Opinion

Felix Salmon

Chart of the day, Apple valuation edition

Felix Salmon
Nov 28, 2011 16:39 UTC

Screen-shot-2011-11-27-at-3.13.22-AM.png

Andy Zaky at Bullish Cross has a great post on Apple’s valuation, showing the astonishing degree to which the market is discounting the value of a dollar of Apple’s earnings today, compared to just two years ago. Back then, it was worth $32; now, it’s worth just $13. In the eyes of the market, Apple earnings are worth less than those of Cisco, Comcast, IBM, or AT&T, and are worth just 13% of the earnings of Amazon.

All of which raises the obvious question: why is Apple trading at such a seemingly depressed level? I have a few ideas, none of which are particularly compelling.

  1. It’s run out of buyers. The Apple bull run has been going on for so long, at this point, that anybody who wanted to buy it has bought it already. And they’ve done pretty well by doing so. If they want to rebalance so that they keep their Apple holdings constant as a percentage of their total portfolio, they’re more likely to be selling than they are to be buying.
  2. We’re all long Apple already. Apple is now firmly ensconced in its position as one of the two most valuable companies on the US stock market, in a world where ETFs and index funds are only getting more popular. As a result, if you’re long the S&P 500, you’re long Apple in quite a big way. And a large amount of the trade in Apple is going to be index-arbitrage trading. This is inevitably going to increase the correlation between Apple and the S&P 500. And when the S&P 500 has much lower earnings growth than Apple, that’s going to act as a drag on Apple’s share-price growth.
  3. The headline share price is high. This shouldn’t matter, but it does. Small investors feel a bit weird about spending $2,500 on Apple stock and getting the grand total of seven shares in return. And the high share price sends a message to bigger investors, too: it says that Apple isn’t in the business of managing its share price, and is not about to engage in shenanigans like stock buybacks. Indeed, the market shouldn’t even expect a dividend any time in the foreseeable future, despite the fact that Apple clearly has more cash than it knows what to do with.
  4. The headline market capitalization is high. When a company is worth $340 billion, a 10% rise in the share price means that the stock market has created $34 billion of new wealth. Which is harder than creating $3 billion of new wealth.
  5. The appeal of the mean-reversion hypothesis. Apple can’t go on increasing its rate of earnings growth forever; indeed, it can’t even sustain its current level of earnings growth very long. It’s so big, and has come so far, and is making so much money, that at some point the only way to go is down. This is true on a conceptual level, but I don’t think it’s true on a practical level: Apple’s market share is still pretty small in the US, and positively tiny in the rest of the world. There’s a lot of growth potential left in this company, as smartphones increase their global penetration and as more people move from Windows to Macintosh.
  6. Steve Jobs is dead. Apple’s p/e ratios started shrinking at about the same time that Jobs did, and all the hagiographic attention on how unique Jobs was only serves to remind us that he’s not around any more. If the next generation of Apple products is a success, people will still give Jobs the credit, and worry that Tim Cook won’t be able to replicate Jobs’s achievements. It’s going to take a long time before Cook can truly own the company and come out from Jobs’s shadow; in the meantime, investors are naturally going to worry that the glory years are over.
  7. Apple’s earnings come from the frothiest, most disposable part of consumer income, which is the first part of consumer spending to go away if and when the economy heads south. As such, Apple’s more vulnerable to an economic downturn than most of its peers.
  8. There isn’t a real bear case for Apple: the closest thing I can find is all technical-analysis astrology. And the way that markets work, stocks are much more likely to rise when people are bearish than when they’re bullish. No one seems to think that Apple is actually overvalued; indeed, analysts are ratcheting up their earnings forecasts at an astonishing pace. Here’s a table from Bill Maurer:

eps.tiff

Estimates are up 12% over the past 90 days for the first quarter of 2012, and they’re up 7.5% over the past 90 days for the full year. This also helps explain the compression in forward p/e ratios.

What’s certain here is that the market simply isn’t rewarding Apple for its astonishing level of earnings growth of late. Which is weird, since that kind of earnings growth really wasn’t priced in a couple of years ago. Zaky’s convinced we’re seeing a market failure here, and I’m not convinced he’s wrong. But I’d be happier if someone could persuade me that there’s actually a good reason why Apple earnings seem to be worth so much less than so many of Apple’s less-successful peers.

