Felix Salmon


Nick Rizzo
Oct 26, 2011 04:23 UTC

Some of today’s favorite links from Counterparties.com:

The IMF is considering getting involved with the EU’s bailout investment vehicle — Reuters

Treasury may soon offer floating-rate bonds — Bloomberg

This chart will be handy in the event the supercommittee fails — Washington Post WonkBlog

Could this tweak to CEO pay have prevented the financial crisis? — The Economist

US consumer confidence is at recessionary levels, whether we’re in one or not — FT Alphaville

A very smart profile of Mitt Romney, focusing on his time at Bain — New York

And a giant Legoman has washed ashore in Florida. No word on what was being explainedBoingBoing

How to make ETFs less risky

Felix Salmon
Oct 25, 2011 19:37 UTC

Harold Bradley and Bob Litan made some very good points about ETFs in their Congressional testimony last week — testimony which Paul Amery today greets as “a mixed bag”. But it’s hard to argue with this:

We have enough history with financial innovations to at least raise questions when we see an innovation growing at very rapid rates. ETFs are no exception. We believe that these instruments may now be undermining the fundamental role of equities markets in pricing securities to ensure that capital is efficiently allocated to growing businesses. When individual common stocks increasingly behave as if they are derivatives of frequently traded and interlinked ETF baskets, then it is trading in the ETFs that is driving the prices of the underlying stocks rather than the other way around.

There’s a tragedy of the commons going on here: for any given individual investor, ETFs make a huge amount of sense. But if individual investors — and a lot of institutions, too — all pile into ETFs en masse, then stocks lose their price-discovery role, and large deleterious effects can start emerging.

For instance, one big reason to buy a market index rather than a handful of individual stocks is that the index provides diversification. But that diversification is disappearing as people pile into ETFs:

High co-movement of securities is not new, often occurring when markets reflect crowd panic or euphoria. What is new, however, is how ETFs decrease diversification benefits, with stocks and sectors worldwide moving together, even when there is no panic. Stocks move together today more than at any time in modern market history with recent data indicating that individual common stock prices that make up the S&P 500 index now move with the index 86% of the time.

Here’s one particularly striking chart:


This isn’t the S&P 500, which has even higher correlations. It’s just large-cap stocks. Which are all moving together in lockstep — much more than they were even in 1987, and more even than they were in the Great Depression.

Amery comments:

It’s common sense that the more investors buy and sell equities via index trackers like ETFs and futures, the higher you’d expect internal index correlations to be. And since ETFs have been growing in importance, the greater you’d expect their impact on index stocks’ co-movements to be.

Researchers at JP Morgan came to similar conclusions last year, arguing that high-frequency trading is also playing a role in boosting internal index correlations.

There’s nothing forcing investors, by the way, to purchase those index trackers where such herd effects are most prominent. You don’t have to buy the S&P 500—you could easily choose an index put together in different ways and featuring different stocks. Arguably, avoiding “overowned” indices should be near the top of a list of any investor’s priorities.

This I find a bit less convincing. As the above chart shows, there are very high co-movements even outside the S&P 500, it’d be hard to find any kind of broad stock index without a high correlation. And if you only get a small benefit in terms of extra diversification, then the costs, in terms of higher ETF fees for unusual instruments, are likely to be higher than the benefits from diversification.

That said, there are lots of people who make money from the huge amounts of cash sloshing into ETFs, and especially from the way in which the S&P 500 ETFs have to rebalance every time the index changes. And the more popular S&P 500 ETFs become, the more we’re all just funneling cash — some 30bp per year, it’s estimated — to those rebalancing arbs.

What is to be done? At the margin, Bradley and Litan’s idea that ETFs should have tighter circuit breakers than individual stocks is a good one. Amery reckons that “it’s important not to leave loopholes where trading in the ETF is stopped, but that in most of the underlying stocks can carry on” — but I don’t see that. If you want to keep on trading individual stocks, that’s fine — just stop the ETF driving their movement.

