Felix Salmon

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Two things you don’t expect to see together are the nation’s highest foreclosure rate and a housing shortage. Yet as Bloomberg’s John Gittelsohn and Prashant Gopal report, that’s exactly what Stockton, California is experiencing right now. While there are lots of foreclosures, they’re not happening at heavily-discounted prices. “People see a foreclosed home for sale in this area and they’re going to jump on it”, said one longtime Stockton realtor.

There’s also evidence that Obama administration’s much-maligned foreclosure relief program is now picking up pace. Susan Wachter, a Wharton professor, was particularly impressed:

Changes to Obama’s loan-modification program had the biggest impact on reducing pending foreclosures since late 2010 by creating a template that lenders followed, Wachter said. That included incentives to compensate loan servicers for reducing principal on loans for delinquent borrowers. In January, the administration tripled the award to 63 cents for every $1 in writedowns.

Nationally, there’s been some very good housing news of late: the Case-Shiller home price index showed prices rising 3.6% nationally year-on-year. Especially impressive were the gains in areas that have been hard hit by the housing bubble: 20% in Phoenix, 7.6% in Detroit, and 7.4% in Miami.

Bill McBride of Calculated Risk points to new data showing that the government-supported refinance boom has been continuing. Refinancing has a smaller impact on the economy than does a boost in home sales, but it does provide a way for banks to finance a portion of the recovery by giving homeowners more cash to spend each month. In an economy that’s growing at less than 3% annually, even modest increases in consumer spending are helpful. One thing that certainly won’t help: unless Congress acts many of the very same homeowners who’ve gotten help from their lenders will see those savings taxed as income. — Ben Walsh

On to today’s links:

New Normal
The problem with the much-hyped return of US manufacturing: crappy pay – Felix

EU Mess
How Spain ended up with 25% unemployment – Sober Look

Servicey
“It never gets easier, you just make more money” and 9 other rules for I-bankers – Epicurean Dealmaker

Tax Arcana
Most Americans pay less in total taxes than they would have 30 years ago – Binyamin Appelbaum

Alpha
Jeff Gundlach is just waiting for “something to go kaboom” – Bloomberg

The Fed
Examining the dove-to-hawk ratio at the Fed – FT Alphaville

Financial Arcana
Wall Street is still trying to securitize energy efficiency loans to consumers – Slate

Philosopher Bankers
“Greg Davies, head of behavioral and quantitative investment philosophy for Barclays” – Forbes

Investigations
An editor at TheStreet.com passed a stock tip to his dad, then the FBI called – WSJ

Yikes
Citigroup is lowering bonuses and cutting more banking jobs – Bloomberg

Awesome
7 ways of looking at the news that Mitt Romney’s dad got free McDonald’s for life – Gawker

It’s taken more than three years for the other shoe to drop, but boy what a shoe this is.

A bit of background: in June 2009, Bryan Burroughs raised questions in Vanity Fair about the role that Kroll played in protecting Ponzi schemester Allen Stanford:

Behind the scenes, Stanford was even more aggressive. As the company grew, he became renowned within law-enforcement circles for aggressive counter-intelligence… His greatest asset may have been a top security firm, Kroll associates, whose Miami office worked with Stanford for years. “Stanford was spending millions of dollars a year trying to figure out who was looking at him, and aggressively combating whoever it was,” recalls the former FBI agent. “Kroll was essentially running a propaganda campaign in defense of Stanford’s good name.

Kroll’s role in defending Stanford’s reputation, in both law-enforcement circles and the wider banking community, was an example of a controversial practice known within the private-security world as “reputational self-due diligence,” that is, vouching for a client’s good name… “It is, by all accounts, an exceedingly lucrative business… It is controversial, even inside the firm.”

The idea here was that if Stanford hired Kroll to protect and burnish the Stanford reputation, then he could continue to raise money for his Ponzi much more easily. But what exactly was Kroll doing for Stanford? Murray Waas has now found out, and it’s not pretty. Essentially, rather than simply sing the praises of Stanford, Kroll would make extremely aggressive ad hominem attacks against anybody who dared raise questions about the firm, including a former senior State Department official named Jonathan Winer.

Stanford asked Kroll’s Tom Cash for “an in depth profile, credit history, marriage, kids, work personal quirks”, and instructed Cash to “go after him as hard on as many fronts as possible”. Cash was happy to oblige, telling Stanford that “our info is wife by whom he had two children divorced him and ran off with another woman. Wife also was a lesbian”. (Incidentally, for anybody who thinks that Kroll is particularly good at finding out these things, none of that information was true — not only was the wife not a lesbian, the couple actually had three kids, not two.)

This kind of thing seems to have been quite common:

During the same period in which it targeted Winer, Kroll also tried its tactics on two former Stanford employees who sued him and threatened to talk to the Securities and Exchange Commission, the emails showed.

“I think we might be able to assist in this investigation which could get very significant unless we can discredit the accusers,” Cash wrote Stanford.

Earlier, after the newspaper Caribbean Week published an article critical of Stanford in 1996, Stanford directed Cash to “go for … the jugular” in investigating the story’s author.

Cash assured Stanford that Kroll had “three people working full time in developing information in the United States.” The newspaper soon published a retraction of the article.

Kroll even sent “undercover agents” to “infiltrate” meetings of Antiguan dissidents, since the dissidents were unhappy with Stanford’s influence on the island.

No wonder this kind of business is controversial: I have difficulty imagining that any clean executive would serially unleash dogs like these on their critics. What’s more, Kroll isn’t even disowning its activities:

Kroll, which has been referred to as Wall Street’s “private eye,” says its employees had no clue they were helping to conceal the second-biggest Ponzi scheme in U.S. history.

This makes it sound as though the attacks and spying would have been perfectly OK, if it weren’t for the fact that they were being done on behalf of a Ponzi artist. So a couple of questions for Kroll: are these techniques normal? How often do you use them? And where do you draw the line? Because it seems to me that what Cash did went way too far.

