Felix Salmon

Chart of the day: Do IPOs create jobs?

Felix Salmon
May 29, 2012 21:37 UTC

In the wake of its fabulous report about how investors in VC funds are stupid, the Kauffman foundation has released another report, this time about IPOs. This one comes with a very bad press release, which says in breathless fashion that “nearly 1.9 million new jobs forfeited in the past decade as fewer entrepreneurial firms join ranks of public companies”. In fact, the report itself is much less alarmist, and a single chart does a very good job of debunking the idea that if we had more IPOs, we’d automagically have much more employment.


What this chart shows is that during the dot-com bubble, companies like Amazon and eBay would go public and promptly reinvest the proceeds, using them to grow as fast as they could. Both of them were just three years old at IPO, and used their equity capital to carve out dominant positions in their respective corners of the internet. As the report says, the market’s mantra during the dot-com bubble was “grow rapidly or fail”, and so all companies which went to market adopted pretty much that strategy.

With hindsight, many of those companies would have been better off conserving their capital, preserving a bunch of liquidity for a rainy day, and going for sustainability over growth. But that didn’t happen, and what you can see in the chart is a spectacular failure of public companies to create jobs after the dot-com bubble burst. The older companies certainly didn’t: total employment in companies which went public in 1996, for instance, actually fell significantly between 2000 and 2003. And even newly-public companies, if they went public in 2001 onwards, basically gained no jobs at all; the only exception was 2004, the year Google and Salesforce went public.

So yes, the number of companies going public after the dot-com bubble burst was lower than the number of companies which went public during the bubble, when equity capital was dirt cheap. That doesn’t mean that jobs were forfeited as a result: if more companies had gone public, there’s no way they would have grown their payrolls at the rate that the cohorts of 1996 and 1997 did.

Indeed, the report itself explains very clearly that the 1.9 million number is not remotely something to be taken literally:

Since the number of years in which to grow would have been shorter than for the firms that went public in the late 1990s, the jobs created through 2010 probably would be lower. Second, there is an assumption that the average quality of firms going public would remain the same as those that actually did go public. In other words, that there would have been additional eBays, Amazon.coms, and Googles if there had just been more IPOs. Third, that the people that would have been hired would not have been doing something else. In other words, there is an implicit assumption that a mass army of would-be engineers, scientists, and marketing experts is sitting at home watching television. And fourth, that the capital invested when a company raises funds in an IPO would not otherwise have been invested in job-creating activities. The average company that conducted an IPO during our sample period raised $162 million in inflation-adjusted dollars, and if there were 2,288 more IPOs of the same average size, $370 billion of capital would have been pulled from other uses.

Instead, the point of the 1.9 million jobs number is that it’s low, not high: it’s being presented in order to contrast with insanely overinflated figures elsewhere, such as Grant Thornton report which says (slide 15) that the decrease in IPOs “may have cost the United States 22 million jobs over the last decade”.

In fact, what has happened over the past decade or so is that companies have been getting older and older at IPO, and have been able to raise, in some cases, billions of dollars in venture capital before going public. As such, IPOs have not been a way of raising growth capital, so much as a way of creating an exit for VC funders. Or, to put it another way, there are still lots of hot 3-year-old technology companies raising huge amounts of equity and using it to hire loads of people. They’re just doing it in the private markets rather than the public markets.

What’s more, the fast-growing technology companies which are going public now, or which have gone public in recent years, are hiring precisely the one group of people where there’s no unemployment problem at all: computer engineers in general, and Silicon Valley computer engineers in particular.

Once upon a time, when IPOs were primarily ways for young, fast-growing companies to raise the capital they needed to continue to grow, there was a strong case to be made that they helped create jobs. Today, however, IPOs are something else entirely. If there were more IPOs, that might be a good thing, but it’s silly to believe that we’d have more jobs that way. IPOs, like leveraged buyouts, are financial tools used by financial professionals to make money. Those financial professionals surely like to think of themselves as job creators. But their real job is to make money, not jobs. And so while there are reasons to bemoan the lack of IPOs in recent years, this idea — that we’d have many more jobs right now if there had only been more IPOs — isn’t one of them.


