Felix Salmon

Counterparties: Bruised bonds

May 31, 2013 22:04 UTC

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With Federal Reserve chairman Ben Bernanke hinting that the US central bank may be getting ready to cut back on its bond-buying program, the bond market has been beaten up. The yield on the benchmark 10-year Treasury note rose dramatically this month, from 1.63% at the beginning of May to today’s closing rate of 2.2%. As David Wessel notes, that’s the biggest monthly move in three years. Optimists see this as a sign of economic growth, while bond investors are worried about their books, warning of an impending crash.

Neil Irwin explains that higher rates may be a sign of increasing confidence in economic growth. “If this explanation is true, then the slight uptick in interest rates from such low levels shouldn’t be enough to undermine the nascent housing recovery,” he says. Wessel agrees with Irwin, arguing that “markets, hungry for more certainty than Fed officials can provide, over-interpret each adverb Fed officials use”. UBS’s head of global rates strategy put out a note today which hypothesized that the market is overreacting to rumors about QE, concluding that bonds are cheap.

Goldman Sachs, on the other hand, says, “the bond sell-off: It’s for real,” and expects rates to hit 2.5% by the end of the year. BofA agrees, warning that “risks of a bond crash are high”.

Either way, argues Alen Mattich, the Fed is in a Catch-22 situation. “Central banks argue that their bond purchases are meant to push down yields in order to make long term finance cheaper. But, at the same time, a sign that QE’s working is rising yields.” The trick, then, is to figure out how to keep rising yields from slowing growth. – Shane Ferro

On to today’s links:

Wall St. boot camp: $1,000 a day to learn the difference between a pivot table and a header row – DealBook

Tax Arcana
How Apple’s multi-billion dollar “check the box” tax loophole snuck through Congress – Reuters

No, you probably didn’t predict the financial crisis – Noah Smith

EU Mess
Thousands of “Blockupy” activists protest austerity, as European joblessness hits a new record – Guardian

The government settled a big case with Citigroup – so why are the terms confidential? – Jonathan Weil

Unintended Consequences
The uneven, perplexing market for mobile money in Africa – Bloomberg Businesssweek

“The Treasury market is a beach ball being held under water” and other ways of looking at the recent bond market plunge – WSJ
Emerging market currencies are getting crushed – WSJ

The “Society of [Google] Glass Enthusiasts” is exactly as strange as you thought it would be – Bianca Bosker

Nordic Models
How Sweden partially finances college costs and leaves student with manageable debt – Matthew Phillips

Year-over-year core inflation is at the lowest level on record – Catherine Rampell

The USSR’s old domain name is a virtual haven for criminals – AP

Bloomberg’s CEO is upset he can’t hold Matt Winkler accountable for the spying scandal – NY Post

Morgan Stanley really wanted to shrink its derivatives business – until it found 3 big deals – Bloomberg
Running one of the worst-performing US food makers nets Smithfield’s top 5 execs $85 million – Bloomberg

New Normal
Once again, the US consumer is expected to save the economy – Sober Look

Goldman Sachs gets 17,000 applications for 350 intern spots – WSJ

And, of course, there are many more links at Counterparties.


Sweden = Socialist paradise with manageable average debt of $19K.

USA = Capitalist hellhole with staggering average debt of $25K.

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Don’t worry about cov-lite loans

Felix Salmon
May 31, 2013 16:12 UTC

Talk to a bubblista for more than about five minutes, and you’re bound to hear the phrase “cov-lite” come up in conversation. The argument goes something like this: during the last credit bubble, we saw a large increase in cov-lite loans. Now, we’re seeing the same thing all over again. So, we’re in another bubble!

A recent report from Moody’s sparked the latest round of such commentary: Matt Wirz’s headline (“Beware of the Covenant Bubble”) was only slightly more alarmist than Moody’s own (“Signs of a ‘Covenant Bubble’ Suggest Future Risks for Investors”), while Stephen Foley at the FT took a similar stance.

But the fact is that cov-lite loans — loans unencumbered by various promises made by the borrower to the lender — make perfect sense for all concerned. To understand why, look at Wirz’s article, where the word “investors” appears five times while the word “banks” doesn’t appear at all. All we’re seeing here the natural evolution of the loan market.

Once upon a time, loans were bank loans. A company would go to its bank, negotiate a loan, and that was pretty much that. The bank would typically know the company’s business very well, as well as its officers, and the two counterparties would have a healthy relationship whereby the bank would help the company through rough patches as and when they occurred.

