Felix Salmon

Kathleen Madigan had an important post on Friday, showing financial profits roaring back to more than 30% of all domestic US profits. As she says, “that’s an amazing share given that the sector accounts for less than 10% of the value added in the economy” — and makes it “hard for banks to cry poverty” when it comes to things like debit-card interchange legislation.

Madigan gave us the percentage chart, which shows the finance industry taking an even greater share of total corporate profits than it did during most of the boom year of 2006.

But I wondered: how much of this is a function of generally lower profitability overall — a question more of a low denominator than a high numerator? So I went along to the BEA website and put together this chart:

The blue line is total domestic profits. The green bars are the massive profits made by the Federal Reserve — an incredible $233 billion in 2010 alone. But as you can see, those Fed profits are dwarfed by the red bars, which are private-sector financial profits. Those dipped into negative territory just once, in the fourth quarter of 2008, and in the fourth quarter of 2010 reached an annualized $379 billion — bringing the total for the year to more than $1.3 trillion.

What this chart says to me is that nothing has changed, and nothing is going to change. Banks are still extracting enormous rents from the economy, and profits which should be flowing to productive industries are instead being captured by financial intermediaries. We’re back near boom-era levels of profitability now, and no one seems to worry that the flipside of higher returns is higher risk. Any dreams of seeing a smaller financial sector have now officially been dashed. And the big rebound in corporate profits since the crisis turns out to be largely a function of the one sector which we didn’t want to recover to its former size.

Update: Thanks to John Coogan for pointing out that the BEA already annualized the quarterly figures, as well as seasonally adjusting them. So I was wrong to add up all the quarterly figures for 2010 to get what I thought were annual figures. Sorry.

Thanks largely to the NYT, the wealth-inequality survey by Michael Norton and Dan Ariely is back in the news. You might remember it from back in September. Here’s how it was reported in HufPo:

The respondents were presented with unlabeled pie charts representing the wealth distributions of the U.S., where the richest 20 percent controlled about 84 percent of wealth, and Sweden, where the top 20 percent only controlled 36 percent of wealth. Without knowing which country they were picking, 92 percent of respondents said they’d rather live in a country with Sweden’s wealth distribution.

Similarly, Tim Noah, in Slate, said the survey showed respondents favoring “a wealth distribution resembling that in Sweden”. And Chrystia Freeland has the same idea: “Americans actually live in Russia, although they think they live in Sweden”, she writes.

The Norton and Ariely paper is easy to misread in this way. Americans Prefer Sweden is one heading; the text does little to dispel that idea.

As can be seen in Figure 1, the (unlabeled) United States distribution was far less desirable than both the (unlabeled) Sweden distribution and the equal distribution, with some 92% of Americans preferring the Sweden distribution to the United States. In addition, this overwhelming preference for the Sweden distribution over the United States distribution was robust across gender, preferred candidate in the 2004 election and income.

If you look at the referenced Figure 1, it labels three different charts as “Sweden (upper left), an equal distribution (upper right), and the United States (bottom)”. It also comes with a note:

Pie charts depict the percentage of wealth possessed by each quintile; for instance, in the United States, the top wealth quintile owns 84% of the total wealth, the second highest 11%, and so on.

The clear implication is that in Sweden, the top wealth quintile owns 36% of the total wealth, as demonstrated in the “Sweden” pie chart. But that’s not true. Go back to footnote 2 (yes, a footnote), and you find this:

We used Sweden’s income rather than wealth distribution because it provided a clearer contrast to the equal and United States wealth distributions; while more equal than the United States’ wealth distribution, Sweden’s wealth distribution is still extremely top heavy.

This is an important point, which nearly all the discussion of the paper has missed. Mark Gimein has put together the charts showing what the truth of the matter is. The first two charts are reality, while the third is the fictional “Sweden” of the Norton-Ariely paper:

The point here is that wealth inequality is ever and always enormous. The US and Sweden are very far apart, when it comes to inequality, but if you look at wealth inequality rather than income inequality — which is the subject of the Norton and Ariely paper — then countries tend to look more alike than different. A huge part of the population of just about every country is going to have zero wealth — if you live paycheck to paycheck, for instance, or if you’re young and haven’t been earning money for long, or if you just spend a lot. That doesn’t mean you’re poor.

