “Ability” depends on how much additional resources for debt payment the government can “squeeze out” through reductions in spending or increases in taxation — a political consideration. So the relation between them is -to use an old phrase-”dialectical” and the analysis is based on what Adam Smith called “political economy”. This may sound like “scholastic” nit-picking, but the point is vital for guiding the rating decision process.

It is reasonable, therefore, for S&P to keep one eye on debt ratios when it’s judging the US willingness to pay: the higher the amount of debt a country (or any debtor, for that matter) has, the lower that debtor’s willingness to pay becomes. If I only have $5,000 outstanding on the mortgage on my $300,000 home, I’m going to be extremely willing to pay that debt. If I have $500,000 outstanding, then, not so much. But as Levey says, these things aren’t scientific. And it’s silly to try to move from a general principle — the higher your debts, the lower your willingness to pay them — to something spuriously quantitative, like putting a dollar amount on the point at which your willingness to pay will fall.

Levey also says that I’m wrong about the difference between S&P and Moody’s. He’s much more of an expert on this subject than I am, so it’s worth taking his views seriously. But his stated reasons for disagreeing with me are pretty weak. He gives three:

First, S&P “notches” for subordinated debt, meaning that they are taking into account that a default on that debt is likely to have a greater severity than on senior debt.

No, it doesn’t mean that at all. Subordinated debt is more likely to default — that’s what subordinated means.* And because it’s more likely to default, it has a lower credit rating. You don’t need to look at severity in order to give a different credit rating to subordinated debt than to senior debt.

Second, market participants would find ratings almost impossible to use without comparability of meaning. So — in a sense — the markets more or less force equivalence of meaning on the agencies.

Essentially, Levey is saying here that S&P has to do what Moody’s does, since the markets think the two agencies are doing the same thing. I don’t buy it.

Third, if the meanings were that different, there would be a lot more “split ratings” (situations where the agencies rate differently) than there are.

This isn’t really true. The main case in which the difference in methodologies would result in a split rating is a case where there’s a significant risk of default, but where the likely loss given default is zero, and the likely recovery rate is 100 cents on the dollar. This is exactly what we’re looking at in the case of the US sovereign rating, and it applies to entities with US sovereign guarantees as well. But beyond that, it’s rare elsewhere. In general, if an issuer defaults, they’re not likely to pay off their debts in full. And as a result, S&P and Moody’s are likely to have similar ratings.

The ratings could diverge at the other end of the spectrum, too — Moody’s might have a lower rating than S&P, if the default probability were low but the loss given default was likely to be enormous. When does that happen? Mostly in the world of structured credit, where Moody’s had a vested interest in ignoring the fact that recovery values in the event of default were generally zero.

All that said, I suspect that what Levey’s saying here does have some truth to it: S&P is well aware of how its ratings are interpreted by the markets, and does little to disabuse the markets of that impression. I do think that the difference between S&P and Moody’s explains why S&P downgraded the US and Moody’s didn’t. But I don’t think the difference is all that big in their general day-to-day operations.

*Update: Greycap points out, in the comments, that really the meaning of the term “subordinated” is what happens to the debt in bankruptcy: that the claims are junior to other claims after the company has defaulted. This is true. But by the same token, everybody knows this, and lots of companies restructure or otherwise work out their debts “in the shadow of bankruptcy” — essentially trying to replicate the likely outcome of a bankruptcy case without all its myriad associated costs. It’s very easy, in that situation, for subordinated debt to suffer a haircut or become converted to equity while senior debt remains whole.

Update 2: Greycap seems to think that a default on subordinated debt while the senior debt remains whole “arguably has never existed in the history of the world and will never exist until the end of time”. Just off the top of my head, isn’t that exactly what we saw at Anglo Irish Bank?


The test of whether S&P considers their notching of sub-debt to be a PD or LGD issue would be in how they treated it in the default statistics. If they count the default against the rating of the senior debt (even though it remained current), that suggests that the senior debt reflects the PD and notching the sub-debt was due to lower expected recovery. On the other hand, if they count the default against the rating of the sub-debt, then that suggests that they believed they were rating the PD of the sub-debt itself. I don’t see enough disclosure in their 2010 report to be sure which approach they chose.

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Why the NYT paywall isn’t like the FT’s

Felix Salmon
Aug 15, 2011 13:40 UTC

Fred Wilson has nice things to say about my analysis of the NYT paywall — thanks, Fred! — but it’s worth teasing out one area where he and I might differ.