But fiddling around with circuit breakers won’t make any difference on a day-to-day basis. And cracking down on ETFs more generally risks throwing the baby out with the bathwater. My feeling is that the best thing to do here is simply adopt the kind of financial-transactions tax that the Europeans are talking about — a 0.1% Tobin tax on all ETF trades. That would drive away the day-traders and rebalancing-arbs from the ETF market, leaving it to the buy-and-hold investors that ETFs are very good for. It can’t do much harm, and it could well do quite a lot of good, from a systemic-risk perspective.


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Why Netflix stock is so volatile

Felix Salmon
Oct 25, 2011 17:15 UTC

netflix 2011-10-25.png

Daniel Indiviglio looks at the impressive plunge in Netflix’s stock price, both today and over the past three months or so, and wonders what on earth could have happened in the real world to justify such a plunge.

Even if its stock was overvalued at its July peak, a 74% drop in a little over three months is enormous. Was it really that overvalued? The company may now be undervalued: investors may be overreacting.

Indiviglio’s main point is well taken. The standard view of stock markets is that they’re some kind of objective collective judgment on the fundamental outlook of a company. The company does whatever it does, generating revenues and profits and cashflows and the like, and then the stock market places a present value on those fundamentals.

Under that model, the price action in Netflix makes no sense.

But that model doesn’t reflect the real world. In the real world, many companies — especially ones with high-flying stock prices — become self-fulfilling stock-price-appreciation machines, at least until the party stops.

And what’s happening to Netflix’s stock price has everything to do with Netflix’s stock price, and very little to do with Netflix itself.

Whitney Tilson, famously, was one of many people who went short Netflix at about $180 per share and busted out when it just kept on rising. Netflix, as the chart above quite clearly indicates, was for a very long time a steamroller which would just flatten anybody who tried to short it. And so the shorts went away, bruised, bloodied, and beaten.

Without short interest, there was almost nothing keeping Netflix stock in the realm of sanity. If you wanted to buy it, you needed to find somebody willing to sell it. And with the stock going ever upwards, such people were very hard to find. The stock had its own dynamics, which became increasingly divorced from any corporate fundamentals.

Or, more accurately, the stock dynamics became entrenched within Netflix’s corporate fundamentals. The deals I wrote about yesterday — like paying $30 million per movie for the right to stream DreamWorks’s animated films months after they’re available on DVD — were cheap when they were essentially being paid for with bubblicious Netflix equity. Indeed, insofar as they caused the stock price to rise, they had negative cost to Netflix: the more deals like this that Netflix did, the more valuable Netflix became.

But then the stock started falling, and all those dynamics were reversed. In a normal company with some kind of short interest, a falling stock price is met with shorts taking profits and supporting the price. In this case, the shorts were few and far between, and they too were enjoying the momentum trade. They weren’t covering.

Indeed, short interest started going up, rather than down: all the momentum traders who were happy making money on the way up were equally happy to try to make even more money on the way down.

And suddenly investors started looking at corporate fundamentals, and asking questions about whether streaming operations could ever be hugely profitable for Netflix — or even profitable at all. The dynamics of the rising share price were clear: every time that Netflix looked as though it was making lots of money, the price of the next streaming deal would only go up. Netflix has to buy streaming rights from big-media companies, and those companies are going to extract as much money as they can from Netflix, up to and possibly even beyond the point at which it declares bankruptcy. It’s the big-media companies which have the pricing power here, and now that Netflix has set eye-watering precedents for things like DreamWorks Animation and House of Cards, it’s going to find it difficult to pay more reasonable rates going forwards.

So people with equity in Netflix are in a difficult place. Their company is locked into a model where it pays billions of dollars for streaming rights, while keeping the price to subscribers dirt-cheap. That’s a model which on its face looks much more attractive to the content creators than it does to Netflix. And it’s very hard to place a value on the permanent equity of Netflix in that kind of dynamic. When it was going up, it was going up. But now it’s crashed so dramatically, no one has a clue where Netflix stock should be trading, or even whether Netflix — having largely abandoned its DVDs-by-mail business model — even has a viable model at all.