Eventually, however, as both companies and banks started getting much bigger, that model didn’t work any more. Companies wanted multi-billion-dollar loans — the kind of sums no bank could muster for a single borrower. And they started transacting with multiple banks and advisors, to the point at which it could no longer be assumed that the bank would always know when a company was getting into trouble.

The solution to this problem was something known as the syndicated loan. A single borrower, rather than borrowing from a single bank, would instead borrow from a consortium of banks — there could be dozens in a single deal. And because no borrower can be expected to maintain a deep relationship with dozens of different banks at the same time, the trust relationship got replaced with covenants — promises the borrower would make to its lenders. It might promise not to exceed a certain debt ratio, for instance, or it might promise that its cashflows would always exceed its interest payments by a certain amount. If any of those ratios were violated, that would count as an event of default on the loan, and the borrower would be forced to renegotiate with the consortium.

Covenants were a clumsy replacement for simple communication between a borrower and its bank, but they were necessary, especially since the new, syndicated loans had another key characteristic: they were tradable. If Bank A wanted to sell its part of the loan to Hedge Fund B, it could do so whenever it wanted to — even if the hedge fund in question had no relationship at all with the borrower. Essentially, loans were becoming more like bonds: they were becoming debt instruments to be traded between various investors, rather than loans which a single bank would hold to maturity and beyond. Still, most of the time the loans were initially sold to banks which at least aspired to having a lucrative relationship with the borrower in question. It was generally understood, for instance, that you would find it easier to get an advisory mandate if you already had a healthy lending history. And so the loans still felt more like loans than bonds, tied up with covenants and restrictions which brought the borrower and the lenders closer together.

Nowadays, however, the loan market is an investors’ market, and if you’re not a bank, covenants are generally much more trouble than they’re worth. For one thing — and this is very important — they increase the probability of default. Here’s a key chart from a June 2011 Moody’s report, which looked at 104 cov-lite issuers who borrowed in the loan market at the height of the bubble, between 2005 and 2007.

In a period where corporate issuers as a whole were defaulting at a rate of 10.35%, issuers with cov-lite loans defaulted at just a 7.8% rate, while the cov-lite loans individually defaulted at a very low 4.1% rate.

This makes intuitive sense. As the more recent Moody’s report says, “a cov-lite capital structure allows for increased financial flexibility at a time when a company needs it most, potentially allowing it to forestall default while getting through a choppy patch in its business”. Defaults are messy, time-consuming, expensive things; few companies benefit by going through a forced restructuring just when they’re being badly hit by a financial crisis or recession. If they have the financial flexibility one sees in cov-lite loans, that generally helps them rather than hurts them.

But does that flexibility only serve to increase the severity of default further down the road? If banks can’t interfere early, does that mean they’re going to end up taking bigger losses later? As Moody’s puts it, there’s an assumption “that  cov-lite issuers are less likely to default, but once they do, value may have deteriorated to a greater degree than it would have if lenders had been able to step in earlier to address a breached covenant”.

Well, it turns out that assumption is wrong as well:

What you’re looking at here is recovery rates, from the wonderfully-named Ultimate Recovery Database. When a debt instrument goes bad, how much value does the lender end up with, at the end of the day? In the case of cov-lite loans, the answer is 89.6%. That compares to recovery rates ranging from 5.6% to 47.2% for all other debt instruments, be they loans or bonds.

Why did cov-lite loans do so well both in terms of default rates and in terms of recovery rates? Because instead of relying on covenants, the lenders relied on something much easier and simpler: subordination. Invariably, whenever you see a cov-lite loan, you’ll find a junior loan beneath it, which needs to be wiped out before the cov-lite loan takes any losses at all. (That’s why the default rate for companies with cov-lite loans, in the first chart, is higher than the default rate on the cov-lite loans themselves.)

For both borrowers and lenders, then, cov-lite loans make perfect sense. The borrower doesn’t need to worry about an unwieldy consortium of unfriendly lenders breathing down its neck, forcing restructurings even when all the debt-service payments are being made in full and on time. And the lenders don’t need to worry about such negotiations either, protected as they are by subordination — and by the proven ability of cov-lite borrowers to navigate difficulty and emerge in one piece on the other side. Covenants, after all, are based on the idea that lenders know better than borrowers how a stressed borrower should best run its business — a proposition which, these days, is unlikely to be true.

The only conceivable losers here are the banks, which lose their dream of having a broad-based relationship with a certain borrower, knowing its finances intimately on a real-time basis, and being able to sell it all manner of overpriced financial services if and when it gets into trouble. You’ll forgive me if I don’t shed many tears for them.