In countries like Sweden, indeed, the social safety net is strong enough that you don’t need to build wealth in the same way you do if you’re Chinese, say. Wealth is a form of insurance, and when insurance is nationalized, you need less wealth. As a result, people can enjoy the fruits of their money, instead of saving it up for emergencies or for retirement — and only a small percentage of the population really spends a lot of effort in a successful attempt at accumulating more.

Indeed, Sweden and the US are even closer together, in terms of wealth inequality, than the charts above suggest: as Gimein notes, the Swedish data exclude money held offshore, the value of family owned firms, and the considerable wealth of super-rich Swedes like Ikea founder Ingvar Kamprad, who left the country to avoid taxes.

Ariely told Gimein that “we created a more equal society than the most equal society in the world,” while calling it “Sweden”. Which might be interesting as an academic exercise, but the message was lost on most of the people who read the paper, and who thought that there really was a society where the lowest quintile owns 11% of the wealth.

Wealth inequality is a problem — but it’s one of those things, like homeownership rates, where public policy only makes a very small difference to some very large numbers. Norton told Gimein that he and his colleagues are now exploring “whether educating Americans about the current level of wealth inequality (by showing them charts and pictures) might increase their support for policies that reduce this inequality.” Well, it might. But it’s important not to mislead people about what’s possible.

Ask, and you’ll receive an explanation of what this chart means.

One way to look at this chart is in horizontal slices. Right now, for instance, if you look along the bottom of the chart, you can see that the line is bluest at the right-hand end, and reddest in the middle-class zone up to roughly $100,000 a year in annual income. When the chart is blue, that means you’re paying less tax than people on your income level have done historically, and when it’s red that means you’re paying more.

Looked at this way, you can see that taxes were generally very low up until about 1930, and they were generally pretty high in the 1940s and 1950s. And then something interesting happens around 1970: different parts of the population start being taxed in very different ways. So people earning roughly $10,000 to $50,000 a year had historically very low tax rates between about 1970 and 1980, while people earning more than $1 million a year (in 2011 dollars) have been doing very well for themselves since about 1990.

Another way to look at the chart is to look at vertical slices of it. For instance, the slice for people earning $1 million per year, in 2011 dollars, is on the left. In this case, the very rich had it best during the Gilded Age of the 1920s, and were taxed most heavily in the 1940s and 1950s. During the 1980s they were taxed at a historically-normal level, and today they’re undertaxed by historical standards.

But the main takeaway from the chart, at least for me, is that taxes in general have been declining for a long time now, especially on the rich. Which is one big reason why the fiscal situation looks unsustainable: we’re just not raising enough money in taxes to be able to pay for the amount we spend each year. With entitlements on both the retirement and healthcare side of things certain to rise inexorably for the foreseeable future, the chart is going to have to get redder from here on in. It’s not a question of whether, it’s just a question of when.

The jobs report this morning showed average hourly earnings increasing by 1 cent to $22.87 over the past month; that brings weekly earnings up to $782.15, on average, up 2.3% on last year. That’s a modest improvement, but an improvement all the same.

But Michael Greenstone and Adam Looney decided to take a step back, and look at median earnings across the population overall, rather than just in the working population. The resulting picture, especially for men, is pretty gruesome:

They write:

This analysis suggests that earnings have not stagnated but have declined sharply. The median wage of the American male has declined by almost $13,000 after accounting for inflation in the four decades since 1969. This is a reduction of 28 percent!

There’s a lot going on here, but a large part of it is that between 1970 and today, the share of men without any earnings at all increased from 6 percent to 18 percent. Many of those men are in prison, but a lot more are simply discouraged.