Charles Fishman has an upbeat cover story in the new Atlantic, talking about how manufacturing is making its way back from China to America. As the world demands an ever-more nimble manufacturing sector, able to produce smaller quantities of goods more quickly, it makes sense to make those goods here rather than be forced to spend a month shipping them over from China, especially with shipping costs rising. On top of that, Chinese manufacturing costs are rising too: inputs from labor to natural gas are getting much more expensive. (Natural gas costs four times as much in China as in the U.S., while James Fallows reports that a typical Foxconn salary is now $400 a month, three times what it was six years ago.)

Fishman’s enthusiasm for bringing the designers closer to the means of production — it really does make for much more efficient assembly lines — means that he papers over the reality of what America’s new manufacturing-sector workers are being paid:

Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.

There’s a huge difference between $13.50 per hour and $21 per hour: the latter is something you can actually live on, something you can consider to be a career. The former is not. And that’s a problem, as Adam Davidson explains: the reason that people aren’t going to college to learn the skills needed on a modern manufacturing assembly line is simply that those skills aren’t valued highly enough. Even McDonald’s, where there were noisy strikes today, looks attractive in comparison:

Isbister doesn’t abide by strict work rules and $30-an-hour salaries. At GenMet, the starting pay is $10 an hour. Those with an associate degree can make $15, which can rise to $18 an hour after several years of good performance. From what I understand, a new shift manager at a nearby McDonald’s can earn around $14 an hour.

What we’re seeing here is the same thing that Seth Ackerman saw at Hostess: wages that are so low, the workers prefer to give up the work entirely, and take a better-paying job elsewhere.

In a piece for Salon, Jake Blumgart quoted a bakery worker who had been at the company for 14 years. “In 2005, before concessions I made $48,000, last year I made $34,000…. I would make $25,000 in five years if I took their offer. It will be hard to replace the job I had, but it will be easy to replace the job they were trying to give me.”

What we have here is a situation where a company offered a wage in the marketplace and couldn’t get any workers to accept it. Consequently, it went out of business. The word “competitive” gets thrown around a lot, often with the murkiest of meanings, but in this case there can be no doubt at all that a company, Hostess, was unable to pay a competitive wage. Ninety-two percent of its workers voted to walk out on their jobs rather than accept its wage, and they stayed out even after they were told it was the company’s final offer.

All of which means that there are two enormous problems with the story that manufacturing is returning to the US. That might be true, but (a) it’s not creating many jobs, and (b) the jobs it is creating are not the good jobs which people want to have for many years. Instead, they pay $15ish per hour, which is what teenage babysitters make in New York.

Once upon a time, in the halcyon 1950s and 1960s, a man could have a blue-collar factory job and make enough money to support a whole family. Those days are over now, but they echo still in the dreams of manufacturing returning to the U.S. The idea is that were that to happen, good jobs would magically be created. Where the reality is that manufacturing jobs are not good jobs any more: you’re better off working in retail, whether you’re in the US or in China. And you don’t need to spend unpaid years in college learning technical skills to get a retail job.

So while I’m as excited about the Internet of Things as the next guy, and I love any economy where ideas can become products with unprecedented ease, I don’t think that this is a particularly good solution to the unemployment problem. It’s better than nothing, of course. But I do get worried when The Atlantic splashes the word “COMEBACK” all over its cover: that makes this phenomenon seem much happier than in truth it is.

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The eponymous inquiry led by Lord Justice Brian Leveson was intended to be a full account of the Hackgate scandal. It has now delivered a 1,987-page report, along with a more digestible 46-page summary, finding “significant and reckless disregard for accuracy” in the UK press. In the end, it recommended a continuation of self-regulation, with one significant caveat: the press would be licensed and overseen by Ofcom, which is part of the UK government.

John Cassidy notes that the “previous system of self-regulation, under which Fleet Street’s finest largely oversaw themselves, had been reduced to a bad joke”. But John Gapper thinks a regulatory role for Ofcom is a “badly misguided” proposal. And Michael Wolff, author of a Murdoch biography, is exasperated:

Oh, for God’s sake seems to me the fairest response…the inquiry calls for a goopy, bureaucratic, obfuscating oversight board, which could be perilous to the freedom of the press or as likely toothless.

What’s more, the report fails to take a stand on the very issues and people who caused the inquiry to be formed in the first place: the Murdochs.

The report has its odd moments — warning police officers against having drinks with journalists, for instance. It also grants outsize importance to print media, saying that blogs and twitter aren’t news and devoting just one page out of 2,000 to the internet.

Prime Minister David Cameron has rejected the proposal for Britian’s first statutory regulation of the press since the 16th century, saying he didn’t want to “cross the Rubicon” and impinge on free speech. That puts him at odds with members of his own coalition and the opposition Labour party.

The report won’t close the books on a scandal that has affected an estimated 4,775 people, 310 of whom have been publicly identified. Victims have accused Cameron of “ripping the heart and soul” out of the inquiry. — Ben Walsh

On to today’s links:

Long Reads
BuzzFeed’s awesomely designed story on the history of Pong – Chris Stokel-Walker
A great interactive feature on “the perfect terrorist” – Frontline

Economy
TINSTAAFL: NYC fast food workers launch one-day strike – Salon

Alpha
It’s time for CEOs to stop obsessing over shareholder value – Economist
Is stock picking just another upper-middle class male hobby? – Felix

Taxmageddon
Is this the deal? $1.2 trillion in new revenue, $1.6 tillion in cuts and savings – Politico

Replication
A look at national fertility rates suggests the world’s population will peak in 2030 – Aleph Blog
Americans making a record low amount of Americans – Pew Social Trends

The Fed
Nominal GDP growth has been amazingly consistent at 4.1% for the last 3 years – Crossing Wall Street
James Bullard on price level targeting – St. Louis Fed

Light Touch
A new contender for the title of “Most Captured Regulator” – Jesse Eisinger

Wonks
Human sacrifice, the original negative interest rate – FT Alphaville

Popular Myths
Millionaire-tax flight doesn’t really exist – Dylan Matthews

Best and Brightest
“An economic index I don’t understand is going up? Yay!” – The Onion

Huh
Yoko Ono is a ” reminder of what New York used to be before it was taken over by hedge fund types” – NYT

Politicking
“Hey”: friendly yet borderline stalkerish email subject lines remarkably effective – Businessweek

Vox Pop
Naive, infirm US public would rather cut defense spending than healthcare – Matt Yglesias

More than half the world now lives in cities, and nearly all the growth and value creation in the world comes from what Richard Florida calls “megaregions” centered on large conurbations. So it’s really useful to see which cities are doing well, and which are not.