I will second casualsophist. I’ll also add that it’s fair to assume that cov lite loans as a group are to higher quality borrowers that historically have fewer total wipeouts for lenders – larger borrowers, for example. Also, the answer to a covenant default in many cases is that the bank group gets an amendment fee or a higher interest rate – so better economics. Felix’s knowledge of this particular area seems pretty superficial.

What does seem fair to point out is that cov lite loans do have some covenants – they’re just “lite” covenants but are broadly equivalent to covenants on high yield (junk) bomds and probably stricter than covenants on investment grade bonds. While it is a sign of a more borrower friendly market, there’s no magical reason that a BB rated loan has to have dramatically more onerous covenants than BBB senior unsecured bonds.

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Counterparties: Broken tax breaks

May 30, 2013 22:18 UTC

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The Congressional Budget Office is out with a report that boils down the byzantine US tax code into something relatively simple: the benefits of taxes aren’t distributed equally. In fact, more than half of the total dollar value of America’s 10 largest tax breaks, deductions and exclusions go to the top 20% of American earners. 17% of these tax expenditures — including the mortgage interest deduction and preferential tax rates for capital gains — go to the top 1%.

Meanwhile, the middle class and poor get relatively few such benefits from the tax code: 8% of the value of these tax expenditures goes to the middle quintile and 13% go to the lowest-earning quintile.

Gawker takes the populist angle on this: “Surprise: The Tax Code Mostly Benefits the Rich”. Derek Thompson has a headline tweak: “Right headline might be: Here’s What Happens When You Have a Progressive Tax System With Lots of Breaks in a Top-Heavy Economy”. And the CBO itself points out the poorest Americans get benefits equal to 12% of their after-tax income, while the top 20% of earners get benefits equal to roughly 9% of their income. (Regardless of which metric you use, the middle class gets screwed by the tax code.)

Kevin Drum thinks the CBO’s calculations distort the picture a bit. Lower tax rates for capital gains and dividends aren’t really tax expenditures, Drum writes. And the CBO ignores the value of the standard deduction to the lower and middle classes. As a result, Drum argues, the CBO makes the tax code seem more tilted toward the wealthy than it really is.

Whatever method you use, the tax code matters — which is one reason why reforming it has been so politically fraught. The 10 largest expenditures total $900 billion, or 5.7% of GDP, the CBO says. As Dylan Matthews notes, over a decade these expenditures cost nearly $12 trillion. That’s more than Medicare, defense, or Social Security.

The tax code has also had an unusually dramatic impact on the structure of American society. A new Piketty-Saez paper looks at why income inequality has grown in America at a far faster rate than most other rich nations. The answer: the 1% have more than doubled their share of American income in the past 30 years in large part because of tax policy. As America’s top tax rate has fallen, income inequality has soared, they find. – Ryan McCarthy

On today’s links:

America’s paper of record considering a pivot to America’s sponsored content provider of record – Edmund Lee

Second Acts
David Petraeus joins KKR for some reason – Jonathan Chait

Fannie Mae’s former CEO sleeps just fine, thank you very much – Max Abelson

Crisis Retro
The only group that’s skirted criticism over the financial crisis? Shareholders – Jesse Eisinger
Shareholders are selfish jerks – Matt Levine

Tax Arcana
How one Irish accountant helps Apple save tens of billions – Guardian

Bold idea: Give the poor money – Matt Yglesias

Wait, the “start-up nation” trend-mongering may have been just a trend? – WSJ

“Morgan Stanley Lowers Ambitions” – WSJ

Consumers’ attitudes toward the stock market have done a 180 in the last year – WSJ

Enough with the anecdotes, there isn’t another housing bubble – Ryan Chittum

How Goldman sailed around maritime law – WSJ

The nation’s largest oil store almost got hit by the Moore, Oklahoma tornado – Climate Wire

Follow us on Twitter and FacebookAnd, of course, there are many more links at Counterparties.


“But what exactly do you think will happen in 2033 when the trust fund is exhausted. Do you think 50 million seniors are actually going to get 78% of what they were promised?”

I expect that 40 million will receive their promised benefits, and the 10 million who can most afford it will receive sharply reduced benefits. The difference will be made up through the additional taxes that you mention. I certainly hope and expect to be among the top 20% that loses benefits, as the alternative is worse.