COMMENT

Well put fifthdecade, exactly what I believe is the real reason for AAPL low P/E — the big fund managers really don’t understand Apple, they still remember the insanely overpriced Mac of the 80′s losing out to MS and think that Apple will be wiped out by the new MS’s : Google Android and Amazon Fires. What’s wrong with actually trading on fundamental facts instead of complete guesswork of we’re Apple will be years from now. After all if Apple ‘s fundamentals based on hard facts start slipping it only takes a few seconds to make a trade, but the fundamentals so far show plenty of continuing growth.

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Chart of the day, Morgan Stanley bailout edition

Felix Salmon
Nov 28, 2011 04:55 UTC

stanley.tiff

Ladies and Gentlemen, this is what a lender of last resort looks like. What you’re looking at here are three lines. The black line is Morgan Stanley’s market capitalization, which tends to hover in the $40 billion range but which fell as low as $9.8 billion in November 2008. The orange line is the amount that Morgan Stanley owed to the Federal Reserve on any given day — an amount which peaked at $107 billion on September 29, 2008. And the red line is the ratio between the two: Morgan Stanley’s debt to the Federal Reserve, expressed as a percentage of its market value. That ratio, it turns out, peaked at some point in October, at somewhere north of 750%.

Many congratulations are due to Bloomberg, for extracting this information from the Fed after a long and arduous fight. It couldn’t have come at a timelier moment: if the ECB wants to avert a liquidity crisis, charts like this give a sobering indication of just how far it might have to go, and how quickly it might have to act.

On September 16, 2008, Morgan Stanley owed $21.5 billion to the Fed. The next day, that number doubled, to $40.5 billion. And eight working days later, on the 29th, the bank’s total borrowings from the Fed reached $107 billion. The Fed didn’t blink: it kept on lending, as much as it could, to any bank which needed the money, because, in a crisis, that’s its job.

The Fed likes to say that it wasn’t taking much if any credit risk here: that all its lending was fully collateralized, etc etc. But it’s really hard to look at that red line and have a huge amount of confidence that the Fed was always certain to get its money back. Still, this is what lenders of last resort do. And this is what the ECB is most emphatically not doing. I find it very hard to imagine the ECB lending some random European investment bank €100 billion just for the sake of keeping liquidity flowing.

And it’s frankly ridiculous that it’s taken this long for this information to be made public. We’re now fully ten months past the point at which the Financial Crisis Inquiry Commission’s final report was published; this data would have been extremely useful to them and to all of the rest of us trying to get a grip on what was going on at the height of the crisis. The Fed’s argument against publishing the data was that it “would create a stigma”, and make it less likely that banks would tap similar facilities in future. But I can assure you that at the height of the crisis, the last thing on Morgan Stanley’s mind was the worry that its borrowings might be made public three years later. When you need the money, and the Fed is throwing its windows wide open, you don’t look that kind of gift horse in the mouth.

Every time the Fed fights tooth and nail to prevent certain information from being made public, and loses, there’s a certain feeling of anticlimax: we get the information, and ask what on earth is so dangerous about normal people knowing it. The Fed is one of the most vital and least trusted institutions in America, and there’s a reason why a book called End the Fed is still riding high in the Amazon charts, more than two years after it was published. If the Fed wants to get Americans back on its side — and it needs to get Americans back on its side — then it will have to stop fighting these silly battles against transparency. Especially since the release of this data has a lot to teach the Fed’s counterparts in Frankfurt.

COMMENT

“The Fed didn’t blink: it kept on lending, as much as it could, to any bank which needed the money, because, in a crisis, that’s its job.”

The United State’s central bank, “the Fed”, has a very strong motive for lending to its member banks as much as they want to borrow. The member banks own all of the common stock shares of the Fed! And the member banks receive an enviable 5% fixed annual dividend rate on their investment. And they essentially choose all the Fed directors, although they play a charade of recommending their choices to the U.S. President first. No wonder the Fed “kept on lending, as much as it could, to any bank which needed the money”.

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The problematic charitable-donation tax deduction

Felix Salmon
Nov 28, 2011 02:11 UTC

David Kocieniewski has a long article about Ronald Lauder as sophisticated consumer of tax-avoidance advice, who has managed to become worth somewhere north of $3 billion even as he’s given away hundreds of millions of dollars to charitable causes. (In 1988 he was worth less than $250 million; he inherited a lot of money from his mother in 2004, but today his stake in Estee Lauder constitutes only about one fifth of his net worth.)