This data appears to make passing of the JOBS act even worse. Companies, broadly, are not having any trouble raising funds in the private market and fail to create many jobs once going public. Now VCs can more easily cash out in the public market and accounting controls are even more lax.

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Did falling correlations cause JP Morgan’s trading losses?

Felix Salmon
May 23, 2012 20:30 UTC


Many thanks to Scotty Barber for putting this chart together for me. It shows the extraordinarily high correlations that we saw within the S&P 100 at the height of the Lehman crisis; at the height of the Greece crisis; and then, again, for pretty much the entire second half of 2011. At that point, high correlations really did look as though they were the new normal.

Obviously, correlations within and across different asset classes don’t always move in tandem with each other. But in general, the RORO trade, as it’s known, (risk-on, risk-off) tends to send correlations soaring across the board. And I can’t help but wonder whether that huge plunge in correlations that we see at the beginning of 2012 was related to the way in which JP Morgan’s CIO blew up.

Remember that the CIO’s main job was to make hedges: buy buying or selling one thing, the idea was that the bank would protect itself against losses on some other thing. So in order for hedges to work, those two things need to continue to be highly correlated.

But if you look at this chart, the period when Bruno Iksikl was putting on his huge CDS index trade was also the period when correlations were falling at an almost unprecedented pace.

Jamie Dimon, from the day he revealed the losses, has had nothing but the harshest possible words for the hedges in question, saying that they were flawed and should never have been put on. But that’s easy to say in hindsight. Maybe they were really great hedges, in a high-correlation world — and then correlations fell apart, and the trades started moving against JP Morgan, and they had to get bigger and bigger in order to retain any hint of actual hedging capability. Obviously we don’t know for sure that’s what happened. But it’s certainly consistent with movements in correlations this year.


@MrRFox, I try to avoid situations where the “whisper loop” is relevant.

Like I said, it might not be a level playing field, but it is closer than it was 30 years ago. And the big players have their own problems (among other things — they pay half their profits in bonuses to the traders while eating all the losses).

Sometimes it isn’t so bad to be a small, unsophisticated investor.

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Chart of the day, college-dropout edition

Felix Salmon
May 22, 2012 21:16 UTC


In March 2010, the unemployment rate for high-school graduates 25 years or older peaked at 11.9%. Since then, it has dropped 4.2 percentage points — a pretty impressive showing, in just two years — and now stands at 7.7%.

In the same period, the unemployment rate for college dropouts 25 years or older also fell, from 9.5% to 8.0%. But that drop, of 1.5 percentage points, is much smaller. And now college dropouts have a higher unemployment rate than their friends who never went to college at all.

And these two series are very comparable: both sets include about 34 million people.

Now these numbers aren’t seasonally adjusted, and you can see that the unemployment rate for high-school graduates is pretty bumpy. As a result, it might well rise again soon. But the big picture is clear: unemployment among college dropouts is proving much more stubborn than it is among most of the rest of the population.

Jed Graham lists a number of reasons why that might be the case. For one thing, with the majority of Americans now attending college, even if they don’t all graduate, college is less of a destination for the elite than it used to be. The elite will always get jobs, but as students become less elite, they’re  less assured of having great careers once they graduate.

And for another thing, college dropouts are still significantly more likely than high-school graduates to have a job: their employment rate is higher, even if their unemployment rate is lower, since they have a significantly higher labor force participation rate. On the other hand, the reason for the higher labor force participation rate is just that fewer people used to go to college, which means that among people 68 years or older, high-school graduates vastly outnumber people who went to college. And once you’re over 68, you can be excused for no longer being in the labor force.

So what’s going on? Graham’s convinced there’s something real here:

Labor Department data show that while the jobless-rate advantage of college dropouts over high school finishers has disappeared and turned negative, the advantage of two-year-degree holders over college dropouts is way above the historical norm.

Meanwhile, the jobless rate differential between high school finishers and two-year-degree holders is right in line with its historical average. This suggests that the principal mover is a decline in employment outcomes among dropouts.

I suspect that the conjoined forces of for-profit colleges and student loans are a significant contributory factor here. College dropouts certainly have more debt than they used to, and although indebtedness doesn’t directly lead to higher unemployment rates, it does at the margin act as a constraint on the massive life option that everybody has when they leave college. If high debts force you into some crappy job when you drop out of college, your chances of getting a good long-term career diminish.