The blue line in this chart can be read as showing the competitiveness of working-class Americans in an increasingly globalized economy. It’s in secular decline, it’s not coming back, and it has been exacerbated greatly by the loss of 12 million jobs over the course of the Great Recession. Those jobs aren’t coming back, either. The US is going to have to create millions of new jobs going forwards. But it’s also going to have to look after the growing ranks of the unemployed — those who are looking for work, to be sure, and also the growing ranks of those who don’t even bother any more.

My colleague Peter Rudegeair asked me a good question last week: even if the number of stocks listed in the US is falling dramatically, what’s happening in the rest of the world? He even helped answer the question, finding data from the World Federation of Exchanges. Which I then played around with a bit in Excel to generate this:

The US is clearly the outlier here: everywhere else in the world is still seeing the number of listings rise. (And now maybe it’s a bit more obvious why Deutsche Börse is buying the NYSE, rather than the other way around.) At the end of 2009, there were more companies listed in the Americas outside the US than there were inside the US.

US listings now account for only about 10% of all listed companies globally — that’s significantly less than America’s share of global GDP, which is closer to 20%. Even as the US is moving from public to private, or at the very least from many public companies to fewer public companies, the rest of the world is still moving fast in the opposite direction.

Looking at this chart, it seems to me that anybody with the bulk of their equity holdings in US companies is clearly missing out on something important. Yes, US companies are active globally, and those US listings do include a smattering of foreign companies, in the form of ADRs. But it’s a big world out there, and if you’re looking for an everything bagel, it’s going to be hard to find it if you confine your search to US counters.

This chart comes from the official news release on US bankruptcy filings in 2010:

There’s no financial crisis, in this chart, and no sign of any let-up in the rate of increase of bankruptcies. That’s consistent with what the news release says:

Bankruptcy filings in the federal courts rose 8 percent in calendar year 2010, according to data released today by the Administrative Office of the U.S. Courts. Total filings remain at a five-year high.

But look a bit more closely and you see something very odd. Check out the x-axis: there’s a column every three months from December 2006 through December 2009. And then there’s a sudden jump to December 2010: three bars have been left out.

What’s more, the chart starts immediately after the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 took effect. The act caused a huge spike in bankruptcy filings before the Act went into law, and therefore an artificial drop afterwards — as a result, we have no indication of what’s remotely normal when it comes to these figures.

So let’s have a look at the same chart, presented a bit more honestly:

What we have here is the rate of filings not only slowing down but even falling a little in the final period, from 1.595 million filings to 1.593 million. And clearly we seem to be topping out — there’s much less of a sense, here, that there’s no end in sight to the growth in bankruptcy filings.

On top of that, there’s a lot of smoothing going on here due to the use of overlapping 12-month periods. If you look at the raw quarterly data, you get something more like this:

Here, bankruptcy filings peaked at 422,000 in the second quarter of 2010, and have subsequently fallen by more than 12% to 370,000 in the final quarter. Far from rising, as the official chart suggests, the actual number of bankruptcy filings in the fourth quarter of 2010 was lower than it was in the fourth quarter of 2009.

What’s more, in both of my charts it’s clear that the number of filings is more or less “back to normal” after the artificial interruption of BAPCPA. The act was meant to decrease the rate of filings; it doesn’t seem to have worked very well in that regard, although admittedly we’re still painfully emerging from a particularly nasty recession. But in any case adding the historical data does make the official chart much less scary.

None of this is remotely obvious from the press release, which unhelpfully provides the underlying data in an eight-column grid with the numbers running from left to right and bottom to top. If I didn’t know any better, I would say that someone at the press office was trying to make the bankruptcy situation look worse than it actually is. But I have to say I have no idea why they’d do that.

Update: Apologies, my charts somehow disappeared from this post when it was first posted. They should be there now!

Update 2: A quick show of hands, if anybody’s still reading this. My charts here are clever embedded things where you can mouse over the columns and see the actual figures. On the other hand, they don’t seem to show up in RSS feeds. So, should I continue with smart interactive charts, or should I go back to dumb pictures? Any opinions?