The middle is not particularly overtaxed. The greatest tax burden falls on two-earner families making between $100k and $200k. They phase out of the middle class tax breaks. They pay Social Security on the majority of their earnings. They fall squarely in the 25% tax bracket. Sure, they stand to benefit from the mortgage interest deduction and the retirement account deductions, but they still pay a marginal rate on their income pushing 50% (when you include state taxes) and an overall tax burden that is greater than those on either side of this range.

And this is the group that I expect to lose Social Security benefits. After all, they can afford it.

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The Frannie gamble

Felix Salmon
May 29, 2013 22:55 UTC


This is a three-year chart of Fannie Mae’s common stock, which fell almost 30% today; it’s now at a level not seen since Friday afternoon. You can think of this as shares “getting destroyed” if you want — but really what we’re seeing here is little more than a game of chicken between traders who find it easier to day-trade from their desks than to jet to the 32nd floor of the Galaxy Macau casino for the weekend.

Every so often the financial markets throw up a security which doesn’t make any sense from an intrinsic-value perspective but which traders love to trade anyway. A large amount of cocktail chatter than springs up around the question of whether this is all just a game, where traders try to second-guess each others’ moves, or whether there might actually be some value buried in there somewhere.

Examples are easy to find: AIG stock circa January 2010, for instance, or credit default swaps on the USA a year earlier. For people who have internalized the efficient markets hypothesis, the fact that such things have value means that there has to be a credible story explaining where that value might lie. And sometimes there is: AIG is now a genuinely valuable company, and shares which were trading at a silly $29 in January 2010 are now trading at a pretty sensible $45.

The Frannie trade is interesting because it’s basically a bet on the US government taking pity on various different classes of shareholder. The common stock is pure gamble, but there’s real money being invested in the preferred stock, which is being held by the likes of John Paulson and Jim Millstein, the man who managed to unlock the value in AIG. Millstein explained the bull case to Nick Timiraos:

At some point over the next year, “the government is going to get all of its money back. So the questions for the government are what will, and what can, they do with the excess?” said Mr. Millstein.

Fannie and Freddie, which took around $188 billion from the U.S., will have paid the government about $132 billion in dividends by next month. Investors betting on the preferred shares are taking heart in those improved fortunes.

The problem is that while the government might well get its money back, in nominal terms, from Fannie and Freddie, the $188 billion in debt is still outstanding: the $132 billion in dividends has not paid down a penny of the debt. Since the debt is first in line for any payout from the companies, there’s no particular reason to believe that the preferred stockholders, who are next in line, or the equity holders, who are even more junior, are ever going to see any money at all. The government can keep on dividending out as much money as it likes from Frannie, and still hold onto 188 billion reasons why no one else should ever get anything.

Of course, if the government wanted to recapitalize Frannie and give the companies back to their current shareholders, it always could. But that doesn’t seem likely — especially given how fiscally conscious most of Congress is, these days. And certainly there’s been nothing in recent weeks to justify the massive run-up in the prices of the preferred and the common shares. Rather, what we’re seeing is textbook speculation: people buying shares just because they think a greater fool will be willing to jump onto the momentum trade in the future. If you time it well, you can make a lot of money with that strategy.

There’s another trade here, too, though, which is more distasteful. Timiraos reports that “small investors also have begun to pile in” to Frannie preferreds, and I can’t help but think that they’re doing so for much the same reason that their counterparts a few years ago invested with Bernie Madoff. Back then, it was thought that Madoff was managing to front-run the market, and that his investors were reaping the benefit; now, it is thought that well-connected Washington types like Millstein have inside information about what the government is going to do, and/or are likely to influence the outcome, and that the smart trade is to just follow the insider money.

But that trade — following the smart money — almost never works for retail investors, since the smart money never advertises its exits. If you were lucky enough to be in on this trade a few weeks ago, then you’re sitting on a very nice profit right now. But my guess is that it’s over now, and that if the stock has peaked, the Frannie preferreds aren’t going to stay at their current elevated levels much longer.


The run-up in the common this week was pure momentum players. It had to end badly.

- IF – there is any value in the Agencies, it will be in the pref, not the common. The end result would have to be a conversion of the pref to new common. That would dilute the existing common shares by 5Xs.

Felix points to the Fannie S pref. A better benchmark is the Fannie T, last at $8.

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Counterparties: Bits of laundry

Ben Walsh
May 29, 2013 21:21 UTC

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Even criminals need financial intermediaries. Yesterday federal prosecutors shut down Liberty Reserve, a currency exchange and payment processor, and indicted seven people connected to the company. The indictment called the company a “financial hub of the cybercrime world… including credit card fraud, identity theft, investment fraud, computer hacking, child pornography, and narcotics trafficking”, and alleges it laundered $6 billion via 55 million illegal transactions for one million users over the last seven years.