Fred says that the NYT “went with the FT’s model”, and I’ve also heard privately from another person making an impassioned case that the NYT and FT models are basically the same.

But they’re not.

The NYT paywall is so porous that it can be considered to be a genuinely freemium model. If you follow a link to the NYT site, you will never run into the paywall — no matter how many times you do so or how many NYT articles you’ve read that month. If you then want to stay on the NYT site and read other stories there, it’s very easy to do that too: the paywall might appear, but it’s easy to circumvent. (One popular way of doing this: just strip off the extra garbage in the URL which summons the paywall.)

That’s why I likened the NYT paywall to a polite “please keep off the grass” sign, with symbolic low green hoops separating would-be readers from their desired content. If they want to get there, it’s easy to do so; the NYT is just making it clear to them that it would like them to pay for a subscription first. Being both polite and reasonably wealthy, it turns out that hundreds of thousands of nytimes.com readers have done just that.

At the FT, by contrast, the paywall was much less porous from day one, and has been tightened up substantially since then. In fact, with the exception of Google’s First Click Free program, the FT has deliberately made it as hard as it possibly can for non-subscribers to read its content.

The difference between the NYT and the FT, then, is that the porousness of the paywall is a feature at the NYT and a bug at the FT. Yes, both of them have an official meter which counts how many stories you’re allowed to read before the paywall gets thrown up. That’s the crack-dealer model of selling content: give ‘em a little for free, and soon they’ll be begging for more. The free stories you read before the paywall goes up aren’t a porous paywall, they’re an integral part of the whole paywall model.

Put the question this way: when it comes to paywalls, is the FT more like the NYT, or is it more like the WSJ? The WSJ doesn’t have a meter; it has a more old-fashioned system where some articles are free to everybody and others sit behind the wall.

But I’m more interested in how forbidding the wall is, rather than in where and how exactly it’s placed. Both the FT and the WSJ are signed up for First Click Free, which means that both of them are susceptible to the elaborate workaround of copying the headline, pasting it into Google News, and then clicking through from there. Beyond that, both of them basically make it as hard as possible for non-subscribers to read stories behind the wall.

If I link to a WSJ or FT article, I can have no assurance that my readers will be able to read it. The same is true with respect to sharing that article on Twitter or Tumblr or Facebook or even LinkedIn. (The exception is Google Plus, since First Click Free is in effect there.) More generally, if a non-subscriber wants to read a specific story behind the WSJ or FT paywall, it’s very hard for them to do so, compared to the NYT site, where it’s much easier.

That’s why I like the NYT paywall and lump the WSJ and FT paywalls together. Whether there’s a meter or not is pretty much irrelevant, especially considering the way in which the FT has steadily tightened up its meter to the point at which non-subscribers can barely read anything at all. Even subscribers, like myself, find it very hard to read FT content a lot of the time: try following a Twitter link to an FT story on your mobile device, or trying to read an FT story in Flipboard, and you’ll see what I mean.

The NYT paywall is generous to subscribers and non-subscribers alike, and the NYT has managed to keep both goodwill and traffic with respect to its non-subscribers. That can’t be said of the WSJ and FT, who take a much more hostile and adversarial approach to the people who aren’t paying them hard cash. The NYT sees value in remaining accessible to everybody; the FT and WSJ see value in restricting access only to paid subscribers.

Which is why I think it’s fundamentally misconceived to think of the FT paywall as being very similar to the NYT paywall. Rather, it’s at heart the same as the WSJ paywall: a way of restricting content as much as possible to subscribers exclusively. The NYT is a free website with a mechanism for getting readers to subscribe; the FT and WSJ are subscription websites with some content available for free. It’s the NYT model which I love, not what’s going on at the FT.


You make a good point about walls and the message they send. Exclusivity and hostility can lose you future subscribers; moreover, you may alienate potential ones in the present.

This podcast had an interesting part about sacrificing long-term loyalty for short-term gain: http://www.npr.org/blogs/2011/01/26/05/t he_friday_podcast_can_a_publi.html, circa 9:00. I don’t think their market research captured the full spectrum of npr listeners — which is maybe where the difference between t-shirts and media comes in, but that’s a discussion for another time.

Habits and loyalty are like trust. They take time to build, and it has to happen willingly. It’s a cooperative endeavor. Once broken, they require additional efforts to rebuild.

To the commenter above, I share your concern about viable business models. However, I feel the same way about journalism here as I do about primary school teachers. If people need great social status, perks or boatloads of money to do it, they probably aren’t the kind of people you want to see following that calling.