And more generally, college is slowly moving from the “things which are bought” column into the “things which are sold” column — for-profit colleges, in particular, recruit aggressively in ways that would have been unthinkable to an earlier generation of tertiary educators. As a result, people drop out of college not just because it’s statistically certain that in any college class there will be some students who drop out, but increasingly because a lot of students, especially in courses offered by for-profit colleges, really can’t and shouldn’t be in those classes in the first place.

Besides, it makes conceptual sense that if you’re going to drop out of college, you’d be better off not going to college at all. Say you drop out after two years: you could have been working hard at the beginnings of a career during those two years, earning money to get yourself started on some well-defined course. Instead, people who drop out of college (Bill Gates, Mark Zuckerberg, and a handful of other exceptions notwithstanding) generally have little idea of what they want to do next, and are well behind their high-school peers in terms of building an economically-productive life.

All of which is to say that while it’s still indubitably a good idea to go to college, the “go to college” advice has to be added to, these days, with further admonitions not to take on too much debt, and certainly not to drop out. Because as far as employability is concerned, it seems that college dropouts have never had it so bad.


Just for the record, Gates and Z’berg and Steve Jobs all failed to complete u/g studies, but it hardly seems fair to lump them in with a crowd that “shouldn’t be in those classes in the first place”. Those guys got what they needed from school and were ready to move on to (much) better things long before their 4-year stretches were up.

Not like they couldn’t cut it in school.

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Chart of the day: JP Morgan’s excess deposits

Felix Salmon
May 21, 2012 13:51 UTC


Many thanks to Ben Walsh for putting this chart together for me. What you’re seeing is JP Morgan’s excess deposits — the size of the bank’s deposit base, minus the amount of its loans — both in absolute terms and as a ratio. Either way, it’s going up and to the right.

JP Morgan clearly has a certain amount of control over the amount of deposits it takes in. What you’re looking at here isn’t entirely a flight-to-quality trade: JP Morgan’s total deposits actually fell in the two years following the financial crisis. They were just over $1 trillion at the end of 2008, they dropped to $940 billion at the end of 2009, and then they fell again to $930 billion at the end of 2010.

But then, in 2011, they shot straight back up — and now they’re at a record high of $1.13 trillion, with JP Morgan having failed to lend out more than $400 billion of that amount. That’s a record not only in absolute terms but also in relative terms: for every dollar that JP Morgan has on deposit, it has managed to lend out just 64 cents.

To put it another way, JP Morgan has $9,900 on deposit per US household — and of that, $3,600 per US household is “excess deposits” which are mostly being farmed off to London rather than being invested in helping US individuals and businesses grow.

The ostensible purpose of JP Morgan’s Chief Investment Office is to take the bank’s excess deposits and invest them in a way which manages to hedge the rest of the bank’s exposures. But if you’re spending 57 cents on hedging operations for every dollar you’re making in original loans, which is the case here, then something’s clearly very wrong. JP Morgan’s loan book isn’t that risky, or difficult to hedge. And if it is, JP Morgan needs some new loan officers.

The real story here, of course, has nothing to do with the difficulty of hedging JP Morgan’s loan exposures. Rather, the hotshot CIO traders in London were managing to get a higher return on their “hedging” operations than the loan officers were getting on their bread-and-butter loans. And so Jamie Dimon started taking in all the deposits he could find, and sending them straight to London, where they could be “hedged” to the tune of billions of dollars a year in profits.

It’s easy for JP Morgan to bring in huge amounts of deposits, of course: corporate balance sheets are bloated with cash, and those corporations want to deposit their funds with a too-big-to-fail institution. But if those deposits are being attracted by JP Morgan’s implicit government backstop, then it’s incumbent upon JP Morgan to lend them out into the US economy, to get it moving again. Rather than sending them off to London to be gambled away by the likes of Bruno Iksil, even as JP Morgan’s total loan base remains lower today than it was in 2008.