Sadly, that’s not what we’re getting. Instead, we get things like “The 20 Richest Metros in America“, from The Atlantic, based on the metric of personal income per capita, or — and this is much worse — CNBC’s First Annual Recovery Road Trip, which spent much of this week counting down the top three cities in America, based on a highly convoluted and opaque methodology based loosely on stock-price appreciation.

The results of these exercises are always useless. Here’s a list of random cities! (This is the Atlantic’s list.)

1. Bridgeport, CT
2. Midland, TX
3. San Francisco, CA

Here’s another list of random cities! (This is CNBC’s list.)

1. Atlanta, GA
2. Charlotte, NC
3. Philadelphia, PA

Here, by contrast, is the actual league table for US cities:

1. New York
2. Los Angeles
3. Chicago
4. Washington
5. Houston
6. Dallas
7. Philadelphia
8. San Francisco
9. Boston
10. Atlanta
11. Miami
12. Seattle

As you’d expect, this league table changes only very slowly, but it does change: Philadelphia fell behind San Francisco, for instance, in 2008, but then regained its seventh-place position in 2009. And lower down the table there’s more movement: Pittsburgh has risen from 25th place to 22nd since 2007, for instance.

The problem is that because this league table doesn’t change very much, there’s not much news value in reporting it, and instead reporters are drawn to gimmicks. Similarly, if you wanted to use public-company stock-market capitalization as a metric, then the obvious thing to do would simply be to list the cities with the largest market caps. My guess is that it would look very similar to the metropolitan GDP league table, and therefore, again, not be all that newsworthy. So instead, CNBC decided to go with the amount that stock prices have fluctuated, a methodology akin to simply throwing darts at a list of cities.

If you want to do valuable reporting on the cities which are getting things right, then the thing to do is to look at the growth rates of America’s biggest metropolitan areas, see which areas are consistently outperforming, and ask why. It’s much less gimmicky. But it’s much more useful.

This is the best news that Argentina could possibly have hoped for: the Second Circuit Court of Appeals — the same three judges which upheld Judge Griesa’s decision last time around — has decided that this time, he’s gone too far. Here’s their order:

If you recall, the big thing that Griesa did last week was to not put a stay on his order, forcing a showdown on December 15, when Argentina is due to make a $3 billion payment to its exchange bondholders. If Argentina made that payment, said Griesa, it would also have to pay its holdouts in full.

The Second Circuit, here, has said that Griesa was too hasty: it wants time to think a bit over what he’s done, and whether it’s just. So everything is “stayed pending further order” of the Second Circuit, and nothing is going to be decided for a while — at least until after February 27, when oral arguments will be heard. (Expect a packed-to-the rafters courtroom for that one.)

As a result, Argentina has three months’ breathing room — and every interested party in this case, which includes the US government and lots of people representing the hidden plumbing of the markets, will file an amicus brief.

What’s more, the Second Circuit also recognized the exchange bondholders as “interested non-parties” in the case, who can themselves appeal Griesa’s judgment — thereby setting up a Boies vs Olson showdown in February, with Argentina very much on the same side as David Boies, who’s representing the exchange bondholders, and against Ted Olson, who’s representing Elliott Associates.

At this point, handicapping the ultimate outcome is anybody’s guess, although whatever the Second Circuit decides you can be pretty sure that one side or the other will appeal it to the whole circuit, sitting en banc. As a result, don’t expect those Argentine credit default swaps to trigger any time soon: this case is going to be caught up in the law courts well into 2013.

My hope is that somewhere up the chain, principles of national sovereignty and smoothly-functioning markets will prevail, and Griesa will be overruled. But I have no idea where or when that might happen, or how likely it is. All I know for sure is that a lot of lawyers are going to be making an absolutely enormous amount of money in the next few months.

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America’s top CEOs agree on at least two things: America needs to do something about its debt and everyone needs to sacrifice. Under the auspices of the organization Fix the Debt, the (self-serving) CEOs of companies like Goldman Sachs, Honeywell, Microsoft and UPS have amassed a reported $43 million budget to convince Washington to avoid the fiscal cliff and to make broad cuts to bring down the national deficit.

The organization, which has Alan Simpson and Erskine Bowles as co-founders and policy gurus, says in its core principles that deficit-cutting policy should be enacted now, but implemented gradually. It’s also for reforming Medicare and Medicaid and “pro-growth tax reform, which broadens the base, lowers rates, raises revenue and reduces the debt”.

Fix the Debt’s website includes a set of “CEO Tools“, including a presentation that “you can leverage to communicate the debt story in a visual way”, and a sample letter to employees. Morgan Stanley’s James Gorman seems to have written his own version of that letter.

According to the WashPost’s Tom Hamburger, Fix the Debt has managed to displease both liberals and some business groups:

…at least three companies represented in Fix the Debt also belong to a separate coalition that has sought to cut corporate tax rates.

That agenda of cutting corporate taxes has drawn fire from some within the business community, especially small firms and partnerships that do not pay corporate taxes but instead pay taxes on business earnings according to individual income tax rates. These critics say that the chief executives in Fix the Debt are willing to see individual income tax rates rise – in particular, through the expiration of Bush era tax cuts for the wealthy at the end of year– because this could create flexibility in the federal budget for cutting corporate taxes during a tax reform effort proposed for next year.