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Whither the M&A scoop?

Felix Salmon
Aug 15, 2011 13:04 UTC

You’ve heard it here and everywhere: Google is buying Motorola Mobility for $12.5 billion. But here’s the media twist to the story: you didn’t hear it anywhere first.

Deal scoops are the most basic currency of business journalism. Once a deal is certain to get done, but before it’s officially announced, an M&A banker on one side or the other (it’s nearly always the bankers, rather than the lawyers or the actual companies doing the deal), tactically leaks news of the deal to a carefully-chosen source.

Virtually everybody wins when this happens. The leak always takes place when markets are closed, so there’s no risk of insider trading on the news. The banker leaking the news gets to control the story, since the journalist isn’t going to call around before publishing it. And the journalist gets a big scoop.

I’ve never been particularly impressed by these scoops: if a piece of news is going to come out in a press release in a few minutes or hours, then getting it first, while markets are closed, has little value to readers. But journalists fight incredibly hard to get them, and financial journalism’s biggest names have been made this way — think Charlie Gasparino or Andrew Ross Sorkin.

But given the value being created for bankers and journalists alike by the existence of the market in scoops, it’s notable when a deal like this one comes along with no advance word at all — not even someone reporting it breathlessly on CNBC five minutes before the press release comes out.

Is there a reason for this dog not barking? It might conceivably be a function of the buyer in this case. Leaks more often come from the buy side, rather than the sell side, and there’s normally a nod and a wink from the acquirer to the banker before they happen. If Larry Page made it clear that he didn’t want such shenanigans going on around his biggest deal ever, then that would probably have sufficed to shut them down.

And then there’s the more general decline of the scoop ecosystem. No longer is it possible to control the way that a story is received by leaking it strategically for prominent placement on the front page of the WSJ or NYT or FT. All those publications will put the news online first, it will instantaneously get disseminated across hundreds of news sites, and the resulting front-page story — if it even makes the front page, seeing as how it’s now commodity news — will be reported out rather than a single-source affair.

Right now, there’s a vacancy in the scoops market: there’s generally been one go-to reporter on the M&A beat, and there isn’t one any more. Steve Lipin gave way to Sorkin, and Sorkin has now largely given up his scoopmongering for grander jobs as a book author, newspaper columnist, website editor, and TV anchor. But maybe Sorkin will be the last of the breed. Mike Arrington still gets a lot of scoops in the tech world, but the big M&A scoops from Wall Street just don’t seem as important any more, thanks largely to the speed of the internet.

Sorkin’s Dealbook was clearly set up to bring together a large number of excellent financial journalists who care about this kind of thing and who can deliver scoops — but it hasn’t done particularly well on that front. Wall Street bankers don’t care half as much as Silicon Valley dealmakers do when it comes to the most important blogs in their area — but they know that the era of the important front-page newspaper M&A scoop is largely over.

So while it’s still possible that someone new will come along and inherit the mantle that Lipin passed to Sorkin, I’m not holding my breath. And maybe that’s a good thing. Because it might free up precious journalistic resources to concentrate on real enlightenment, rather than evanescent exclusivity.


Avoiding scoops is easy: bonus deal teams IB and legal, on news, stock/options not reflecting the deal before it is announced. Then it is in their individual interests to keep quiet and to make sure the others on the deal team keep quiet.

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Felix Salmon smackdown watch, earnings-yield edition

Felix Salmon
Aug 14, 2011 13:47 UTC

The economic historian James Macdonald emails with a very different version of my earnings-yield chart. Instead of going back to 1985, he’s found annual data all the way back to 1920. And instead of using Treasury bonds — a sui generis asset class with its own dynamics surrounding flight to quality and the like — he’s uses the yield on BAA-rated bonds instead. The result is fascinating:


Writes Macdonald:

It is not reasonable to relate earnings yields to T-bonds. They are not comparable investments. The proper comparison is with the corporate bond yields. My preference is not even AAA, since that is quite rarefied, but rather BAA – definitely investment grade but more reflective of the typical corporation and more susceptible to market jitters.

The historical pattern seems to me to be as follows:

  • a twenty-year period from 1920-1940 when bond and earnings yields were more or less comparable
  • a twenty-year period from 1940 to 1960 when earnings yields were significantly higher than bond yields
  • a twenty year period from 1960 to 1980 when the two yields were more or less comparable
  • a twenty-five year period (?) from 1980 to 2005 when earnings yields were significantly lower than bond yields. (I put a question mark, because there is also a major divergence of yields in 2009. However, I take that as a temporary aberration because of the collapse of S&P earnings during the Great Recession thanks to the losses of the financial sector).