BE A SPORT – show Jamie Dimon how turn his Whale of a losing position into a minnow, and win a book from Felix’ desk. My secretary has one on her desk in CA from that OWS thing a few weeks back. First one to post the answer that turns Jamie’s turkey into an eagle (relatively speaking) will be awarded the tome. Here are the ground rules -

The successful exit strategy will require a little help from the Bros in DC – it can’t be anything that isn’t apparently neutral on its face, plausibly necessary to protect the stability and functioning of the financial system, and yet effectively puts all the high cards in JD’s hands.

Hint I: Like all vexing problems, cracking this one requires that you appreciate all the unusual strengths that arise from the existing status of the client – in this case, JPM.

Hint II: The client’s adversaries may also enjoy a similar status – maybe, but that doesn’t mean they’ll be permitted to utilize it the same way JD does.

(With all the cash JD has already stuffed into Demo pockets, he’s entitled to at least a little help when he’s desperate – we are in an election year, aren’t we? Who’s gonna say “No” to Jimmy-the-ATM? He just needs you to help him figure-out what to ask for that his soul brothers can politically deliver.)

I’ve already posted the solution on another site, so it’s been time/date-stamped. When this drama is all played-out – shouldn’t be long now – I’ll post the link, or sooner if someone nails it before then.

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Chart of the day: The CDX NA IG 9 basis

Felix Salmon
May 11, 2012 16:00 UTC


Here’s the chart you’ve all been waiting for, courtesy of Reuters’s very own Scotty Barber: the spread on the CDX NA IG 9 index — the synthetic index on which JP Morgan’s Bruno Iskil was selling enormous amounts of protection — minus the spread on the index’s constituent bonds.

Three things jump out here. Firstly, the basis is negative, not positive. That means that the obvious trade was to buy the underlying bonds and hedge by buying protection on the index. That obvious trade, if held to maturity, should always make money. Iksil was funding that trade, by selling protection on the index.

Secondly, the chart is going up and to the right. Since Iksil was selling protection, that means the market was moving against him. Or, to put it another way, the obvious trade makes money when it expires at zero, and as the chart moves towards zero, Iksil loses money on a mark-to-market basis.

Finally, the move doesn’t seem to be all that huge — only about 30bp in this quarter. Which doesn’t seem remotely enough to cause a $2 billion loss. Still, Iksil managed it somehow.

Update: Many thanks to Sally Kohn for making the chart infinitely better by putting whales on it.


Agree- this is all about tranches….he would struggle to lost that much in single names, but the deltas on tranches make it a lot easier

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Chart of the day, equity and GDP edition

Felix Salmon
Mar 22, 2012 14:25 UTC

The Epicurean Dealmaker has been watching global equity markets metastasize:

Over the past few decades, the public equity markets have evolved from a relatively staid and selective backwater, a playground for pension funds, insurance companies, and the idiot sons of wealthy men, into a gigantic global pool of capital, driven and supported by huge amounts of money from literally everybody… I will leave it to an enterprising PhD student to research the data, but I suspect the aggregate amount of equity market capitalization as a percentage of GDP has swelled tremendously over the past three decades. Equities have gone mainstream, and as they did, the size of equity markets ballooned.

To illustrate his point, TED talks of a fund manager who invests in no more than 100 stocks at a time. When he was managing $100 million in the 1980s, he could easily invest $1 million in a company; by the time his portfolio had grown to $10 billion in the 1990s, his average investment was north of $100 million per stock. That, in turn, makes it very hard for institutional investors to buy small-cap stocks, and helps to explain why small companies can’t IPO any more.

But that’s just anecdote; I wanted data. So I found an enterprising PhD student Ben Walsh, and asked him what’s happened to equity market capitalization as a percentage of GDP. And he, in turn, found Google:

There’s definitely an up-and-to-the-right trend here, but it’s very noisy, and we’re not talking orders of magnitude: global equity capitalization is probably about 50% higher now, relative to the size of the global economy, than it was in the 1980s. That’s an interesting trend, and a welcome one. But I don’t think it explains much about the IPO market. After all, the effective minimum size for IPOs has gone up much more than 50% since the 1980s.