Kocieniewski’s article raises a salient question: should the tax deduction for charitable contributions be abolished, capped, or otherwise profoundly reworked? President Obama’s jobs bill includes an idea he’s been unsuccessfully pushing ever since he became president: that the deduction for charitable giving be capped at 28%, even if your top marginal tax rate is 35%. According to a recent paper from the Center on Philanthropy at Indiana University, this modest tweak to the tax code would produce about $20 billion per year for the public fisc, while reducing total charitable giving by about $2 billion per year. That seems like a great idea to me, whether or not the government uses some of the proceeds to support the worthy charities which lose out.

Among those worthy charities, however, I would not include the Neue Galerie. It seems that Lauder has not actually donated his $135 million portrait of Adele Bloch-Bauer to the gallery; if and when he does, however, he’ll be able to deduct the full amount from his taxes at the top marginal rate of 35%, and thereby reduce his tax bill by more than $47 million. (If he can persuade the IRS that the painting has risen in value since he bought it, the deduction would be worth more still.)

Put another way, the government will spend $47 million so that Ronald Lauder can transfer a painting from his own ownership to that of a museum he controls. The painting doesn’t even need to be moved into the museum: it’s there already, and has been there since the day the museum opened. As far as the public and the art world are concerned, nothing will have changed — but as far as Lauder is concerned, he has a “reduce your tax bill by $47 million any time you need to” card just sitting in his back pocket.

There is very little public policy served by giving Lauder such a card. At the margin, does it make him more likely to open up a lovely museum of early 20th Century German and Austrian art in a Fifth Avenue mansion? Possibly. But the connection is tenuous enough that it’s hard to have any conviction in. And two things are undeniable: no one but Ronald Lauder will ever donate a $100 million painting to the Neue Galerie; and Ronald Lauder will never donate his portrait of Adele Bloch-Bauer to anybody else. No matter what happens to the tax code.

What we have right now is a situation where non-profit organizations, especially cultural ones like art galleries and museums, get very little direct government support — and when they do get direct government support, the Republican party in particular loves to rail against such expenditure as being fiscally irresponsible. On the other hand, private museums like the Neue Gallerie are the annual beneficiary of millions of dollars in federal tax expenditures which no one ever seems to question.

There are however hints that the tax-deduction sacred cow might finally be showing the first signs of weakness. Exhibit A: a curious column by Stephen Carter, in Bloomberg View, rattling off the parade of horribles that might happen if the deduction is eliminated.

Carter talks about — without citing or linking to any examples of — “the rising mania among politicians on both sides of the aisle to adopt a policy long popular within academic circles — either eliminating or severely restricting the charitable deduction, at least in the upper-income brackets”. Without any citations or links, it’s hard to know what he’s talking about, but I assume he’s not talking about the Obama proposal: reducing a deduction from 35% to 28% is not my idea of “severely restricting” anything, and if he was talking about an on-the-table presidential policy proposal, I’m sure his editors would have forced him to come out and say so.

In any case, color me enthusiastic about this idea, if indeed there is a “rising mania” for it. There are lots of public policy reasons why the federal government should encourage charitable giving — but I can’t think of any good reasons why that encouragement should be targeted especially at higher-income taxpayers. Generalizing wildly, the poor give to churches and the needy; the rich are much more likely to give to museums or concert halls or their own bespoke charitable trusts.

Carter is absolutely right that the funds donated to charity each year go to a very different set of places than the funds which are spent by the federal government, despite the fact that both are designed “to promote the general welfare”. In that sense, government can never replace charity.

But of course people wouldn’t stop giving to charity if the tax deduction went away — indeed, 70% of Americans don’t itemize their taxes at all. And there will still be plenty of millionaires and billionaires who want to save lives and/or put their names on hospital wings, or support their beloved local opera house, or help keep Central Park beautiful. The only important numbers here are the deltas: if the tax deduction went away, how much would charitable giving go down? And which charities would be hardest hit?

It’s hard to answer the first question with any specificity. But the second is easier to answer. Take a look at the $360,000 salary for the director of the Neue Galerie — or, for that matter, the $1.5 million paid to the general manager of the Metropolitan Opera, or the other seven-figure salaries paid at non-profit hospitals, universities, and foundations. There’s a rich-people money-go-round here: Jeff Raikes of the Gates Foundation doesn’t need his million-dollar salary, but the foundation is paying it anyway, as a matter of principle, presumably to encourage other foundations to start paying similar sums. These 1% salaries aren’t being paid out of small-dollar donations from the masses; they’re being paid out of large-dollar donations from other members of the 1%. And there’s no good reason for the US tax code to encourage such things.