Now the two yields are more or less the same. Are we supposed to take that as a signal to sell bonds and buy shares?

I am not at all convinced, at least on the basis of the historical evidence. We may be entering a long period when the two yields track each other. Or we may be entering a period (perhaps to be expected after a major financial disaster) when investors demand a premium yield from shares compared to bonds. In any case, the period from 1985 onwards can scarcely be taken as the historical norm, since, as we know from other statistics, such as long-term PE ratios, shares have been overvalued for almost the whole of this period.

My feeling is that a long-term period when investors demand a premium yield from shares compared to bonds is precisely the kind of period that a long-term investor wants to be putting her money into shares rather than bonds. Again, there are market timing issues here — shares might fall rather than rise for much of that period, especially during times when the premium is rising rather than falling. But if you just go back to basics and look at securities as giving you ownership of an income stream, then it seems perfectly sensible to me to pick the larger stream, given the choice.

If there’s a big risk to this strategy, it seems to me, the risk is overleveraged companies. If companies get in over their head and find themselves unable to make their interest payments, then their equity can be wiped out, and ownership transferred to bondholders. But in this particular economy, I don’t see that as a big risk — certainly not for BAA-rated companies. We saw during the financial crisis that nearly all non-financial public companies had been decidedly conservative with respect to the big debt binge known as the Great Moderation; if you were looking for massive corporate leverage, you needed to look to private equity deals.

And what if we’re just entering another period akin to the 60s and 70s, where the two yields track each other while rising? Again, I think I’d rather be in stocks, if only because they’ll do much better than bonds if and when inflation kicks in.

Finally, there’s the possibility I raised in my original chart — that stock prices are uncommonly cheap relatively to bond prices right now. Which certainly seems to be the case if you think that history began in 1985. If stocks revert to the post-1985 norm of yielding less than bonds, then moving from bonds to stocks at these levels would probably make a fair amount of sense on a mark-to-market basis. As a long-term investment, though, stocks might look a bit less attractive: you’d be less reliant on earnings and more reliant on capital gains to make up the difference.

What really surprises me about Macdonald’s chart, however, is nothing to do with the difference between stock yields and corporate bond yields, but rather the way in which nominal corporate bond yields move very slowly and smoothly. There does seem to be something reassuringly safe and reliable in that orange line. So if your priority is preservation of nominal capital, rather than maximizing your long-term net wealth, there’s something pretty attractive about corporate bonds, too.

Update: I missed this on Friday, but Jake from EconomPic Data has his own version of the chart, using T-bonds but going back even further than Macdonald does. I love this:


What happened in 1970 or thereabouts that this correlation suddenly became so strong, after barely existing before that? Could it possibly be the arrival of Modern Monetary Theory and Modigliani-Miller?


Just came across this – a great post – many thanks for providing this information :-)

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Feces, fascists, and Michael Lewis

Felix Salmon
Aug 14, 2011 03:33 UTC

Kevin Drum doesn’t think much of Michael Lewis’s latest European dispatch for Vanity Fair — and neither do I. There’s precisely one thought-provoking paragraph in the entire 9,600-word article:

One view of the European debt crisis—the Greek street view—is that it is an elaborate attempt by the German government on behalf of its banks to get their money back without calling attention to what they are up to. The German government gives money to the European Union rescue fund so that it can give money to the Irish government so that the Irish government can give money to Irish banks so the Irish banks can repay their loans to the German banks. “They are playing billiards,” says Enderlein. “The easier way to do it would be to give German money to the German banks and let the Irish banks fail.” Why they don’t simply do this is a question worth trying to answer.

Sadly, Lewis doesn’t bother trying to answer that question. Instead, he returns to the running theme of the article, which might be evident if I excerpt a few words from here and there:

excrement – anality – Scheisse (shit), Dreck (dirt), Mist (manure), Arsch (ass) – The Money Shitter – crapping – rear end – toilets – “shit” – “my little shit bag” – laxative – “Purgation-Calendar” – anal – “As the fish lives in water, so does the shit stick to the asshole!” – scatological – “I am like ripe shit, and the world is a gigantic asshole” – sitting on the john – indulgence in fecal imagery – Scheisskerl (“shithead”) – feces – one of his favorite things to do with women was to have them poop on him – filth – coprophilia – The Call of Human Nature: The Role of Scatology in Modern German Literature - bowel movements – ring of filth – shit – Scheisse – splattered by their mud – a men’s bathroom – urinate – sat in the stall – “shit” – crap – crap – “Lick my ass” – “Lick my ass” – anally obsessed – stewing in their own filth – energetic anality – a blowout with prostitutes – anality – “Kackwurst is the term for feces” – ‘shit sausage’ – Bescheissen: “Someone shit on you.” Klugscheisser: “an intelligence shitter” – “you are said to shit money: Geldscheisser” – Die Kacke ist am Dampfen: the shit is steaming – a secret fascination with filth – “Scheisse glänzt nicht, wenn man sie poliert—Shit won’t shine, even if you polish it” – “Scheissegal: it just means I don’t give a shit.” – stick figures engaged in anal sex – simulating anal sex onstage

Which is not to say that there isn’t a sub-theme here. There is:

Nazi – Hitler’s favorite words – Hitler’s doctors – Hitler – the Nazis’ ambition – provincial Nazis – Hitler – Göring’s Air Ministry – Hermann Göring – the only advantage to the German financial system of having no Jews – the new Holocaust Memorial – Jewish Museum – spending decades denying they had ever mistreated Jews – Nazi-era expropriation of shares in the zoo owned by Jews – Hitler’s bunker – German guilt – “the Jews” – there are no Jews in Germany, or not many – “They never see Jews” -When they think of Jews – their victims – terrible crimes – a Jew whose family was driven out of Germany in the 1930s – Aryan – A Jew’s Life in Modern Germany - HOLOCAUST – Nazis – Hitler – A landscape once scarred by trenches and barbed wire and minefields – another Holocaust Memorial

Yes, the article’s about Germany. And, like Lewis’s previous articles on European countries, it’s an attempt to shine a light on the European financial crisis through the lens of national stereotypes. This is a dangerous exercise at the best of times, but in this case Lewis has gone way over the line. His article fails to say anything new or interesting about what happened in Germany during the crisis. And that’s fine, it has a lot of company in that respect. Everybody has an off day. But this essay is worse than that: it forces us to re-examine all of Lewis’s previous articles in the series as well.

Lewis’s articles on previous countries have all been criticized within those countries for precisely the kind of stereotyping which is so pointlessly offensive in this one. Not only has Lewis descended to an extended scatological riff which demonstrates absolutely nothing about the Germans’ propensity to buy subprime-backed bonds; he’s done so while violating Godwin’s Law. (Full disclosure: I’m half-German, so not entirely impartial in this case.)

Lewis is the best writer in financial journalism by some large margin, and much of what he does when reporting and writing his stories is simply unique. His technique is a labor-intensive one: Lewis talks to an enormous number of people, works out what story he wants to tell, and then puts together various tales and individuals he’s discovered over the course of his reporting in the service of telling that story in the most entertaining and compellingly readable way. It doesn’t matter how important you are, or whether you’ve given Lewis an important nugget of unreported news: if it doesn’t help the structure of his story, he’ll happily leave it out.

There are other financial journalists who are excellent writers, albeit not very many of them. Matt Taibbi and the NYT’s David Segal spring to mind. But none of them are willing to subsume news in service of the story to the degree that Lewis is.

This is not, in and of itself, a bad thing. In fact, in many ways it’s admirable. Lewis is an expository journalist by nature, and a master storyteller; he’s not a muckraker or news-breaker. We have far too few storytellers in financial journalism, while there are literally thousands of journalists looking to break incremental pieces of news. It’s clear where Lewis’s value lies — he can explain what’s going on to a broad audience of Vanity Fair readers, and doing so in a way that they love to read. No one else could make them care about Greece’s role in the European financial crisis; Lewis’s article on the country is a veritable master class on how to take a dry and recondite subject and make it thoroughly entertaining.

But Lewis’s incredible facility at storytelling is a powerful tool, and we have to be able to trust the craftsman who wields it. Lewis’s stories tend to be far more deeply reported than they seem at first glance, and in order for us to trust that he stands on the side of the angels we have to be able to trust in his judgment about what exactly the real story is. Because his raw material is extensive enough to support just about any thesis he wants.

And this is why the Germany story worries me. Not because it’s wrong, exactly. Lewis hasn’t suddenly converted to some crazy theory of the European financial crisis which fundamentally misstates what’s going on, or misleads his readers. But when he reaches so readily for the feces and fascists, Lewis does make us question his broader judgment. No honest accounting of Germany’s role in the financial crisis would — or should — include either.