There are also the familiar fingerprints of Pete Peterson, especially in the emphasis on cutting entitlements. Michael Hiltzik has called Peterson the most influential billionaire in US politics, and it’s easy to see why. Fix the Debt is project of the Committee for a Responsible Budget, which is, in part, funded by Peterson’s foundation. Many of the members of Fix the Debt’s coalition are similarly funded by Peterson and/or founded by his former employees. From 2007 to 2011, Ryan Grim and Paul Blumenthal report, Peterson has spent almost half a billion dollars of his own money crusading against the national debt. — Ryan McCarthy and Ben Walsh

On to today’s links:

Hackers
An identical copy of a US entrepreneur’s security software ended up being used across China – Bloomberg

Crisis Retro
Bank of America’s CEO apparently can’t remember anything – Matt Taibbi

Mysteries Explained
Poor management killed Hostess, not unions – LAT

Taxmageddon
Lloyd Blankfein compares CEO efforts on the fiscal cliff to WWII – Joe Weisenthal
Fix the Debt is more concerned with protecting the Bush tax cuts than reducing the long-term deficit - Next New Deal
People are paying $80,000 to hear Simpson and Bowles speak for some reason – NYT

Bond Vigilantes
A concise guide to Argentina’s possible default, angry hedge funds and “legal colonialism” – Steven Davidoff
Why Elliot vs. Argentina is a domestic Argentine issue – Felix

Leaders
Groupon’s board may be rethinking the value of the “youth and humor” of its CEO – WSJ

Cephalopods
What it was like to be a woman at Goldman Sachs – Atlantic

New Normal
Federal student loans are making it too easy to borrow too much – WSJ

Crisis Retro
Mozilo admits Countrywide’s subprime loans were a “continuous catastrophe” in a 2006 email – Scribd

Retractions
Nassim Taleb is rather fragile when it comes to parodies of Antifragile – Josh Brown

Investigations
SAC Capital gets its Wells Notice – Reuters

Wonks
The World Bank’s chief economist on inequality, taxation, and multi-player sudoku – Oxfam

Apple
“Something is wrong with my iPad: I still hate my life.” – McSweeney’s

I had a fascinating lunch, a couple of weeks ago, which lodged in my mind the idea that stock picking, at least when practiced by individuals, is best analyzed as an upper-middle-class hobby rather than as purely profit-focused investing activity. Once you start looking at it that way, suddenly a lot of behavior, which looks irrational under most lights, starts making a lot of sense.

For instance: subscriptions. These things are serious money-makers, whether they’re old-fashioned newsletters, whether they’re Barron’s subscriptions ($149/yr), or whether they’re slightly more high-tech products like the various subscription products at thestreet.com (between $152/yr and $1,040/yr), Minyanville (between $499/yr and $899/yr), or, now, at Seeking Alpha ($2,388/yr).

These prices aren’t always completely transparent (good luck trying to find the Minyanville prices on their website, for instance), but they’re high for a reason: they’re sending the message that the subscriptions are meant to make you money. At the same time, however, if you compare these sums to the sort of money that the upper-middle classes spend on, say, golf, then they don’t look quite so large. A golf habit is unlikely to cost you less than $5,000 a year, and can cost tens of thousands, not including the extra amounts that many people pay to buy real estate on the golf course.

What’s more, the number of golfers in America is significantly larger than the number of stock-pickers. This is a niche market, which means again that prices need to be high: you’re never going to sell millions of subscriptions to anything.

One thing worth noting here: stock picking, even more than golf, is an overwhelmingly male hobby. Put aside all the mathematics about how individual investors consistently underperform the market and pay enormous fees to various financial-service middlemen; all you really need to know is that if something is done only by men, it probably isn’t particularly sensible.

Still, the Seeking Alpha model is an interesting one: they’re basically crowdsourcing their subscription product, by offering their contributors between $100 and $500 per article (or more, if the article gets lots of page views), if they consider the post high-quality enough to qualify for the Seeking Alpha Pro product.

You can do the math: Seeking Alpha says that it wants to feature five “Alpha-Rich” articles per day on its pro site, for which it will pay $500 apiece. Let’s say it also features a couple of dozen Pro articles at $100 a pop: that adds up to an editorial budget of $5,000 per day, or about $1.25 million per year. Divide that by $2,388, allow some budget for in-house editors and the like, and the product looks like it will break even once it gets to about 600 subscribers. Which is not all that many, considering Seeking Alpha gets about 4 million visitors per month from the US alone.

I would never recommend any stock-picking subscription, just as I would never recommend stock-picking. But the Seeking Alpha model is quite a clever one: the articles are behind a paywall for 1-3 days, then they get opened up to the public, where they can accumulate a decent comment stream and give the author (as well as the subscription product) the oxygen of publicity. After that, they go back behind the paywall, because even old analysis is valuable when you’re dealing, as Seeking Alpha wants to do, primarily with undercovered small-cap stocks.

What’s more, it stands to reason that a crowdsourced product is likely to provide more value than product with just one or two authors: no individual can come up with that many insightful ideas, and Seeking Alpha Pro is able to prominently feature ideas from contributors who might only have one or two great analyses per year.

Still, the ultimate value of any such product is ultimately likely to be negative rather than positive, if only because once you’ve paid for it, you’re going to want to act on it. And the minute you start trading stocks on your own, you become the dumb money.

How much is the real cost of a subscription, then? The $2,388 a year is just the up-front cost, but on top of that you need to layer on your trading fees and your general underperformance. What’s more, if you’re subscribing to Seeking Alpha Pro, you’re probably subscribing to other products, too. Call it $5,000 a year, all-in.