Richard Thaler has a smart take on all this:

Having decided that charitable giving is a worthy cause, the government subsidizes charitable gifts from certain households, and for those chosen to be part of the plan, every dollar donated to a charity is increased by a specified percentage. To qualify, taxpayers must have a substantial home mortgage; the subsidy rate increases with taxable income. Low-income taxpayers receive no subsidy, but donations from qualified high-income taxpayers are subsidized by as much as 40 percent — or more…

The tax subsidy rate should be the same for everyone. This means that rather than being a deduction from income, the subsidy should take the form of a tax credit, so that if you contribute $1,000 and the subsidy rate is 15 percent, your taxes would be reduced by $150. (Ideally this credit should be “refundable,” so it is payable even if your tax bill is zero or negative.)

Carter’s response to Thaler is to say that it’s “a solution that would, of course, ‘cost’ the government more” than it’s spending right now in tax expenditures on the charitable deduction. But again, he doesn’t explain why this should be the case; it’s certainly not self-evident. A universal, refundable 15% tax credit would be a lot more democratic than the current deduction, and allow all Americans to take advantage of it, rather than only the minority who itemize their taxes. And if it did indeed end up costing more than the current system, with its deductions of 35% or more, that would only go to prove how badly skewed towards the rich the current system is.

We’re getting nowhere with respect to deep reform of the tax code, but it’s back on the table, as it is during every presidential election campaign. If we’re serious about it, then we should start taking an ax not only to the mortgage-interest deduction but also to the charitable-donation deduction. Because every time I see reports of a family charitable trust which carefully makes only the minimum outlays each year, I wonder just how charitable a lot of these donations are.

And of course Bloomberg View has a very large dog in this fight: it’s based in the headquarters of the Bloomberg Foundation offices on 78th Street, which are by some margin the most lavish offices I’ve ever seen in my life. Mike Bloomberg has every right to spend as much money as he likes on his foundation. But there’s absolutely no reason why the rest of us should subsidize those expenditures.

COMMENT

PLEASE VISIT http://donationmoneyfreetocharity.weebly .com

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Europe’s insoluble problems

Felix Salmon
Nov 25, 2011 23:39 UTC

Mohamed El-Erian is calling for massive recapitalization of the banking system:

The global financial system is being refined “day in and day out,” El-Erian said, and as a result the balance between public and private is shifting and regulation is altering. “This is not being done according to some master plan,” but in reaction to a series of crisis management interventions.

None of these piecemeal policy moves restored confidence in the markets, he said. What is needed is a coordinated and simultaneous set of policy actions globally in four areas: restoration of credit markets, elimination of deteriorating assets from balance sheets, injecting capital quickly into the banking system, and regulatory forbearance.

Oh, wait, that was El-Erian back in October 2008. But he’s saying something very similar now:

In addition to specifying higher prudential capital ratios, governments must now bully banks to act immediately. Where private funding is not forthcoming, which should now be the presumption for a growing number of banks, recapitalization must be imposed, in return for fundamental changes in the way financial institutions operate and burdens are shared.

The main difference, here, is the move from “regulatory forbearance” the first time around, to governments forcing “fundamental changes in the way financial institutions operate” today. But either way, this is basically, the bank-nationalization debate all over again.

In the U.S., we didn’t nationalize in 2009. We ended up taking only modest stakes in banks, and getting through the crisis through the massive application of liquidity by the Fed. If the central bank, as lender of last resort, ensures that banks will always be funded, then you don’t need nationalization. It’s a bailout by monetary rather than fiscal means, and it’s a lot friendlier to bank shareholders than nationalization is.

But the problem in Europe is that the ECB is displaying neither the willingness nor the ability to act as a lender of last resort — and in that situation, the only policy action left is for governments to step in and try to backstop the banking system directly. This is a very dangerous road to travel down: it’s basically what Ireland did when it guaranteed the liabilities of the entire Irish banking system, thereby consigning itself to a national fiscal nightmare for the foreseeable future.