I’m inclined to see the lapse of judgment in this case as being one of style rather than substance, and I continue to be a huge fan of Lewis’s journalism generally. But the lines do blur. Malcolm Gladwell has said that good non-fiction writing “succeeds or fails on the strength of its ability to engage you”, rather than on its necessarily being right convincing. The result, at least in Gladwell’s case — and, for that matter, in Taibbi’s, too — is oversimplification in the service of style. Lewis, with his Germany piece, has done something a bit different: he’s demonstrated so little faith in the ability of his subject matter to be interesting that he’s resorted to the laziest stereotypes of all. You could even say he’s the kind of person who files a polished and prestigious article for Vanity Fair, but who, on closer inspection, turns out to have filled it up with excrement.

Update: Gladwell responds in the comments, to say that while he’s OK with readers being engaged but not convinced, he’s not OK with being wrong.


This is racism pure and simple – an “opinion maker” of Jewish extraction “dumping” his barley concealed animosity against the Germans and trying to pass off the disgusting result as a piece of serious journalism. He is the mirror image of anti-Semites who accuse Jews of degrading society with moral filth – Freud and his theories on “anal fixation” being just one popular example. Just imagine if someone had written this filth about Jews – he would be drawn and quartered, so to speak. In any case, Lewis’ filthy spewings saw a lot more about his own squirming-like-a-toad mind than it does about the Germans. Go to hell, you hater!

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Chart of the day: The great earnings-yield divergence

Felix Salmon
Aug 12, 2011 22:49 UTC


After I wrote my post on Monday about the huge divergence in yields between stocks and bonds, I wondered just how historically unprecedented this divergence was. And now, with the help of this fabulous chart (many thanks to Nick Rizzo, Dan Burns, and Stephen Culp), it’s pretty easy to see: we’re at levels which match those at the height of the financial crisis, and which are otherwise historically utterly unprecedented.

Indeed, from 1985 through about 2002, it was just as common for the S&P earnings yield to be lower than the Treasury yield as it was for the yields to be the other way around. The two tracked each other, and the spread between them almost never moved beyond 2 percentage points either way.

In 2002, everything changed. The spread between the two jumped up to a very high level and stayed there, all the way through the onset of the financial crisis. This was the Great Moderation.

And when the Great Moderation imploded, the spread only widened further. Today, it’s about 7 percentage points. At these levels, it’s almost impossible to see how stocks could possibly be a worse long-term investment than bonds. Yes, earnings can fall. But even if they fall in half, stocks will still yield double what bonds do.

I have to admit that I really don’t understand what’s going on in this chart at all. While any given spike can always be attributed to a fearful flight to quality, that doesn’t explain the decade-long trend.

There does seem to be a feeling in the markets that current earnings levels are somehow illusory — a feeling which long predates fears of a double-dip recession. I’m not so sure about that: while earnings are surely cyclical, in the grand scheme of things corporations seem to be doing much better when it comes to earnings growth than individuals are, and I don’t see that trend reversing itself any time soon.

Even QE2 doesn’t seem to have helped on this front: while it boosted all asset classes, bonds seem to have been the primary recipients of the Fed’s flows, with stocks lagging behind.

So with the explicit proviso that I’m not going to try to explain this graph, I’ll tentatively put forward one hypothesis: that the dot-com bust of 2000-2002 had a much bigger effect on stock-market psychology than we might have thought. It made stock investors realize how fragile stocks really are, and concentrate on the risk that they could fall substantially in price. If you’re think that stocks are going to fall, then it almost doesn’t matter what their earnings yield is — you feel as though you should sell them at any price.

But frankly I don’t really believe it. There’s something more profound going on here; I just can’t put my finger on what it is.

Even without understanding what’s going on in this chart, though, it does seem to say quite clearly that now’s a good time to buy stocks, if only because the opportunity cost of not buying stocks is so enormous. Bonds and cash yield nothing: it’s really hard to see how they can be a better bet than stocks over the medium to long term. Which is not to say that stocks can’t fall, of course: they can. They can fall a lot. I’m not trying to time the market here. But the chart is striking, all the same.


Excuse me for being rude, but who cares. The relationship is irrational as the risks (deliberate plural usage here to denote varied interpretations of the work risk) basis of each is radically different. Maybe try to get closer by comparing the earnings yield to BBB (or take your pick) rated corporate bond yields. Has anybody ever heard of any investor questioning whether Apple or Fedex or BHP is better value than a 10 year t-bond based on the earnings yield?
Maybe the chart is telling you that!