I do think that maybe the distribution arms of the big sell-side equity underwriters have reached the point at which it just isn’t worth it any more for them to deal with any but the biggest accounts; I have a feeling that retail investors had much more access to IPOs in the 1980s and even during the dot-com bubble of the 1990s than they do now. But this is much more a function of the consolidation of the investment-banking industry than it is a function of the size of the equity markets as a whole.

Which opens up an intriguing possibility: is there some way in which the internet might be able to spawn a small, light broker-dealer which could underwrite IPOs aimed at retail, rather than institutional, investors? Think of it as fully SEC-compliant crowdfunding, without any need for a JOBS act. And if not, why not?


@EpicureanDeal, “the true ratio of equity dollars available for investment to gross economic activity”:

If that’s what you’re interested in, then the above chart seems largely irrelevant. MarketCap (a stock variable, see my comment re dimensions) reflects the value of past investments. It may vary without any change to investment or ‘equity dollar availability’.

In relation to investment, equity funding should be conceived as a flow variable, like investment. In macroeconomic terms:

Y = C + I or S = I and you’re looking for the equity part of S – or, more exactly, for the IPO part of the equity part.

Posted by Kamekon | Report as abusive

Chart of the day, FOMC laughter edition

Felix Salmon
Jan 20, 2012 15:41 UTC

FOMC Funnies v2.0.jpg

I was hoping someone would do this — and now The Daily Stag Hunt has come to the rescue. All I can say is, thank you. It turns out that if you’re on the FOMC, then being in a credit bubble is really funny!

(h/t Elfenbein)


I would be interested to see if the meetings in 07 and 08 were more somber.

Posted by onepointoh | Report as abusive

Charts of the day, corporate income-tax edition

Felix Salmon
Nov 17, 2011 15:22 UTC


This is a chart of corporate income tax as a percentage of total corporate profits, and it’s the main thing you should bear in mind when people start saying that the US corporate income tax is too high. And while you’re at it, you should remember this chart, too, showing corporate income tax as a percentage of GDP.


Once upon a time, the corporate income tax generated a significant share of tax revenues; now, it’s bumping along in the 2%-of-GDP range. Yes, the marginal rate of corporate income tax is high, at 35%. But US companies are extremely good at not paying that.

But at least we know the aggregate amount that corporations pay in taxes. What we don’t know — because they won’t say, and no one’s forcing them to say — is how much any given public company pays.

Allan Sloan has a very good column on this today. Companies already report 16 different tax metrics; they should simply be required to add a 17th — the amount they pay the IRS in taxes — which in many ways is most important. The companies already file tax returns; the number’s right there, on lines 31 and 32. They just refuse to say what it is.

Here’s Sloan:

During the past few months I’ve repeatedly asked three big companies in the tax-wars cross hairs — GE, Verizon, and Exxon Mobil — to voluntarily disclose information that would refute allegations that they incurred no U.S. federal income tax for 2010. All have refused, saying they won’t disclose anything not legally required. They still manage to complain about the allegations, however. I suspect that if I called the rest of the Fortune 500, I’d get 497 similar responses.

As a society, we need the “taxes incurred” information to inform our current tax debate. Investors, too, would benefit; knowing the tax that companies actually incur would be a useful analytical tool.

Once the taxes-paid number was public, we could start dividing it into the company’s GAAP profits, to get an idea of what kind of tax rate companies are really paying right now. And of course, companies would be more than welcome, if they were so inclined, to reveal how much tax they were paying in other jurisdictions as well. But for the time being, all we can do is look at the aggregate numbers. Which are showing, very clearly, that corporate income taxes in America are very low and falling.

Update: Kevin Drum creates the chart I should have led with: corporate taxes as a percentage of pretax profit.


> Kudos to Felix for his straight-up correction

Maybe I miss your sarcasm, but if so let me be the sucker and play it straight… BULLSHIT.

He doesn’t fix anything, the article and lead remain as they are; he adds an appendix: “oh by the way if you read this far I kind of screwed up and here’s what I should have said…”. Except that it isn’t even this transparent or apologetic. And anyway, the lead in to the article with the broken-for-its-purpose graphs remain as is (in the 50′s we taxed almost 95% of all profits???).