So color me unconvinced that the solution to a liquidity crisis is an injection of capital. At best it’s insufficient; at worst it’s unnecessary, and only serves to exacerbate the painful process of deleveraging in a pretty drastic manner. After all, liquidity problems can hit anybody, no matter how solvent they are — just ask the German government. The Bund auction failed in large part because the European liquidity-go-round is utterly broken right now, and it’s hard to see how things would improve if Europe’s sovereigns, including Germany, started getting into the banking business.

The idea behind sovereign recapitalizations is our old friend Anstaltslast — the idea that if a bank is owned by the state, then there’s an implicit government guarantee on its liabilities. If Europe’s sovereigns started taking substantial equity stakes in their own banks, then there would be fewer worries over bank solvency: it’s almost impossible for a bank to go bust if the sovereign really doesn’t want it to. But in the context of serious worries over sovereign solvency, this tack doesn’t make a lot of sense. Once you’ve nationalized, there’s no real end to the degree to which you might end up being on the hook for the banks you now own: you can’t credibly claim that the banks you own are now so well capitalized that they’ll never need any more money. And in this case, of course, the worries over European bank solvency are worries over European sovereign solvency. You can’t tie these two rocks together, through nationalization, and expect them to float.

El-Erian is very good at explaining the problem which needs solving:

Europe must still stabilize its sovereign debt situation. But this is now far from sufficient. Policymakers must also move quickly to contain banking sector frailties, and do so using a more coherent approach to the trio of capital, asset quality and liquidity.

It seems to me, though, that sequencing matters here. Liquidity is — always — more important than capital/solvency. Give an insolvent bank enough liquidity, and it can live indefinitely. Remove liquidity from a bank, and it dies immediately, no matter how solvent it might be or how high its capital ratios are. And as for asset quality, we’re pretty much talking a zero-sum game here: when the banks’ dubious assets are the sovereign’s liabilities, the real solution is inflation, not nationalization.

And as for banks’ non-sovereign assets, good luck with selling those. The shadow banking sector knows exactly what happens to asset prices when sellers put €5 trillion of those assets on the market at once, and there’s literally no one out there who would dream of buying such things at or near par.

In every crisis there’s a point of no return — if you don’t do XYZ in time, it’s too late, and the crisis is certain to get out of anybody’s control. I’m increasingly convinced we’ve already passed that point of no return in Europe. The banks won’t lend to each other, the Germans won’t do Eurobonds, and the ECB won’t act as a lender of last resort. The confidence fairy has left the continent, and she isn’t about to return. Which means, as we used to say in 2008, that things are going to get worse before they get worse.

COMMENT

El Erian’s home country of Egypt is a total shambles economically and could sure use some leadership. It has none and yet El Erian is the world’s best.

If El Erian has any decency and patriotism at all (and he should since his father was an Egyptian diplomat and he owes much to his homeland) he would help lead his country out of an economic situation that is getting more dire by the day for his 80 million countrymen.

The real problem with the global economy is that younger countries like Egypt are so poor, meaning that as Europe ages, the slack is not picked up.

Great men like El Erian, instead of leading, whip up governments to do their bidding while profiting from the process. I suppose it is much less fraught than the processes of trying to squirrel away a fortune while actually leading a country.

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Counterparties

Nick Rizzo
Nov 25, 2011 23:00 UTC

A really good overview on Angela Merkel saying “nein” to euro bonds — Spiegel

John Muellbauer: The solution to Europe’s crisis? Conditional euro bonds — Vox EU

European banks still have trillions of dollars of bad loans they’re unable to sell — IFRE

Is Canada’s current housing market frothier than pre-crash America? — The Economist

Why MF Global’s auditors could rubber stamp risk at Goldman, JP Morgan — Bloomberg

The AT&T / T-Mobile deal looks pretty unlikely to be approved — NYT

The Rise and Fall of Bitcoin — Wired

And Dan Primack argues that the internet bubble 2.0 may not have burst yet — Fortune

COMMENT

Call it blind patriotism if you choose, but I think there is a simple reason why Canada, Australia and Sweden are NOT due to the same calamity as America. The first big factor is that these are smaller countries with stable/strong economies that invest next to nil in their militaries and have vibrant multi-party discussions. Second is that while foreign investment is helping to drive prices skyward, those investments are fully paid upfront so the kind of calamity that befell America in regards to massive foreclosures has a next to nil chance. Is the Canadian housing market overpriced? Sure, but is it due for a stunning crash on the order of 25%? I wouldn’t take that bet on any terms.