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How the NYT paywall is working

Felix Salmon
Aug 12, 2011 15:19 UTC


When I wrote about the success of the NYT paywall last month, I got a lot of pushback in the comments and on Twitter. Here’s a sample:

“The fact people pay speaks more people’s average techno-illiteracy/laziness about how to change a link address in their browser than anything else.”

“Add ?ref=fb to the base link of any NYT article and the paywall drops, and Felix thinks this is “working”? Huh?”

“After seeing how many ways you can get by the pay “wall” I would say it isn’t working at all.”

But of course the paywall is working — with the emphasis very much on the “pay” rather than on the “wall”.

Yes, the NYT paywall is porous — but that’s a feature, not a bug. It allows anybody, anywhere, to read any NYT article they like. That makes the NYT open and inviting — and means that I continue to be very happy to link to NYT stories. (If you follow a link to the NYT from this or any other blog, you’ll never hit the paywall.)

I’m in England right now, home to both of the sights above: the polite request to “please keep off the grass”, accompanied by tiny iron hoops; and the forbidding walls surrounding the gardens of Buckingham Palace. The former encapsulates everything which people like about England; the latter is the dark and regrettable side of things.

Now imagine that both of the gardens above were open to anybody paying an annual membership fee. The gardens on the left would have many more freeloaders — people who just saunter onto the grass and enjoy the sunshine without paying. The ones on the right would be much more effective in keeping such people out.

But here’s the thing about freeloaders: if they value what they’re getting, a lot of them will end up paying anyway. What happened when the Indianapolis Museum of Art moved to a free-admission policy? Its paid membership increased by 3%. When the Minneapolis Institute of Arts did the same thing, paid membership increased by 33%.

Sales people and business-side executes tend to believe as a matter of faith that if people can get something for free, they won’t pay for it. But all they need to do is look at their own behavior to see how that isn’t true: when they go to a restaurant in a distant town that they’ll never visit again, they still leave a 20% tip. A large segment of the population feels that it’s only proper to pay for something if you’re getting value from it — and if you invite as many people as possible onto your lawn, that’s a great way of maximizing the number of people who get value from it. Especially in a world where your own enjoyment of it doesn’t impinge on anybody else’s.

The fact is that no one subscribes to the WSJ or the FT because of their exclusivity. As a result, the smart thing for both papers to do is to maximize their paying readership by maximizing their overall readership. Instead, both have taken a scared and defensive approach to digital subscriptions, fearing that if their readers can get their content for free, then they won’t pay.

Wonderfully, the NYT seems to have disproved that idea. It’s no philanthropy: it’s a publicly-listed for-profit corporation, run for the financial benefit of its shareholders. But its paywall marks a new model and very promising in getting consumers to pay for content. It’s not a completely free pay-as-you-wish approach: the NYT nudges people quite hard to pay quite a lot of money. But I’d wager that the majority of people buying digital-only subscriptions to the NYT are doing so only after bypassing the paywall at least once or twice. If you hit the paywall on a regular basis and barge past it, eventually you start feeling a bit guilty and pay up. By contrast, if you hit the FT or WSJ paywall and can’t get past it, you simply go away and feel disappointed in your experience.

Historically, when people paid for news, they paid for a newspaper — a physical object which had value to them. That model is still highly lucrative for the NYT, WSJ, and FT. But they’re taking very different approaches when it comes to the digital world. The WSJ and FT are taking a spines-out approach, on the theory that the pain of not reading their content will force people to pay. The NYT is taking a more open-door approach, on the theory that the pleasure of reading its content will be enough to persuade a large number of people to pay. It’s a far more attractive model, and one which is much more likely to attract new young subscribers over the long term.

Nick Rizzo has collated some thoughts on the NYT paywall from people in the key demographic between 25 and 30 years old, all of whom are paying for the digital-only version of the NYT. Here’s one:

I don’t want to have to deal with the dead trees. There are easily a dozen sections in the weekend edition I don’t have any interest in. It just seems wasteful.

The New York Times is my number one source for news and I appreciate the service it provides. I don’t mean to sound like a total goody-goody, and I certainly get around paywalls when necessary, but I think $15/month is a pretty good deal for the amount of enjoyment and information I get from the Times.

If they took the paywall away completely I guess I’d stop paying. I’m not really interested in skirting it, though. I also buy a lot of music, because I like the product, understand the incentives involved, and want its production to continue.