The Tico Times has a detailed article on the history of the Costa Rica-based business, not to mention “flashy cars, lavish gifts, multiple identities and armed Russian henchmen”.

The criminal attraction to Liberty Reserve is obvious. An email address was all that was needed to to set up an account — some accounts had oh-so subtle names like “Russian Hackers” — and paper trails were nonexistent. The principals seemed aware of who used their services: in an IM conversation, they referred to the company as a “money laundering operation that hackers use”.

Speaking of things hackers like that can be used to launder money, what does Liberty Reserve’s indictment mean for Bitcoin? Kevin Roose says that while both Liberty Reserve and Bitcoin offer users anonymity, “in Bitcoin’s case, there’s nobody to arrest, no entity to prosecute for the sins of the system ”. Bitcoin is vulnerable, Roose notes, to enforcement that targets the exchanges and processors which the currency relies on to function. Timothy Lee thinks that any attempt to shut down, or even regulate, Bitcoin would only drive the currency further underground (assuming that’s possible), making it all the more attractive to criminals.

Kirsten Salyer says “more government scrutiny could actually turn out to be a good thing” for Bitcoin. A competitor is gone, and more money laundering enforcement could help accelerate Bitcoin’s adoption by mainstream users.

Bitcoin’s value has remarkably stable since news of Liberty Reserve’s indictment broke. Perhaps that’s another bit of anecdotal evidence that for die-hard users, there is no such thing as bad news for Bitcoin. To the Bitcoin faithful, everything is a stop on the path to legitimacy. — Ben Walsh

On today’s links:

The largest pork processor in China acquires Smithfield Foods – DealBook

Absent a revolutionary policy change, QE is really the only option – Pawel Morski

Why there is no justice on Wall Street – WSJ

Long Reads
Caterpillar’s Doug Oberhelman: “We can never make enough profit” – Businessweek

Central Banking
The world’s central bankers have overcome a great challenge: their own caution – NYT
The housing market is recovering, and the Fed is a big reason why – Jared Bernstein

Tim Cook promises that Apple is still cool, acknowledges that wearable devices have limited appeal – Reuters
Apple may open up iOS features for third-party developers – BuzzFeed

The state of the Internet in 117 slides – Mary Meeker

“Done carefully, debt is not damning” – Quartz

They’re Just Like Us
Mario Draghi feels misunderstood in Germany and finds it hard to make friends – Der Spiegel

“Warning: This game is not intended to be used for actual monetary policy” – WSJ

Mortgage rates are at their highest level in a year – Reuters

Josh Barro is joining Business Insider – Politico

And, of course, there are many more links at Counterparties.

Promiscuous media

Felix Salmon
May 29, 2013 00:44 UTC

Two years ago, when I wrote about the death of blogging, I contrasted the decline of old-fashioned reverse-chronological blogs with the huge success of Twitter and, especially, Tumblr. Since then, of course, Tumblr has been sold to Yahoo for more than $1 billion, while Twitter is reportedly valued at some ten times that amount. Clearly there’s a lot of value in becoming a successful publishing platform.

One big reason for the success of Twitter and Tumblr is that they have a very clear idea of what their product is, and they focus on making that product great rather than on being all things to all people. Blogging was historically thought of as a one-stop shop: the place where people would post a series of things, and where those things would appear in reverse chronological order. Every so often, a blogger would write something elsewhere, usually for money, and then link to that piece from their blog. But when Twitter came along, something changed: bloggers would write some things on their blogs, and other things on Twitter.

After I realized that Twitter had powers that no individual blog could ever have, I started thinking increasingly about the best platform for any given thing that I wanted to do. Photos of my friends and family of course are easy: they go on Facebook. Less personal photos go on Instagram. And if something could be distilled into 140 characters or less, there’s a good chance that it belonged on Twitter. But Tumblr was great too, for certain things: I’ve now posted to my Tumblr 1,159 times, and have 36,475 followers there. I haven’t spent much time making it pretty or coherent, but short-form content, especially if it’s visual and doesn’t work on Twitter, is often perfect for Tumblr.

There are lots of other platforms too: I’ve seen people like Jerry Saltz get really good at Facebook, although I’ve largely shunned it as a publishing tool. Bloomberg’s Tom Keene is very active on LinkedIn. I had a YouTube channel for a while; that was a lot of fun, and allowed me to do things which don’t necessarily work in print very well. For conversations, podcasts can be wonderful, as can live events. And if I need it, there’s always my own personal blog. Basically, different types of communication require different platforms, and it’s silly to expect everything to fit into one template.