Which is actually not that much, compared to other hobbies: I know people who can spend $5,000 on a single bicycle. If you’re into classic cars, $5,000 is nothing. And similarly, if you’re skiing or flying around in small planes or even just taking a luxury vacation once a year, $5,000 can be a relatively modest sum for a reasonably affluent person. And none of those hobbies come with the extra thrill of dreaming that they could end up being highly profitable.

One thing I would note, though: from a financial-media perspective, you’re limiting yourself enormously if you spend too much time chasing that small group of hobbyists — especially if you’re not trying to sell them subscriptions. Look at the enormous number of websites which put stock tickers next to company names, so that the hobbyists can see exactly what the stock in question is doing that day. It makes the site seem as though it’s targeted at silly males, rather than at a broader, smarter audience.

As a rule: if you want to attract women (and most men for that matter) as well as the stock-picking men, get rid of those tickers and sparklines and constant reminders of what the market did today. Most of the hobbyists are perfectly capable of reading a news article about Apple without being told what the company’s ticker symbol is. But the rest of us find such things incredibly annoying.

Who doesn’t like hanging out in a chocolate factory? My visit to Cacao Prieto, in Red Hook, was fascinating: what I wanted to do was understand the reason why artisanal chocolate (or artisanal coffee, or even artisanal mayonnaise, for that matter) seems to be such a fast-growing market these days.

Both Dan Preston, of Cacao Prieto, and Tim McCollum, of Madécasse, agreed that at the supply end of the chain, nothing much has changed. They’re using Victorian technology, largely (although Preston has built some clever new machines of his own), and relying much more on a simple back-to-basics approach than on anywhere that buzzwords like “scalable” might apply. That said, the marketing at least has got to be much easier these days; the Cacao Prieto website, in particular, is gorgeous, at a cost which would be a rounding error in the context of a big chocolate company’s ad budget.

And the demand end of the chain has changed a lot: as Dan says, there’s a whole new market now for what he calls “fine chocolate”, as opposed to “confections”. And truth be told, that split makes a hell of a lot more sense than, say, the creation of “super-premium vodka”, which is to all intents and purposes identical, in everything but price, to any other vodka. Chocolate, even more than coffee, has a depth and richness of flavor, when it’s carefully and lovingly made, which is easily worth six bucks. (Compare, for instance, the amount you’d pay for a very good coffee, or a very good glass of wine.) If you cultivate an audience of people who consider themselves connoisseurs, they will happily follow you to a world of unprecedented pricing.

On top of that, artisanal chocolatiers, much like Fair Trade coffee merchants, can tell a true story of how they’re doing a very good job of treating developing-world farmers with respect and high prices. That message resonates to differing degrees with different people, but at the margin it certainly helps.

Why are these kind of businesses cropping up now, in particular? I think there are a few reasons. Firstly, money has appeared to fund them for pretty much the first time. In a zero interest rate environment, risky businesses with little correlation to anything else look increasingly attractive — and on top of that, the number of socially responsible or impact investors is rising impressively, and chasing a relatively small number of opportunities.

Secondly, food prices in general have been making up a smaller and smaller proportion of household expenditures for generations now. Here’s food-price inflation, in blue, charted against personal consumption expenditures, in red: the gap just keeps on growing. And in that gap, there’s room for people to spend a little bit more on edible luxuries, without significantly increasing the proportion of their budget that goes to food.

Finally, consumers of pretty much any product, from duvets to dishwashers, tend to become increasingly sophisticated over time. The low end of the market becomes commoditized, and the margins migrate to the high end. This kind of chocolate doesn’t scale to Nestlé or Hershey size: as Dan explains in the video, Hershey was not able to maintain Scharffen Berger’s quality after they bought it. But both Cacao Prieto and Madécasse have room to grow a very great deal from where they are right now. Which is good news for their investors, and good news too for the many parts of America which have yet to discover the wonders of artisanal chocolate.

The WSJ is making a very big deal of its latest investigation into when and how executives trade stock in their own companies. But I’m not particularly impressed: it seems like much more of a fishing expedition than a wide-ranging scandal.

Certainly the WSJ contrives to be shocked at stuff which really isn’t shocking at all:

Douglas Bergeron, CEO of VeriFone Systems Inc., set up a trading plan in January 2011 and then in late March sold nearly $14 million of VeriFone stock. In trades from March 28 to March 30, 2011, he received between $55 and $57 a share.

On April 5, VeriFone’s stock began a long slide—exacerbated by a May 12 Justice Department lawsuit to block a VeriFone acquisition—that left the shares just above $30 in August.

There’s no way that the Bergeron would have known about the Justice Department lawsuit in March, when the suit didn’t appear until mid-May; what’s more, VeriFone is on the record as saying that he didn’t know about it. So it’s hard to see what the WSJ thinks it’s doing, here.

More generally, the WSJ’s methodology seems designed to produce exactly the results that it came up with:

The Journal examined regulatory records on thousands of instances since 2004 when corporate executives made trades in their own company’s stock during the five trading days before the company released material, potentially market-moving news.

Among 20,237 executives who traded their own company’s stock during the week before their companies made news, 1,418 executives recorded average stock gains of 10% (or avoided 10% losses) within a week after their trades. This was close to double the 786 who saw the stock they traded move against them that much.

It’s not obvious what the WSJ considers to be “material, potentially market-moving news”, but I think that two assumptions are probably fair here. Firstly, stocks tend to take the stairs up and the elevator down: if there’s a sharp move in a stock, it’s much more likely to be a fall than a rise. Secondly, executives trading in their own stock are much more likely to be sellers than buyers. They get awarded stock as part of their compensation package: that’s not trading. And once they’re awarded it, they have every right to sell it — and selling it makes perfect sense, in terms of portfolio diversification if nothing else.