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Counterparties

Nick Rizzo
Nov 23, 2011 23:19 UTC

Izzy Kaminska has an intriguing post on what happened with today’s bund auction — FT Alphaville

European banks are avoiding regulations with “false deleveraging” — Bloomberg

Hungary has asked for a “precautionary credit” from the IMF — Telegraph

The “darker side” of US GDP has some bad news for us — WSJ Real Time Economics

America faces two big “fiscal cliffs” in the next 14 months — The Economist Free Exchange

The big rumored mortgage settlement might not include California — Reuters

“How to steal money from Manhattan, with Columbia’s pro-biz think thank” — The Awl

And Tyler Cowen has a great idea for how to handle the NBA strike — Marginal Revolution

Many more links are available at Counterparties.com. Have a great Thanksgiving, if you’re in a country where that’s done.

Chart of the day, tech-stock edition

Felix Salmon
Nov 23, 2011 22:22 UTC

GRPNNFLX.png

Paul Kedrosky reckons that Groupon’s the worst-performing internet IPO since Netflix, in 2002. He’s wrong: Groupon is doing even worse than Netflix did. It’s now trading at 85% of its IPO price; Netflix, by contrast, was still a tiny bit above its IPO price at this stage in its volatile history. (The chart above shows how Netflix performed in its first year as a public company, compared to its IPO price.)

If Netflix is any indication, Groupon is going to trade significantly lower than its current level before it ever recovers. Netflix went public at $15 per share, at the end of May 2002; on October 9 of that year it closed at just $5.22. Which is $2.61 in current prices, since it subsequently had a 2-for-1 stock split. That makes today’s closing price of $68.50 look positively healthy, the stock’s precipitous recent drops notwithstanding.

What this chart really shows, of course, is just how difficult the stock market’s job of price discovery is. In the early days of a technology company’s life as a public company, the stock price can move quite violently.

And with Groupon we should expect especially violent moves, for two reasons. Firstly, the float is tiny; and secondly, there’s a very loud and vehement class of Groupon bears who are desperate to short the stock and are convinced it’s going to zero. They might even be right. But my main point here is that looking at the Groupon share price on a day-to-day basis is a very good way to go slightly mad.

Groupon’s share price doesn’t reflect new news about the company; it’s more akin to a volatile random-number generator. If it goes down, that doesn’t mean that Groupon is a bad company; and if it goes up, that doesn’t mean Groupon is a good company.

This is one reason why technology companies hate going public: they start getting judged,first and foremost, on the one thing they have no control over, which is their share price. And tech-company share prices in general have been doing very badly in the post-IPO period of late. Why on earth would anybody want to join the likes of Demand Media or Renren, both of which are far below their IPO price? Some companies, like Facebook, have so many shareholders that they’re forced to go public. Others have VC backers twisting their arms. But if you have a choice in the matter, most sensible tech-company CEOs are likely to put off an IPO as long as they possibly can.

COMMENT

In this case, Seth, the basis for comparison is the IPO price. It isn’t intended as an IRR graph.

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The lessons of “Margin Call”

Felix Salmon
Nov 23, 2011 17:03 UTC

Jake Bernstein, in his mash note to Margin Call, is right to see the moral heart of the movie in a speech by Paul Bettany’s character, Will Emerson. (Warning: both Bernstein’s piece and this blog post contain spoilers.)

If you really want to do this with your life you have to believe that you’re necessary. And you are. People want to live like this in their cars and their big fucking houses that they can’t even pay for? Then you’re necessary. The only reason they all get to continue living like kings is because we’ve got our fingers on the scales in their favor. I take my hand off and the whole world gets really fucking fair really fucking quickly and nobody actually wants that. They say they do but they don’t. They want what we have to give them, but they also want to play innocent and pretend they have no idea where it came from. That’s more hypocrisy than I’m willing to swallow. Fuck them. Fuck normal people.

Bernstein loves the movie on the grounds that it’s “the story of a Wall Street that has evolved from an economic helpmate to an economic predator”. So how does that square with Emerson’s speech? After all, Emerson’s idea, endorsed by Bernstein, is that Wall Street is actually helping the “normal people” to live beyond their natural means.

But the bigger idea, I guess, is that the “normal people” helped by Wall Street are the 1%, and that Wall Street has its “fingers on the scales in their favor”, and that if the scales are tipped towards the 1%, then that means the 99% are the losers. They’re the prey for Wall Street’s predators.