This morning, I posted some thoughts about CitiBike on Medium — which is also the place I chose to publish my big piece on bitcoin. I like how clean Medium is, and it’s quite well suited to content which is longer than a Tumblr post but also maybe not the kind of thing which I’ve started to concentrate on here at my Reuters blog. Don’t ask me to define exactly what I put where: a lot of these decisions are spur-of-the-moment things, and sometimes I change my mind at the last minute. (This post, for instance, was drafted in Medium before I decided to move it over to Reuters.) But I really do love the ability to create and present the stuff I create in the format which puts it in the best possible light.

The new Reuters site is based around the concept of streams, and the Felix Salmon stream on the site, which will appear at some point in the coming months, is by its nature going to be a different animal, on a different platform, than the current Felix Salmon blog on Reuters.com. I don’t know exactly how it’s going to work — there will be a lot of trial and error involved, for sure — but right now the way I’m thinking about it is as a place where the various things I do on various platforms can be brought together in a single place. If I write something on Medium, or if I write an article for Wired, or if I post something on Tumblr, or if I create a video on YouTube, that thing can live in its own natural habitat while still being aggregated on my own Reuters platform. And of course I’ll always be writing a lot of original content right here — content which in turn will end up being linked to from Twitter, or syndicated on Seeking Alpha, or otherwise shared around the social web.

To put it another way: the death of the blog was really just the death of a single template into which all of a certain person’s output had to be able to fit. Now we have a multiplicity of options, and it’s silly not to take advantage of them. Media organizations have generally embraced their journalists publishing ultra-short pieces on Twitter; the future, I think, is going to be ever further in that direction. Certain journalists will be wonderfully active on Pinterest; others will develop huge followings on LinkedIn. As they do, their employers will be gifted with a brand-new way to extend their brand out to people they never reached before, in what feels like a very personal manner.

I remember having drinks with one editor-in-chief, a couple of years ago, after a NYT op-ed I had written received wide attention. He said that he would be furious if one of his writers had done such a thing: he had a clear expectation that his own publication would be the only place that his writers published pretty much anything longer than 140 characters. That expectation didn’t make much sense to me in 2011, and it just seems silly now. The same NYT op-ed, published as a Reuters blog post, would have been a very different animal: the medium helps create the message, as well as the audience that it reaches. Media companies should be in the business of curating and publishing what works best on their own platforms, rather than becoming jealous of what appears elsewhere. Indeed, many of them publish too much, and would be well advised to publish much less than they do.

Everybody is a curator, these days: publishers design platforms for certain types of content, editors shape publications by deciding what to leave out; journalists try to make sure that the stuff they’re doing is expressed to its best possible effect on the best possible platform. The result is a more fluid media ecosystem than we’ve been used to, but also a more effective one. Let content live where it works best; that way, the publishers of that content will be able to present something with maximal coherence and a minimum of feeling that they’re trying to do something they’re not particularly good at. The publishers who win are going to be the ones with addictive, compelling, distinctive content. Rather than the ones who are constantly flailing around, trying to copy everything that’s good somewhere else.


Not sure I agree, Felix. A lot of Tumblr posts and Tweets are “matches” in the sense that users are retweeting or reposting content they found somewhere else, sometimes with credit and sometimes without, ultimately creating little. The number of spam/PR accounts on both platforms are also high. These supposedly successful platforms are simply replication machines with fewer scruples about copyright than mainstream news sources. And what are the metrics by which we can measure their success? As far as I can tell, neither Tumblr nor Twitter has turned a profit after absorbing hundreds of millions of dollars in investments. Is that something others should aspire to? If so, why?

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Counterparties: Why Europe wants to be more Austrian

May 28, 2013 22:32 UTC

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European leaders convened at Sciences Po in Paris today to tackle the continent’s increasingly scary youth unemployment crisis. They did a great job of delivering concerned rhetoric (“We have to rescue an entire generation of young people who are scared,” said Italian labor minister Enrico Giovannini). They weren’t quite as good at nailing down specifics.

However, there is some evidence that leaders are slowly becoming motivated to do something. Their clear incentive: the political ramifications of inaction could look something like last week’s riots in Stockholm, if not much worse.

Joe Weisenthal points to the below chart, showing Germany (DE) and Austria (AT) both with youth unemployment rates below 8%, Greece (EL) and Spain (ES) well above 50%, and Italy (IT) and Portugal (PT) each approaching 40%. Far more countries in Europe are above 20% youth unemployment than are below it.