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Market failure of the day, Connecticut commuter department

Felix Salmon
Oct 25, 2011 04:40 UTC

Shelly Banjo’s article about the multi-year waiting lists for parking spots at Connecticut train stations is going somewhat viral, for good reason:

The waiting list for a Fairfield Parking Authority permit has 4,200 people and stretches past six years…

“It’s like season tickets to the Giants—even when you’re dead they get passed down to your children,” said Jim Cameron, head of the Connecticut Rail Commuter Council…

Connecticut’s parking crunch is, in large part, a problem of supply and demand: More than 60,000 commuters head toward Manhattan on Metro-North’s New Haven train line on weekdays, but transportation officials say stations have public parking for nearly 20,000…

John Eck, a former television executive from Fairfield, kept his permit after he left his job last spring—”just in case” he needed to start commuting again.

“You hear horror stories of people missing the renewal deadline and losing the permit in other towns,” Mr. Eck said. “I wouldn’t give it up for anything.”

Eugene Colonese, the transportation department’s rail administrator, said the task force “came to a certain point and well, stopped its work for a little while.”

He said the department is still “looking for the best way to get commuters to stations, a balance we think will be between building more transit-oriented development, looking at shuttles and other public transportation, as well as parking improvements.”

The parking lot at Fairfield train station is big enough for 1,053 cars; the station sees 2,942 people, on average, ride in to NYC, and the waiting list now has 4,278 names on it. These are all big numbers. The price for a spot, however, is low: just $340 per year. Obviously, that’s well below market, and causing all manner of problems. But there’s another number that’s lower still:

We recently spoke to Director of the Fairfield Parking Authority, Cynthia Placko…

Placko told us there isn’t room for many more than the 24 bike lockers that are already there, and those are totally filled.

My guess is that it really isn’t all that hard to take the space given over to 1,053 parking spots and use it effectively to house transportation for 2,942 people. Unless, that is, those people are all taking up the space of some enormous SUV.

In a place like Fairfield, it’s hard to raise the price of parking so much that you start to incentivize car-sharing directly. So here’s my proposal: rip out a bunch of car spaces, and replace them with covered, secure parking for bicycles and scooters. Maybe motorbikes, too. Surely that’s an obviously better way of getting commuters to stations than giving them each a couple of hundred square feet of massively underpriced prime Connecticut real estate, and then acting shocked when they flock to the opportunity.

Update: Fairfield could even buy back parking slots for more than they were sold for, and convert them to two-wheeled parking. Continue to do that until there’s one empty two-wheeled parking space. And then auction off the rest to the highest bidders.


A parking garage is about $4M to build. That’s only $1k per person in the queue.

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Nick Rizzo
Oct 25, 2011 00:55 UTC

Most Greek bailout money has gone to pay bondholders — The Washington Post

The EFSF could become more or less an insurance company — The New Yorker

“If you can show correlation [of greater than zero] then you can buy sovereign CDS” — IFR

Roubini: European policy makers are “hell bent to commit growth harakiri” — CNBC

Sarko to Cameron: “You have lost a good opportunity to shut up.” — The Guardian

The moral case for NGDP targeting — Interfluidity

Already lean US manufacturers could cut further — WSJ

Rhode Island: tiny state, huge debt problem — NYT

Parking passes are an alternative asset class in Connecticut’s Gold Coast — WSJ


I bought 1000 shares of Netflix at $300 because I thought it would continue to rise forever. Now I’m underwater. Can I have a taxpayer-funded bailout, please? If I don’t get one soon, I’ll be in serious financial trouble. You wouldn’t want me to have to declare bankruptcy over a minor error of timing, would you? That wouldn’t be fair!

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Netflix and the economics of nonrival goods

Felix Salmon
Oct 24, 2011 22:14 UTC

Netflix released its third-quarter results this afternoon, showing net income of $62 million, down slightly from the second quarter’s $68 million. And things are going to get much worse before they get better: “We expect to report a global consolidated net loss,” the company said, in the first quarter of 2012. Maybe the company shouldn’t have spent $40 million, over the course of the third quarter, buying back 182,000 shares at an average price of $218 apiece. (In the wake of today’s results, they’re trading in the $80s.)