I don’t buy this analysis. I don’t believe that Wall Street is meaningfully improving the lives of the 1%, except insofar as Wall Streeters are the 1%. (Remember that financial professionals make up only 14% of the top 1%, and 18% of the top 0.1%. They’re a large chunk, but by no means the majority.)

In fact, I suspect that the top 1%, if anything, are responsible for a disproportionate share of Wall Street’s income. Wall Street isn’t picking the pockets of the 99% and giving the proceeds to the 1%: it’s picking the pockets of the 1% and giving the proceeds to itself. And Wall Street is taking a whole bunch of money from the 99%, too. But for the 86% of the top 1% who don’t work in finance, I really don’t believe for a minute that Wall Street is helping them out by giving them the hard-earned money of the 99%.

I also don’t believe in some halcyon era when Wall Street was “an economic helpmate” to the 99%. It has always been very good at extracting rents, and very bad at creating wealth for its clients.

Narrowly speaking it’s easy to see where Emerson’s speech is coming from: the housing bubble was certainly instrumental in allowing millions of Americans to live beyond their means. And yes, Wall Street was a necessary part of the machinery of the housing bubble. But of course the Americans who bought beyond their means did not “get to continue living like kings”; instead, they got foreclosure and eviction notices. And Wall Street wasn’t there to help them when that happened.

But I don’t believe that Wall Street has its fingers on any scale. There are wealthy families who have managed to preserve and grow their wealth over many centuries — Italy and Germany both have quite a few of them, the ultimate Black Swan that was World War II notwithstanding. Those families tend to have a lot of real property: income-producing land, if you’re growing things like grapes or trees, is an amazing long-term asset, since the main rents you’re extracting come directly from the Sun. By contrast, the rich families who hire Goldman Sachs to look after their money and end up invested in Global Alpha or pre-IPO Facebook shares tend to be much newer money. They made it quickly, and they’ll probably lose it quite quickly too — it could quite easily all be gone within two or three generations.

This is one of the reasons why I’m less of a fan of Margin Call than Bernstein is. Where he sees “a running joke” that the big bosses don’t understand the nitty-gritty of finance and say things like “just speak to me in English”, I see a clumsy attempt at providing a bit of exegesis for the audience. Where he sees “ultimate irony” in Demi Moore’s defenestration, I see a risk manager who signed off on ever-riskier trades getting her just desserts. And where he sees the bank as an “economic predator”, I see it as a victim of its own greed. Yes, it causes considerable damage outside its own walls in its decision to conduct a fire sale of its toxic assets. But the alternative was for the bank to fail, and then, as we saw with Lehman Brothers, the damage caused would have been greater still.

If there’s a lesson in Margin Call, I think, it’s only the simple and facile one that Wall Street riches don’t make you happy. I do think the trading-room scenes were surprisingly realistic, by Hollywood standards, and Emerson’s patter as he tries to unwind his massive position rings absolutely true to me — it was written by someone with an excellent ear. (Bettany deserves a lot of credit, too: he plays the role perfectly.) But I think the film ducked the opportunity to show the real damage wrought by Wall Street — the way that while profits go to the bank’s employees, losses get socialized on all of the rest of us.

There was no bailout in this movie; indeed, there weren’t even any regulators. When the bank loses lots of money, it just keeps on going: there’s no sign of how it might recapitalize itself, or who the new owners might be, or even that there are any new owners. It’s a magical world where an insolvent bank can realize enormous losses and stay alive under exactly the same management and ownership. You have a mini-breakdown, you bury your dead dog, and you go back to your extremely well-paid job.

In the real world, by contrast, Wall Street eats alive any bank which shows the slightest sign of weakness or potential insolvency. Never mind Lehman: look what happened to Bear Stearns or MF Global, which were toast just because everybody pulled their repo lines simultaneously. When a bank makes an error of this magnitude, it dies — and the aftershocks, for the rest of us, are severe. Margin Call let the bank off easy — and America’s taxpayers, too.

COMMENT

But the bigger idea, I guess, is that the “normal people” helped by Wall Street are the 1%

That’s not how I interpreted it. I thought that was a reference to the relative strength of the US dollar (trade imbalance / cheap imports) and especially to mortgage lenders and credit card lenders, student loans and every other kind of credit product, to chase yield as made manifest in the Working American Consumer.