The most serious step toward reducing unemployment is the Youth Guarantee, adopted last month by the EU’s council of ministers (though implementation is left to the member states, so the plan’s fate is far from certain). The plan would ensure a job or training program to anyone under the age of 25 within four months of leaving school or becoming unemployed. This is all based on programs already in place in Finland and Austria, which have youth unemployment rates of 20% and 8%, respectively. The plan is estimated to cost a total of €21 billion, a fraction of the €150 billion youth unemployment is currently costing the economic union annually. Euro zone countries have already set aside €6 billion for the guarantee over the next six years.

The Italian government announced last week it was considering a job-sharing program between older and younger workers. While this neo-apprenticeship model is a way to get more young people into the workforce, “it wouldn’t create any new jobs, and taxpayers would have to pick up the tab for pension contributions for the older workers who choose to participate,” according to the WSJ– Shane Ferro

On today’s links:

The Fed
The Fed’s latest obsession: managing our expectations – Jon Hilsenrath

Finally, a financial innovation that helps investors – Tadas Viskanta

Fiscally Speaking
A handful of states are slowly approaching budget surplus territory – Calculated Risk

Sony makes money on music and movies, not electronics – NYT

Home prices up 10.9% over March – Case-Shiller
The housing recovery visualized – Matthew Phillips

“Dear Dumb VC: You don’t realize you are going out of business” – Andy Dunn
“Finally, someone who deals with VCs writes a long, angry post about how shitty they all are” – Sam Biddle

Health Care
Walmart is flying employees to top hospitals to have surgery — and saving money – National Journal
Obama’s Cadillac tax is working – Matt Yglesias

Bad Data
A happiness study that only samples bloggers – The Atlantic

“Hot Money”
Criminals need non-bank financial intermediaries too – WSJ

EU Mess
Why a German exit from the euro zone would be disastrous — even for Germany – Pedro da Costa
Angela Merkel is reversing her stance on austerity in a fashion that’s possibly entirely symbolic – Der Spiegel

What if quantitative easing is actually deflationary? – Frances Coppola

“We’re starting the Uber of organ transplants” – McSweeney’s

Big Government
How Washington is dealing with the food truck lobby – Bloomberg

Streaming video is slowly killing cable – Pando Daily

And, of course, there are many more links at Counterparties.


Exactly, FifthDecade. Too many people confuse college with job education. College isn’t a terribly good structure for learning job skills, and job skills aren’t the central purpose of going to college.

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America’s healthily idiosyncratic housing market

Felix Salmon
May 28, 2013 15:17 UTC

This is the chart of US Case-Shiller prices. You can click to enlarge it, but sometimes it helps to take a step back: The thicker blue line is a composite of 10 cities, the red line is a composite of 20 cities, and the medium-weight green line, for you locals, is New York City.

This isn’t the chart you’re possibly familiar with, the one showing the sharp spike upwards in the past few months. That chart measures year-on-year gains; this one shows absolute levels, with January 2000 arbitrarily set as the 100 point.

The messages from this chart are different from the ebullient headlines you might be seeing elsewhere. The first message is that house prices aren’t suddenly soaring again: we had a big bubble from about mid-1997 to mid-2006, whe then had a big crash from mid-2006 to mid-2009, and since then we’ve basically just been wiggling sideways: nationwide house prices now are basically back to where they were at the beginning of 2009.

The second message is that there are massive regional variations, as you’d expect in a country the size of the USA. After setting every city equal to 100 in January 2000, the range today is enormous: it goes from 81, in Detroit, to 190, in Washington. And for all the bidding-war anecdotes in chattering-class circles about houses selling in one day for way above the asking price, there’s not much sign of frothiness here: indeed, New York prices actually fell in March.

All of this is good news. The last thing we need is another housing bubble, or any hint that we’re moving back towards a world where housing costs comprise a disproportionate part of the typical family’s monthly budget. Affordable housing is good for everybody, and if you see housing costs spiraling out of reach, that’s bad for the economy; it’s not amazing good news. Yes, it might be a consequence of a healthy economy — although it might equally just be a consequence of new home construction failing to keep up with demand. But it’s not in any way a leading indicator when it comes to broad-based growth; quite the opposite.

We’re also seeing a healthy degree of divergence between cities — and, as those chattering classes will tell you, between neighborhoods within cities, as well. “Property” is not some all-encompassing asset class; different houses in different cities are going to be worth different amounts, and their value is going to fluctuate in different ways. When all house prices start behaving the same way, and correlations start tending towards 1, that’s a good sign you’re either in a bubble or a bust.