In hindsight, it’s pretty clear that Netflix CEO Reed Hastings let the bubblicious stock price — it briefly topped $300/share at the beginning of the quarter — go to his head. The company was swimming in money! And so, in September, Hastings signed a deal to pay $30 million per movie for everything that DreamWorks creates, in return for the right to stream those movies a few months after they’re released on DVD. It’s known as the “pay-TV window”, and in order to wrest those rights from HBO, Netflix had to outbid HBO, which was reportedly paying something in the neighborhood of $20 million per movie.

It wasn’t even the first time that Netflix went head-to-head against HBO in a bidding war: Hastings says that HBO was an underbidder back in March, when Netflix won the exclusive rights to TV series House of Cards. And in the case of the DreamWorks deal, remember that Netflix already gets all those DVDs the day they come out, long before streaming will be allowed. The $30 million per movie was just for the Netflix customers who have streaming and who either don’t have the DVD service, or who want to watch the movie but haven’t got around to watching it on DVD yet.

A lot of ink has been spilled over Netflix’s decision to separate its DVD and streaming businesses, and to increase its prices sharply. Those decisions are, surely, the proximate cause for its torrid present. But the big-money deals show the same amount of arrogance, with even less business justification. It’s obvious why companies raise prices: they think they’re going to make more money that way. But why would Netflix spend hundreds of millions of dollars preventing movies and TV shows from being shown on HBO? That’s much less obvious.

When he’s on the record, Hastings loves to say that his core market is simply people who want “unlimited streaming for $8 a month and a vast catalog”. Movies and TV shows are nonrival: if all he’s interested in doing is maximizing the size of his catalog, then there’s no need for Hastings to exclude HBO from running the exact same content. But flush with a soaring stock price, Hastings decided that he was willing to pay eye-popping sums of money to turn his nonrival good into an excludable good: if he has it, then HBO can’t have it too.

I can see why people might want to spend small amounts of money to do that. A certain part of Netflix’s actual and potential subscriber base has HBO, and some of those people will decide that HBO is good enough for them and that they don’t need Netflix as well, and maybe if Netflix keeps House of Cards from HBO then some of that subset will decide to subscribe to both, and Netflix will get extra subscribers. But there’s no way the economics can be worth the kind of sums being bandied about here.

Indeed, the whole DreamWorks deal, in particular, seems Pareto sub-optimal for all concerned. Wouldn’t all three parties have been better off if DreamWorks had agreed to license its movies in the pay-TV window to both HBO and Netflix? If Dreamworks got, say, $15 million from HBO and $25 million from Netflix, then DreamWorks would have made an extra $10 million per movie, while both HBO and Netflix would have gotten the movies for $5 million less each than they were willing to pay.

My guess is that it’s HBO which prevented such a deal from happening — it’s owned by Time Warner, which has its own interest in preserving big-media monopolies as a matter of principle. But I doubt that Netflix fought very hard to abolish the exclusivity provision — no matter how much money it was spending on content, its market capitalization was rising even faster, so the market was saying that it was doing something right.

Now, however, things are different. The market doesn’t trust Netflix to run itself efficiently and effectively any more, and deals like these are going to be scrutinized a lot more closely. As a result, I suspect Netflix will be much more open to sharing content with Time Warner than it has been up until now. Whether Time Warner is in any mood to reciprocate, however, remains to be seen.



I think there’s a key point that you’re missing here with exclusivity, and that’s Netflix’s rising competitors beyond HBO. Netflix wants exclusivity not because it wants to prevent HBO from airing, but because it wants to prevent Amazon Prime and other rising competitors in the streaming business from ALSO carrying that good. At a time when customers are less loyal to Netflix than they were before, being able to market themselves as unique from their competitors is important.

Each exclusive contract they get differentiates themselves from ANYONE who wants to enter into the market (and now many companies are), and helps them maintain their market share.

Now, I’m not saying it’s still a smart business deal at the price they paid, but it’s certainly defensible for many legitimate business reasons you don’t address.

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Obama’s pathetic refinancing initiative

Felix Salmon
Oct 24, 2011 19:13 UTC

HARP II is being announced with great fanfare today:

Across the country, nearly 11 million owe more than their property is worth.