Put those two assumptions together, however, and you get exactly the result that the WSJ is so shocked by. Let’s assume that nothing untoward is going on at all, and executives are trading their stock all year long. Assume too that most of those trades are sales. Then assume that the WSJ looks only at the trades which happen before sharp moves in a stock. Since most of those trades are going to be sales, and most of the sharp moves are going to be downwards rather than upwards, it stands to reason that the executives are going to look like they were avoiding losses, rather than seeing the stock move against them.

On top of that, the WSJ seems to deliberately elide key information at points. For instance:

Mr. Zinn bought about $800,000 of Micrel stock in the four days before Micrel put out an earnings news release saying the company hadn’t been significantly affected by the slowing economy—and announcing that it would begin paying a dividend. Within a month, the shares Mr. Zinn purchased just ahead of this news were up 27%.

Mr. Zinn’s timing was good again in early 2010. He bought about $295,000 of Micrel stock during the two trading days before Micrel executives made news at an investor conference by saying the company’s business was improving. Within a month, the stock rose 36%.

The WSJ doesn’t provide dates or stock charts here, and it’s far from clear what “made news” means in the context of executives saying upbeat things about their own company. But what is clear is that the WSJ tells us only what happened to the stock “within a month”, rather than between the trades and the news. If the stock moved after the news was public, that should be neither here nor there.

Not all of the WSJ’s examples are this dubious. But by its own admission, the paper examined thousands of trades, all of which took place in the run-up to potentially market-making news. Even if they were all perfectly innocent, statistically speaking some of them would end up looking suspicious. If you suspect bad-faith dealing, and then you look for it in a certain place and then you find it there, that’s a bright-red flag. But if you had no reason to be suspicious in the first place, then you need a lot more evidence. It’s a bit like discovering that two of your friends share a birthday: it’s a coincidence, but it’s not particularly noteworthy, because statistically speaking it’s pretty much certain that two of your friends share a birthday.

In order for the WSJ’s findings to be newsworthy, then, we’d need a pretty solid analysis of how many cases like this you’d expect just from random chance — and that analysis seems to be missing. The closest we get is this:

“We’ve found a lot of evidence that these insiders do statistically much better than we’d expect,” said Lauren Cohen, an associate professor of business administration at Harvard University who co-wrote a study published this year about the performance of insiders who time their trades. “The perch that they have—they not only have proximity to this private information, but they can actually affect the outcomes.”

There’s no link to the study, but I assume the paper in question is this one. It’s an interesting paper, but it doesn’t use the WSJ dataset, and it doesn’t look for “potentially market-moving news”: it just takes the results of executives with a regular and predictable share-trading pattern, and compares them to the rest.

Altogether, then, I think there’s less here than meets the eye. There might be future shoes to drop, and some of the trades they have found could turn out to be illegal. But I would have preferred less tarring of possibly-innocent executives, and more substantive discussion of what could actually be done to improve the system. The WSJ makes the case that the current system of 10b5-1 plans, where executives pre-plan stock sales, is flawed. But how could it be fixed? You could ask executives to commit to a fixed schedule of purchases or sales long in advance, but all such schedules have to be editable somehow, and in any executive’s life things happen which can drastically change that person’s need for liquidity.

And then more conceptually there’s the whole problem with the idea that executives can’t trade when they have material nonpublic information about a stock — which is just silly at its heart, because executives always have nonpublic information about a stock, and that information would nearly always be considered material for, say, a third-party hedge fund.

The SEC’s rules, as a result, are always going to be a bit unsatisfying, because they need to reconcile two irreconcilable facts: that executives have material nonpublic information, and yet at the same time they have to be able to sell their stock somehow. Lauren Cohen’s paper demonstrates that nothing untoward takes place if the stock sales are scheduled long in advance, taking place on a regular and predictable schedule. But life doesn’t always happen according to regular and predictable schedules, and it’s very far from clear that the problem here is big enough to justify a sweeping new regulation, just to try and prevent an unknown but possibly very small amount of insider trading.

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What is happening to our cherished freedom to monetize our political, financial, and geopolitical forecasting abilities via an Irish-domiciled prediction market of dubious legality? The Commodity Futures Trading Commission has charged Intrade with violating a ban on off-exchange options trading, and filing false forms with the agency.

Intrade announced it would no longer allow US residents to participate in any so-called real money markets and advised them to close open trades and withdraw funds. Unfortunately for its most prescient (or counterparty-risk averse) users, it appears the Intrade market on the existence of Intrade itself hasn’t been operational since December 2010.

Prediction markets, which can be as accurate as aggregated polling data, have been lauded for their potential social utility. Nate Silver, the recent target of a large amount of misinformed criticism, is displeased: “Out of all things the CFTC could be doing to protect consumers and investors, it chooses to sue Intrade?!?” But Matt Yglesias points out that the alternative, allowing illegal commodity contracts to be sold to US residents, doesn’t seem tolerable if the CFTC is going to exercise anything close to its mandate:

This is futures speculation, there’s a legal way to do it, and what Intrade is doing isn’t that legal way. Now in practice, I doubt there’d be any harm if the CFTC decided to play nice and let this slide. But refusing to let it slide is exactly what we need regulators to do.

Justin Wolfers highlights an alternative path laid out in this 2008 paper, co-authored by more than a dozen academic luminaries, including Nobel laureate Vernon Smith. Its recommendation: allow non-profits and government agencies to run small-stakes prediction markets for research purposes, and private businesses to run internal markets limited to employees or contractors. This would allow “prediction markets [to] deliver on their promise [by] clear[ing] away regulatory barriers that were never intended to inhibit socially productive innovation”. — Ben Walsh

On to today’s links:

Taxmageddon
The mortgage interest tax deduction is no longer untouchable – Peter Eavis
How a new Congressional proposal could create a “tax bubble” – Nate Silver
How to fix the charitable deduction – Mina Kimes
Everything you need to know about the fiscal cliff in one FAQ – Wonkblog

Waste
End the 401(k): it costs the US government $240 billion and doesn’t help Americans save – Matthew O’Brien

Remuneration
London’s traders prepare to be 15% less well compensated – Bloomberg

EU Mess
Another deal on Greece’s debt, a late-night press conference and an inevitable fudging of the numbers – FT Alphaville
This deal “looks to be enough to keep the show on the road for now” – JP Morgan

Housing
Home prices rose 3.6% over last year – Case-Shiller

Wonks
Starve-the-beast doesn’t work: Spending doesn’t fall after tax cuts – Christina and David Romer
Basically the best economics article of all time – What If?