The Case-Shiller index, by its nature, attempts to boil down the richly varied set of American housing markets, both between and within cities, to a single number. At one point, Robert Shiller even tried to sell derivatives based on the index, by which homeowners could try to hedge the value of their property, and non-homeowners could try to hedge the risk that prices would move out of reach. They never took off, for various good reasons.

In a reasonably healthy market, property prices tend towards the idiosyncratic — at the level of the individual property, at the neighborhood level, and at the municipal level. Looking at the Case-Shiller numbers, I’d say that today’s market is healthily idiosyncratic, and that even the city-by-city data hides an enormous amount of neighborh0od-level variation. So don’t generalize from today’s numbers — but do feel heartened by them, all the same.


So this time is different. Just like the last time, of course.

At least this time the Fed Chairman is not an ideologically hell-bent liar. This Chairman is not about propping up useless equities…..oh no.

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Counterparties: Washing out with the Tide

Peter Rudegeair
May 24, 2013 20:22 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

A.G. Lafley is hoping that his management skills, along with a bit of Febreze, can get rid of the stench of mediocrity in Procter & Gamble’s C-suite. After a rough four years at the consumer goods conglomerate, Lafley is returning to the top spot after outgoing CEO Bob McDonald announced his resignation on Thursday night.

It’s far from assured that Lafley can bring back his magic touch. The record of CEO second acts is quite mixed, as Matthew Bishop points out: for every Steve Jobs, there’s a Paul Allaire; for every Howard Schultz, there’s a Ted Waitt.

Though the company’s share price makes the timing of switch unexpected — it’s up 20% so far this year — P&G has had a number of stumbles under McDonald’s leadership, as Fortune’s Jennifer Reingold outlined back in February: a headfirst dive into emerging markets that was too much, too soon; a dearth of product innovations; an attempt to get customers to buy more of its premium products that faltered when the recession pinched consumer spending; the archetype of a muddled corporate vision (“purpose-inspired growth”); and a convoluted org-chart that frustrated top managers and led to brain drain.

McDonald’s departure was a big score for Bill Ackman, something the activist hedge fund manager hasn’t experienced much of lately. McDonald tendered his resignation just over two weeks after Ackman blasted the ex-CEO at the Ira Sohn Conference for spending at least a quarter of his time being a director on 21 other boards. Before this coup, Ackman’s highlights over the last six month included seeing his very public Herbalife short get hammered (shares are up 95% from the lows they touched the week after he disclosed his position in December) and watching the man he hand-picked to turn around JC Penney flame out.

Despite the early optimism over Lafley’s comeback — P&G shares are up nearly 5% since yesterday, and one equity analyst raised his price target on the stock from $75 to $95 on the news of the appointment alone — the biggest test of his return will come when, eventually, he leaves again. Because he’s already demonstrated that he erred in choosing a replacement, Lafley will need to show a more rigorous approach to succession planning this time around. — Peter Rudegeair

On today’s links:

Yahoo joins the gaggle of bidders for Hulu – Reuters

The oil price-fixing scandal has landed in the US – Reuters

Right On
Fannie Mae “is regaining its swagger even as lawmakers plot its demise” – Bloomberg

EU Mess
France and Germany team up for a “New Deal” on youth unemployment – Telegraph
“It is highly possible we are at or near the bottom of the cycle” in Europe - Sober Look
IMF searches soul, blames Europe - WSJ

Wall Street lobbyists frequently help draft financial legislation – DealBook
The politicians who hate food stamps but love agricultural subsidies – Arthur Delaney

The deeper agenda behind Abenomics – Reuters

Crisis Retro
Bank of America and Wells Fargo agreed to end mortgage abuses, then didn’t – Reuters

In a change of policy, Goldman Sachs will pay employees to protect its reputation and win clients’ trust – Bloomberg

“It’s Rich Kids of Instagram, concentrated in one Canadian” – Kevin Roose

Private equity firms and hedge funds are recruiting first-year analysts again - DealBook

New home sales are up and “will probably continue to increase for some time” - Calculated Risk

Fracking threatens to destroy the German beer industry - Gawker

And, of course, there are many more links at Counterparties.


Because he’s already demonstrated that he erred in choosing a replacement

Realistically, in a large, diverse, mature business like P&G, is the competence of CEO (barring massive incompetence) a predictor of corporate profits?

For large, stable companies, I suspect the prime determinant of competence is being hired just before the firm’s market segment does well.

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