Kudos would be to him if he fixed the article, fixed the headline, and removed the search engine bait. But he won’t do this, he’s going to hide behind some convenient “ethics” which will preempavely paraphrase as “whatever I blog, however wrong it its, must stay there forever in its original form, and the best I can do is to publish SEPARATE corrections and apologies – yes I could get the source material corrected too but that is morally impossible for me to even contemplate because it’s a mortal sin to change what has been published however evil or wrong my initial drunk rantings were.”

Felix, can you revise the article to put WHAT YOU CONCEDE is the _right_ graph as the front of the article and rewrite the first paragraph to reference it instead?

To people other than Felix: please not that he’s not going to respond this this, and he’s certainly not going to do it (11′th commandment to Moses, though shouldnt no show weakness and admit errors other than by addendum, else thoust historical record be muddied).

Posted by bxg6 | Report as abusive

How poverty has tracked global population

Felix Salmon
Oct 31, 2011 18:48 UTC


184x558_popchart_left_align.gif The world officially hit 7 billion people today, and so to celebrate I decided to take a look at what’s happened to poverty in the world as its population has increased — many, many thanks to Nick Rizzo and to Laurence Chandy and Homi Kharas at Brookings, two Englishmen who provided him with unpublished data and were extremely generous with their time.

The big picture can be seen in the chart at left: the number of poor people hasn’t been growing nearly as fast as the number of people. And indeed over the past 24 years, as the world’s population increased by 40% from 5 billion to 7 billion, the total number of people living in poverty has actually gone down. (One small note I should make about these charts: the dollar-a-day figures from 1987 onwards actually measure the population living on less than $1.25 a day, so a jump in the absolute-poverty numbers between 1974 and 1987 is partially a function of the fact that we’re raising the bar from $1 to $1.25.)

In fact, there’s pretty much the same number of people living in absolute poverty today — about 890 million, or 12.7% of the global population — as there were all the way back in 1804, when the world’s population hit 1 billion and 84% of them were living in absolute poverty.

Indeed, back in 1804, only 5% of the world was living on more than $2 a day. (All these numbers, of course, are real, and adjusted for purchasing power.) Today, that number is 4.7 billion, or 67% of the world’s population. The number of people in the world living out of poverty has been growing faster than the world’s population as a whole for pretty much all of recorded history.

And the “global middle” — people living on somewhere between $10 and $100 per day — is growing particularly fast. It was 1.14 billion in 1987; it’s 1.96 billion today. That’s an increase of 72%, even as the population of the world as a whole has gone up by just 40%.

A huge amount of what we’re seeing here is the effect of China, of course. Here’s what’s happened in East Asia over the past 24 years:


Absolute poverty in East Asia has gone down to 142 million today from 822 million in 1987, even as the population as a whole has risen from 1.5 billion to 1.9 billion. 24 years ago, more than half of East Asia lived in absolute poverty; today, it’s just 7%.
The other big global population center is South Asia, which includes India, Pakistan, and Bangladesh; its history of poverty reduction is less heartening but still substantial.


There’s a lot of work to be done, here, with two thirds of the South Asian population still living in poverty. But absolute poverty has declined quite dramatically in the past dozen years, which is certainly a start.

You won’t be surprised to hear that the most depressing story is in AIDS-ravaged sub-Saharan Africa.


Even here, however, the percentage of the population living in poverty is no higher than it is in South Asia, and the number of people living in absolute poverty hasn’t actually gone up over the past 12 years.
Here are the other regions:




It should be noted that all of these figures, and especially the African ones, come with massive error bars and caveats; Shanta Devarajan is very good on this. But the big picture is clear: there’s nothing Malthusian going on here. As the world’s population grows, we’re taking people out of poverty, rather than consigning them to it. Which is heartening news in a world of limited resources.


I am happy that we have had a time span where both population and some form of prosperity have coexisted. No one should assume that this relationship is an eternal verity. Our planetary population growth will continue to exert rising pressure on finite natural resources. We can all hope that the future will bring economic gains equal or exceeding population growth. But no natural law guarantees this, and we now have a decades-long failure to make the early promise of unlimited cheap nuclear power come true. A list of known problems–global climate change, depletion of fertilizer natural resources, etc., have conspired to raise food costs and render more nations dependent on imported food. At the least we should strive to enable individuals to have the means to choose whether or not to procreate.

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