Popular Myths
Don’t believe the “net-price” spin that college is actually affordable – The Chronicle of Higher Ed

The Oracle
Warren Buffett: Dimon would be the best Treasuring Secretary during a crisis – Businessweek

Oxpeckers
The NYT’s R&D lab is working on, among other things, a News Mirror – Ad Week
PRWeb is dedicated to filling Google and Google News with utter crap – Search Engine Land

It’s Academic
Looking at cute animals improves work performance, study says – io9

Data Points
Fox News reveres the classic graphical manipulations of statistics, but isn’t afraid to innovate – Simply Statistics

Awesome
Reasons why Los Angeles is the worst place ever - Vice

Yesterday, ZeroHedge published this chart:

Which reminded me of this chart, which Cardiff Garcia found in August:

Both of them are telling the same story: that equity volumes, far from showing any kind of post-crisis rebound, are continuing to fall fast.

It turns out that this is not a purely US phenomenon. Indeed, the global picture is pretty much exactly the same as the US picture. Here’s data from the World Federation of Exchanges:

What all of these charts shows is that volumes are were on a secular uptrend until the crisis, they had a crisis-related spike, and then they’ve been on a secular downtrend ever since. The question is why.

The uptrend bit is easy: volumes, at least until 2009, always went up over time, especially when they were helped along by things like decimalization and high-frequency trading. But what explains the downtrend? It’s not the decreasing number of stocks: that might explain a bit of what’s going on in the US, but it wouldn’t explain the rest of the world.

Instead, I think that what we’re seeing is the slow death of the stock-market investor — the kind of person who subscribes to Barron’s, idolizes Warren Buffett, and thinks of stock-market investing as a do-it-yourself enterprise. During the dot-com bubble, lots of people thought they were really smart when it came to stock-market investing, and then after the dot-com bubble burst, the rise of discount brokerages helped encourage new people to step in to the market and try their luck.

Nowadays, however, the message is sinking in: it’s a rigged game, you can’t win, and you’re better off with a passive strategy.

The fact is that volume, in and of itself, is not a particularly useful phenomenon: it’s the shallowest and most useless form of liquidity. If the primary purpose of the stock market is to allocate capital to companies which need it, then you could happily lose 90% of the volume in the market without a noticeable decrease in utility.

I’ve got a post coming up about stock-picking as upper-middle-class hobby, but it does seem to me that it’s a hobby which is declining in popularity. That’s bad news for stock volumes, bad news for stockbrokers, and bad news for much of the financial media. But it’s good news for upper-middle class household finances.

Charles Forelle has a very wonky post today under the headline “Greek Deal Could Weaken Private Bondholders”, which sounds a bit scary. Basically, there was a Clever Idea which got inserted into the documentation governing Greece’s new bonds, but now it seems clever only in retrospect.

The Clever Idea in this case was that when Greece made interest payments on its bonds and on its EFSF obligations, it wouldn’t pay those creditors directly. Instead, it would pay an intermediary, which takes the money and divvies it up between the private-sector bondholders and the EFSF. The effect was meant to be that Greece couldn’t default on its bondholders without also defaulting on the EFSF.

But as we saw in January, Clever Ideas almost never actually help on a substantive level. My favorite example here is the Rolling Reinstatable Guarantee, which was dreamed up in 1999 as a way of ensuring that bond issues by Thailand, Argentina and Colombia would get paid just so long as those countries were current on their obligations to the World Bank. And yet, when Argentina defaulted, the bonds with the RRG defaulted along with all of the other bonds — even as Argentina remained current on its World Bank obligations.

In this case, the problem isn’t that Greece defaulted on its bonds without defaulting to the EFSF. If anything, it’s the exact opposite. The EFSF has basically restructured Greece’s debt, in a manner which would certainly constitute an event of default were it to take place in the private sector. As a result, all those expected EFSF payments have basically evaporated, and Greece needs to pay only its private-sector bondholders.

At the margin, this is a good thing, not a bad thing, for bondholders. It means that Greece only needs to pay them; it doesn’t need to make payments to the EFSF at the same time. So any protection they lose from their Clever Idea is more than offset by the real world cashflow relief that the EFSF has just granted Greece.

On top of that, the stock of Greek bonds is being cut, too, with a €9.6 billion buyback operation which is designed to cut Greece’s outstanding private-sector debt significantly. Once again, that means that Greece needs to find less money to pay off its remaining bondholders — and that’s good news for those who don’t sell their bonds into the buyback operation.

All of which is to say that if you’re looking at debt issues, the important things — who’s going to fund the deficit, how much debt a country has, how much the debt service will cost — will always outweigh any Clever Ideas. In this case, the “co-financing agreement” is now pretty much worthless — but the fact is that it was pretty much worthless all along. If Greece really wanted to find a way of defaulting on its bondholders while remaining current on its EFSF obligations, it could always come up with with such a way. Now, happily, it doesn’t need to worry about such things. Because its EFSF obligations are to all intents and purposes zero, at least for the foreseeable future.

So the Greece deal is done, and it has ended up looking much like Lee Buchheit said it would look, especially as regards the way that the official sector is dealing with the enormous amount of Greek debt it holds:

What do I think will happen in the end? There will be some form of rearrangement of the official sector debt. If you asked me to predict, I would say it will not be a principal haircut. There is an alternative. The alternative is to stretch out those liabilities for a very long period of time at a very nominal interest rate.