Millions of these people have done everything right. They’ve paid all their bills and kept current on their home loans. But right now, they’re stuck with higher payments because their mortgages are underwater. They’re not eligible to refinance because the decline in home prices have made their property worth less than what they owe. And that’s a problem President Obama knows must be addressed…

Today, President Obama is taking action.

Sounds impressive, eh? It is, until you read the official FHFA press release. At which point you learn that

  • If you’re a homeowner whose mortgage isn’t owned or guaranteed by Frannie, you’re out of luck.
  • If your mortgage was sold to Frannie after May 31, 2009, you’re out of luck.
  • If you want to get out of negative-equity hell by doing a principal reduction, you’re out of luck.
  • If your bank doesn’t feel like participating, for whatever reason, you’re out of luck.

All of which is likely to result in not-very-much, as the FHFA itself concedes:

For many reasons it is very difficult to project the number of mortgages that may be refinanced under the enhancements to HARP, including the future path of interest rates, borrower willingness to undertake a refinance transaction and the number of lenders and servicers who choose to offer the program. Given current market interest rates, our best estimate is that by the end of 2013 HARP refinances may roughly double or more from their current amount but such forward-looking projections are inherently uncertain.

First, by the end of 2013? Never mind mortgage relief now, we’ll try and get you mortgage relief in two years’ time?

Secondly, the current pace of HARP refinancings is pathetic. This chart comes from the FHFA press release, and it shows that over the most recent four months for which we have data, we’ve been managing to do less than 30,000 HARP refinancings a month. And in the 28-month history of HARP, we’ve managed a grand total of 894,000 HARP refinancings, which works out to about 32,000 per month. Interestingly, the chart ends at August 2011, which means it represents exactly half of the total timeframe from the beginning of HARP to the end of 2013.


In other words, the FHFA is projecting that the pace of HARP refinancings won’t increase at all as a result of this plan. We’ll still average out at about 30,000 per month — maybe a bit more, maybe a bit less, but you’re never going to make a dent in the mountain of 11 million underwater mortgages at that rate.

This whole exercise is so obviously pathetic that even above-the-fray central bankers are sneering at its inadequacy. Here’s NY Fed president Bill Dudley, today:

Problems in the housing market are a serious impediment to a stronger economic recovery…

Obstacles to refinancing and access to credit for home purchases are limiting the support provided by low rates to house prices and consumption. Meanwhile, the large supply of foreclosed homes for sale—and the prospect that unemployment and negative equity will continue to feed the foreclosure pipeline—continues to put downward pressure on home values. The risk of further house price declines in turn discourages would-be buyers from entering the market.

Continued house price declines could lead to even more defaults, foreclosures and distressed sales, undermining wealth, confidence and spending. Breaking this vicious cycle is one of the most pressing issues facing policymakers…

Stabilizing the housing sector is particularly important because housing equity is an important part of household wealth. This calls for a comprehensive approach to housing policy, starting with an urgent effort to remove the obstacles that make it difficult for all borrowers to refinance at today’s low mortgage rates, but extending beyond this to tackle other problems weighing on housing.

The best that Dudley can bring himself to say about HARP II is basically that it’s a start. Most importantly, it doesn’t do principal reductions — if you’re underwater when you get your HARP refinance, you’ll be underwater afterwards, too. The FHFA itself, in its press release, helpfully points out that for someone with a loan worth 25% more than their house, they won’t start building equity in their home for ten years if they refinance into a 30-year fixed-rate mortgage.

But the sad fact is that anything more substantive than this is likely to require Congressional approval, and therefore be a political non-starter between now and November 2012. The government’s done almost nothing to address the housing mess, and will continue to do almost nothing for the foreseeable future. Which, as Dudley says, bodes very ill for the economy as a whole.


Wow, that last statement would make you the ultimate 21st centurty political illiterate!

First, whether loans are recourse or non-recourse is a matter for each individual state. Only 12 states are non-recourse. Secondly, if the loan has been serviced on time by the borrower for the past 12 months, and they’ve made it through the recession this far, I wouldn’t worry about the lack of putbacks. The damage has been done, and whatever fallout you’ve seen is all she wrote. It’s ALMOST 2012- there’s been more than enough time for a shakeout. If the borrower has been paying on time at this stage, its more than a good bet that the loan was originated properly.