And here’s Rizzo himself:

I’m on the Times website literally all day long. Any work-around to avoid the paywall would still cost me precious minutes. Plus, I feel that maintaining a quality NYT is immensely important to the country as a whole, and I’m happy to play my part. I subscribe to the Weekender (indeed, to the slightly cheaper Sunday-only edition), which is the cheapest possible way to give myself online access. I subscribe to the New Yorker (which has a semi-paywall) and give to WNYC (which, of course, doesn’t) for similar reasons.

It’s worth noting here the way in which people often end up paying for the NYT largely in proportion to their ability to pay. Those who can’t pay, don’t. Those who can afford only the cheapest subscription buy that. Those with comfortable incomes subscribe to the seven-day paper product. It’s a great way of maximizing both audience and goodwill.

Paying for something you value, even when you don’t need to, is a mark of a civilized society. The NYT treated its readers as mature and civilized adults, and outperformed internal expectations as a result. Meanwhile, the WSJ and FT are still treating their readers with mistrust, as though they’ll be robbed somehow if they ever let their guard down a little. It’s a sad and ultimately self-defeating stance, and I hope in future they learn from the NYT’s embrace of the open web, even in conjunction with a paywall.


Wonder if NYT considered the NPR model of voluntary subscription?

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Black swan funds have their day in the sun

Felix Salmon
Aug 11, 2011 11:41 UTC

According to Bloomberg’s Mike Weiss, so-called black swan funds have been doing wonderfully well of late:

Universa, a hedge fund founded and owned by Mark Spitznagel that consults with New York University professor Nassim Taleb, had a 10-fold return this year through Aug. 8 on the capital in its black-swan accounts, said a person familiar with the firm who asked not to be identified because the information is private. Black-swan clients of Pimco, manager of the world’s biggest mutual fund, saw gains this month of as much as 5.5 times the premiums they paid, according to Vineer Bhansali, a Pimco portfolio manager.

Does this mean that I was wrong to be skeptical about such funds back in July? I guess that depends on whether you consider the market volatility of late to be a black swan; I don’t. Maybe what’s really going on here is that I just fundamentally misunderstood the purpose of these funds and what they’re designed to do.

The internal returns being quoted by Weiss are certainly impressive — it’s not easy to set up a fund which can keep its head relatively close to the waterline during quiet months and which can still end up providing 1,000% returns when things get volatile.

That said, the net effect of all this hedging is smaller than you might think:

At funds such as the $4.9 billion Pimco Global Multi-Asset, the insurance program has added 3 percentage points to 5 percentage points of performance this year, according to Bhansali, the chief architect of the firm’s tail-risk management program. The global multi-asset fund, co-managed by Bhansali and Mohamed El-Erian, Pimco’s chief executive officer, is down about 1.1 percent so far this year.

Being down 1.1% this year is a good performance, on a relative basis. But on an absolute-return basis, it’s still negative, in a world where some major hedge funds have posted impressive figures: Och-Ziff’s flagship OZ Master Fund is up 1.2% this year, while Citadel’s two biggest funds are both up around 14%.

The point here is that you get surprisingly little information by looking at the performance of black swan funds in a vacuum, without looking at the broader performance of the people who are making use of them. Most sophisticated investors employ hedging strategies; if they’re invested with Universa, then they’re certain to do less hedging elsewhere in their portfolio. So the real question isn’t what happened to their Universa assets, it’s what happened to their portfolio as a whole, compared to what would have happened had they simply hedged their portfolios internally. And that’s a much harder question to answer.

And we still don’t have any data on what might happen to these funds in the event of a real black swan — something genuinely unexpected, as opposed to a simple bout of market volatility. In many ways, what we’re seeing now is the absolute best-case scenario for these funds: markets bouncing around a lot, with an associated massive rise in options prices, without any real panic surrounding counterparty risk or the future of entire asset classes. For all its volatility, the market has been orderly and liquid throughout, with high volumes, low bid-offer spreads, and none of the crazy quotes we saw during, say, the flash crash.

The black swan funds, then, have done well when faced with what you might call a gray swan — market activity at the extreme end of normal. Does that mean they’d do even better in the event of a real black swan — the kind of tail risk which can wipe out entire portfolios? That’s far from clear: these strategies don’t necessarily scale as you might expect them to. RG Niederhoffer’s tiny $22 million Negative Correlation Fund might be up 5.3% this year, but that doesn’t mean it couldn’t blow up if things got significantly worse.


Talebs whole point is that nothing in the future can be taken for granted. These guys may hedge a lot of types of risk, but a failure of the Options Clearing Corp (which would be a true black swan) would ruin them just like most other derivatives participant.

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