Now check out the official Eurogroup statement, which, crucially, includes this:

An extension of the maturities of the bilateral and EFSF loans by 15 years and a deferral of interest payments of Greece on EFSF loans by 10 years.

This happened faster than most people thought it would: even Buchheit thought that the deal would have to wait until after the 2013 elections in Germany. But the point is that this kind of deal was inevitable, and sets a very important precedent.

This deal isn’t just the latest chassé in the long dance between Greece and its creditors; it’s a blueprint for every other European country with unsustainable official-sector debts as well. Including Greece itself, which will surely require another deal like this down the road. And it encapsulates the big difference between the way the private sector likes to deal with big debts, in contrast to the way the official sector does it.

The private sector likes a big one-and-done deal, where you start with a massive debt stock, and then you swap it for something smaller. The key number is the “NPV haircut”: the value of a bond is the net present value of its future cashflows, and so a big cut in coupons, or a terming out of interest payments, can be just as drastic, from a bondholder’s point of view, as a cut in principal. There’s nothing sacred about principal: what matters is the mark-to-market value of the bond.

The official sector, by contrast, holds principal highly sacred. That allows the Germans and others to say that they aren’t forgiving any debt; it also means that no national parliament needs to ratify a bill writing off any Greek debt. On the other hand, the official sector is happy to term out maturities until, as Buchheit puts it, the 12th of never, and also cut coupon payments at the same time.

I don’t know if anybody’s done the math to work out what the effective NPV haircut is here, especially if you also add in things like the way that Greek interest payments are going to get recirculated back to Greece in a weird kind of rebate program. In a way, it doesn’t matter, because the lesson here is that when push comes to shove, the official sector will always agree to let Greece (or any other troubled Eurozone country) term out its obligations instead of risking a default.

This is the big difference between the private sector and the official sector. The private sector, if it’s owed $1 billion on April 15, expects $1 billion on April 15, whether the debtor can really afford it or not. Failure to make that payment is a default, and if default is a real possibility, then there’s certainly no way the private sector will lend the country new money to make the payment.

The official sector, in contrast, if it sees a big $1 billion payment due on April 15, will simply term it out for a few years. That doesn’t impair the value of the asset on any official-sector balance sheet: it was $1 billion before, and it’s still $1 billion. And so it doesn’t really help with respect to anybody calculating Greece’s debt-to-GDP ratio, since the nominal amount of debt outstanding never actually does down. But in reality, Greece’s ability to manage those debts is much greater than it would be if the debts were mostly private. Because the official sector, deep down, in its heart of hearts, doesn’t actually expect to ever be repaid.

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The Bank of England has imported its next governor. Mark Carney, 47, currently the head of Canada’s central bank, will take over from Sir Mervyn King on July 1. the BoE’s release is at pains to point out that “as a Canadian citizen he is a subject of Her Majesty The Queen”; it also mentions that he used to work for Goldman Sachs — just like ECB chief Mario Draghi, Italy’s Mario Monti, and William Dudley of the New York Fed.

This appointment marks a new breed of central banker, Neil Irwin writes. Unlike King or Ben Bernanke, both academic economists, Carney’s schooled in the “messy, legalistic world of overseeing banks and financial markets”. This will be particularly important because the BoE will soon resume bank oversight.

Carney’s also the head of the Financial Stability Board, and has become arguably the biggest champion of Basel III. He’ll be keeping his job at the FSB, FT Alphaville notes.

What will Carney’s term as the head of BoE be like? For one, count on the push for higher bank capital standards to continue. In this Reader’s Digest Canada interview, Carney said Canada made it through the financial crisis because “our banks had more capital than most banks around the world”.

You can also expect Carney to speak his mind: his dictum is “complacency is really the enemy in finance”, which helps explain his repeated warnings to Canadians that low rates could fuel a housing bubble.

Carney’s approach, according to this 6,000-word Euromoney profile from October, has been reformist, but not radically so. Carney was willing to spar with Jamie Dimon over capital requirements, but he isn’t necessarily a fan of breaking up big banks and he has criticized the Volcker Rule. He’s described as “finance’s new statesman”, but he also has a “zeal for regulation and government supervision”.

Martin Wolf writes that Carney will need that love of government — he’s entering a job that’s “inescapably political”. — Ryan McCarthy

On to today’s links:

Windfalls
How China’s premier saved a Chinese insurance giant — and made his family billions – NYT

Stimuli
Mobile phones — especially 3G models — make economies grow faster – Quartz

Big Pharma
Industry-funded drug trials are 3.6 times more likely to yield positive results – WaPo

Taxmageddon
It’s time for a minimum tax on the wealthy – Warren Buffett
The latest solution to America’s Congressional budget dysfunction? Tim Geithner – WSJ
The White House’s new report on how the fiscal cliff will affect the middle class – White House

Legalese
Sham directors: the fake board members who hide the activities of tens of thousands of offshore companies – Guardian

New Normal
The three dimensions of inequality: global, educational/technological and plutocratic – Brad DeLong
The marginal tax rate of America’s poor is more than 30% – Evan Soltas

Ciphers
The linguistics professors who cracked a 250-year-old Freemason code – Wired

Alpha
The Fibonacci investor who had an epiphany after listening to Coldplay for 11 hours in a row – Bloomberg

Oxpeckers
The NYT has always understood marginal tax rates, but from now on, it will display that knowledge – Margaret Sullivan
CJR calls for a WaPo paywall – CJR

Regulators
SEC chairwoman Mary Schapiro to step down – Dealbook
President to nominate SEC Commisioner Elisse Walter to lead agency for one year – WSJ

Advanced Strategy
The most effective way to raise low-end wages is “simply to raise wages” – Ron Unz

Added Value
How the Chevy Volt came to have an API – Ars Technica

EU Mess
Goldman would prefer not to underwrite deals with Spanish and Italian banks – Bloomberg
Europe still can’t agree on whether or not to write off Greek debt – Reuters