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The unhelpful lionization of small business

Felix Salmon
Oct 24, 2011 14:11 UTC

Jared Bernstein has the wonky version in the NYT, but Jim Surowiecki has the soundbite:

Small businesses are, on the whole, less productive than big businesses, and though they do create most jobs, they also destroy most jobs.

Both of them are making the important point that high-flying rhetoric about the importance of small business is much better politics than it is policy. We’ve been hearing a lot about the individual 99% of late; here’s the corporate 99%, from Bernstein.

New research by the Treasury Department finds that small businesses — defined as those with income between $10,000 and $10 million, or about 99 percent of all businesses — account for just 17 percent of business income, and only 23 percent of them pay any wages at all.

The facts of the matter are stark: larger businesses are more productive (this will come as a shock to anybody who spends most of their life in meetings, but it seems to be true), and they even create more jobs, once you control for firm age. Or, to put it another way: it’s not small businesses which create jobs, it’s startups. Here’s the chart, from this paper by Haltiwanger, Jarmin, and Miranda (HJM):


The statistic that small companies create the most jobs comes from the purple line. But firms mean-revert when it comes to size: as they fluctuate in size over time, they tend to add jobs when they’re smaller, and lose jobs when they’re bigger, and even if they add no jobs overall, that still makes it look as though smaller companies add more jobs.

If you control for mean-reversion effects and look at a firm’s average size, the effect seen in the purple line becomes much less pronounced, and you get the green line instead.

And then look what happens when you add age controls — that is, when you control for the fact that younger companies are more likely to create jobs than older companies. A small family business which has been around for decades is unlikely to be an engine of job growth; meanwhile, large young companies (think Groupon) can hire extremely quickly.

Once you adjust for company age, you get the blue line in the chart — small companies actually lose jobs, on average, and it’s not until you get to about 500 employees that they manage to create any jobs at all.

Here’s Bernstein:

The big story here is that startups—which can only grow at first but which also have high death rates—play an important role in these dynamics. They’re small at first, and many perish—about 40% of the startups’ jobs are lost through firm death after five years. But if they survive, they will generate significant job growth (HJM: “conditional on survival, young firms grow more rapidly than their more mature counterparts”).

This finding and the flip of the lines in the figure when the proper controls are applied have important policy implications. Once we account for the startup effects, small businesses, per se, are not the engines of job growth they claim to be.

The policy implication here is that if you want to create jobs, you’re much better off encouraging startups than you are bending over backwards for small businesses, most of which are reasonably long in the tooth. And the interests here do diverge, although of course there are overlaps.

For me, the most important difference is the degree to which the two groups are reliant on a social safety net. Precisely because most startups fail, the founders and employees at such shops need to be able to know there’ll be someone to catch them if they fall. The success of Silicon Valley can be attributed in large part to a culture where people who have worked and failed at a startup are extremely employable. But on a national level, there are good reasons why we would want to move towards the Norwegian model.

Finally, it’s worth resuscitating this classic Kinsley column from 2008: the fact is that some of the richest members of the 1% are small business owners, while many of the hard-working 99% are in fact large business owners.

Big businesses are not owned by big people, and small businesses aren’t necessarily owned by small people. The typical shareholder in a big business is a worker in some other big business whose pension fund has chosen to invest in that company. Or a retiree who has bought this stock as his or her nest egg. Or it’s somebody’s 401(k).

So the next time a politician lionizes small business owners, remember that you are in fact a large business owner. And that small business, while it sounds romantic, isn’t nearly as important as the political rhetoric tends to make it out to be.


Commuting distance, time and rising cost of employees to reach the bigger employers must be having its effect on employees of the big box stores and other larger firms.

I live in a rural area where all the major big boxes are located in two of three regional cities that have small to middle sizes populations (30,000 to under 200,000). From where I live, commuting distance to the nearest is about a 50 mile round trip. To the farthest, it is about 150 miles RT. That eats into a low wage job quickly.