Posted by stat_arb | Report as abusive

Why Apple’s customers cripple its user experience

Felix Salmon
Nov 23, 2011 06:03 UTC

Apple products have always cost more than the equivalent products elsewhere. It’s one of the reasons that Apple has historically had very high brand loyalty and very low market share — a classic luxury-good combination. But now that Apple has become a mass-market brand, it’s reaching millions of sensible people, who like to save money. And that, in turn, causes an interesting tension.

Back when Apple sold widgets, things were easy: you paid through the nose for your widget, and then you were happy. But now Apple makes mobile devices like iPhones and iPads, an that means it has no choice but to get into bed with the much-hated wireless companies. It tries to control the experience as best it can — but people still end up being faced with ludicrous charges like $30 a month for text messaging. And then, on the perfectly reasonable grounds that $360 plus tax per year is a ridiculous sum of money to spend on a minuscule amount of data, they decide that they’re going to try to get around those charges.

It is indeed possible to get around extortionate wireless charges. Rather than buy a 3G iPad, for instance, you can use one with only wifi, and then connect it when you’re on the go to a tethered smartphone or some kind of MiFi device. And rather than spend lots of money on text messages, you can sign up for Google Voice, and do all your texting with that number.

These money-saving techniques are perfectly rational. And they don’t cost Apple any money — just the wireless carriers. But they’re still bad for Apple, because they defeat the elegant perfection which Apple puts so much effort into getting exactly right. And what’s more, these techniques are most attractive to people who are tempted by Apple products but can only just afford them, or can’t quite afford them. As it seeks to increase its market share, Apple has to sell its products to more and more of these people, who will often be buying an Apple product for the first time. And the last thing that Apple wants is for its carefully-crafted user experience to be sullied by something as banal as an attempt to avoid text-messaging charges.

Take the iPad, for instance: I can attest from personal experience that the 3G iPad is just miles better than trying to use a wifi-only iPad with a MiFi. It downloads emails automatically, even when you don’t ask it to; you can pull it out of your bag and look up anything you like instantly; there’s no waiting around for the wireless modem to get online and generate its wifi signal; you don’t need to worry about how charged up your MiFi is, or where you left it; you get all the advantages of real GPS; etc etc. An iPad + MiFi is adequate; it’s good enough; it’s “all I need”. But the 3G iPad is why people love Apple. And it costs $300 a year over and above the cost of the iPad, which is itself $130 more than the wifi-only version. There are definitely cheaper ways of getting your iPad online. But you lose a significant amount of elegance and ease of use in the process.

As for Google Voice, you can either just install it on your phone with a new number, or you can go through the rather convoluted process of transferring your current number to Google Voice. Either way, you’re going to be using the Google Voice app a lot — an app which is slower and buggier than the phone and messaging apps built in to iOS. And — to answer Ryan O’Donnell’s question — I can’t really recommend it.

Yes, you get to check your text messages on the web, which can be useful — although it’s not that useful. But you also break a lot of things which otherwise work seamlessly in iOS. There’s no MMS, for instance. There’s no iMessage. There’s also — this is big — no texting to anybody with an international number. You can’t text from Siri. FaceTime integration goes away. You can no longer just click on a phone number to call it, if you want to call people from your Google Voice number. And the whole thing becomes generally much less reliable, because you can’t get any text messages at all unless and until you have a data connection. And as anybody with an iPhone knows, there are many, many occasions when you have cell service but data service just doesn’t work at all.

On top of that, you might well be violating your wireless carrier’s terms of service.

Now for some people — specifically people who are very comfortable with iOS, who know their way around an iPhone, and who value the ability to save money — a switch to Google Voice still makes sense. Text-messaging plans are ludicrously expensive, and I support anybody who comes up with a way of avoiding having to pay those bills. (Including, it must be said, Apple, whose iMessage platform, if it catches on, neatly circumvents existing text-messaging systems.)

But it does seem to me that so long as Apple has to deal with the hated wireless providers, people will always be voluntarily accepting a subpar user experience because they want to save on monthly charges. Apple has always hated it when its customers have a subpar user experience, but this problem isn’t going to go away: in fact, it’s only going to get worse.

And in the meantime, if you buy a wireless Apple product, it’s a good idea to be aware that the premium you’re paying for the hardware is not the end of the story. You’re going to be feeling the monthly bills for as long as you use that thing. And they’re going to add up.

COMMENT

I have a “dinosaur” Blackberry 8700 with text and calling only, no browser. It works fine. There is one charge for unlimited talk and text.

Posted by CalGal | Report as abusive
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