The town I live in is comprised of mostly small businesses but they are accessible within ten miles. There are only two large employers. One is a chain supermarket and the other is a subsidiary of a European manufacturer. It pays starting wages somewhat higher than locals, and as Felix notes, the locals are not large employers or good paying either. The super market put several smaller groceries out of business over night. The big manufacturer pays some benefits but isn’t generous. I think only management gets any benefits in the supermarket and the pay for most in near minimum wage. The local small businesses seem to hire mostly part timers.

There are several small scale manufacturers within a fifty mile commute south of here. Some of them have been around for decades and some for at least 50 years, I think. And there are several smaller manufacturers of lumber products, sand and crushed stone, some pre-cast concrete products and related building materials in the next town.

What difference does it make to lionize small firms of not? The fact on the ground say that the small employers are more numerous but no amount of praise is going to make them grow. But now, if either of the two big employers go under, the lower wage employees and a large part of the town would be out of luck. The town would have to live of the property tax from some well-heeled homeowners. Its small “downtown’ intersection is made of of four building and only one is occupied.

If fuel costs go up dramatically, the economic sense or even the possibility of working for the distant big firms is going to wither and there will be no room for those job seekers locally. Even the big town employers could face problems with long distance employees who will find their budgets erode just to get to work.

This country was designed for the private automobile and cheap fuel. High fuel costs will have disastrous consequences, especially for outlying suburban and rural areas. And there will be no cheap fuel no matter what anyone does. Cheap fuel makes the distances between towns and cities seem smaller and expensive fuel will have the opposite effect. There are no “emergency management” plans for that problem because I doubt anyone has given the possibility that fuel costs could cripple the country gas could much thought. All the wars in the ME are doing is transferring the costs of fuel security to the federal level and raising the price at the same time.

A possible RX for this difficulty would be to adopt some of the principles of what has been called “the New Urbanism” that tires to create mixed-use neighborhoods that incorporate residential, employment and institutional uses within walking distance. But the real estate collapse will make that a difficult fix now. Many of those most in need of more sensible housing within an easy commute of employment, will not be able to sell their underwater homes without a loss.

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Nick Rizzo
Oct 21, 2011 22:42 UTC

Who’s ready for six days of EU debt bickering? — Bloomberg

German newspapers: not such big fans of a leveraged EFSF — Der Spiegel

France could definitely lose its S&P AAA rating. Welcome to the club — Bloomberg

Gordon Brown’s plan to fix the EU. Because he’s exactly who we want in a crisis — Reuters

The Fed might once again buy those mortgage-backed securities no one wants — WSJ

Physicists graph 1300 “super-connected” companies that dominate the world — NewScientist

Steven Schwarzman gives a surprisingly funny speech — Dealbook

A glorious, very very long Bess Levin headline — Dealbreaker

All these links, and many more, can be found at Counterparties.com


Heard on the radio today…

When asked prior to their wedding whether they would prefer a $30k wedding bash (roughly the average cost) or a $30k downpayment on a house, most brides preferred the big party. Once married, when the same brides were asked again, most wish they had taken the downpayment. This suggests a very basic disconnect in the way we are wired?

On the same show, an individual with substantial retirement savings, a fully-funded 529 plan, and a debt-free house was advised to borrow against the equity in his house “as long as the proceeds are invested in a diversified bundle of ETFs, not simply the stock market”.

I understand that rates are very low, however this advice essentially amounts to loaning yourself money (at a profit to the banking intermediary), with that simple fact buried in an investment tangle that neither the individual nor the advisor fully understands.

Is it better to have $400k in assets, wholly invested in stocks, or $500k in assets, invested 80/20 in stocks/bonds, offset by $100k of borrowing? The latter is certainly riskier — when you borrow against your home equity you risk losing your house if your cash flow wilts. Moreover, the expected return on the latter course is weaker, since low bond returns are below the present low mortgage rates. It only makes sense to borrow if you wish to bet on interest rates rising, and in that case you won’t be buying broad-market ETFs with the proceeds.

Especially ironic that the caller described himself as “highly risk-averse” and yet was advised to leverage his finances anyways.

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