My fabulous editor, Jim Ledbetter, had a party a couple of days ago for his new book about Dwight Eisenhower. He asked for the most famous passage from Eisenhower’s 1953 “Chance for Peace” speech to be turned into updated charts, so here you go:

Sources: The price of a bomber, according to the Air Force, is $1.2 billion in 1998 dollars, which works out to about $1.6 billion today. It costs $18.5 million to build a school. For the power plant, I’m assuming energy usage of 11.4 kW per person (obviously this is up sharply from 1953) and a cost for building a power plant of $1,050 per kW, which works out at about $700 million. Hospitals are coming in at about $260 million apiece. Highway costs are about $10 million per mile.

A fighter costs $150 million; a bushel of wheat is $8. Destroyers run about $1.75 billion apiece; and construction costs on a new single-family home are $222,511.

And here’s the passage in question, which still carries enormous force:

Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed.

This world in arms in not spending money alone.

It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children.

The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities.

It is two electric power plants, each serving a town of 60,000 population.

It is two fine, fully equipped hospitals.

It is some 50 miles of concrete highway.

We pay for a single fighter with a half million bushels of wheat.

We pay for a single destroyer with new homes that could have housed more than 8,000 people.

This, I repeat, is the best way of life to be found on the road the world has been taking.

This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron.

ARJTurgot2 left this comment on my chart of US taxes:

You are, of course, going to follow up this chart with a second one that comprehensively reflects the changes in State and Local taxes, especially including sales taxes, that have changed since 1950. And that data is going to include things like registration and usage fees, especially gasoline, telecommunications and sin taxes on things like liquor and cigarettes. I understand that is going to vary widely from state to state, so two, perhaps, should be instructive: say New York and California?

If someone wants to point me to a dataset which gives me that information, I’ll happily chart it. But in the meantime, I pulled table D1 (Californian GDP) and table M13 (Californian state tax collection) from the California statistical abstract. That only gives data from 1967 to 2007, unfortunately, and the GDP series changes slightly in 1997. But in any case, here’s the result:

It seems to me that tax revenues have been floating pretty steadily around roughly 5.5% of GDP since the mid-70s, with a brief blip up to a high of 6.8% during the dot-com bubble. I’m sure that the recession has brought the ratio down of late. But what I’m not seeing is any indication that the decline of federal tax revenues is made up for by a concomitant increase in state tax revenues.

Here’s the volume-based stock chart you’ve all been waiting for: the one for May 6, the day of the flash crash. Since the big spike in volume was concentrated at the end of the day, in the final hour of trading, the time-based chart squeezes a huge amount of activity into a relatively small horizontal space. The volume-based chart gives the crash a bit more space.

On the other hand, it’s worth nothing that most of the day’s trading still took place before the crash happened.

On thing that strikes me about this chart is not the crash itself but rather the run-up to it: the initial drop from about 1,160 on the S&P down to about 1,120. On the time-based chart, the decline starts slowly and then rapidly speeds up; on the volume-based chart, however, it’s much steadier. And in fact we saw roughly as much volume in the normally-quiet hours between about noon and 2:40 as we did during the craziness of the crash itself and its aftermath. I’m not going to hazard a guess as to what this means, but I do think it shows that May 6 was a pretty unusual day in the markets even before the flash crash happened.

Many thanks to Omer Uzun at Proteus Financial for putting this together: it’s only one tiny piece in the puzzle, but surely every little bit helps.

A couple of weeks ago, I wondered whether it was possible to see what a stock graph would look like if it split up the x-axis according to volume rather than according to the time of day. After all, when trading is concentrated at the beginning and end of the day, those are the areas worth concentrating on, right?

Wonderfully, Omer Uzun of Proteus Financial rose to the challenge. And here’s the result:

The chart splits the 390-minute trading day between 9:30am and 4:00pm into ten chunks. On the normal stock-market chart, seen in blue, each chunk is 40 minutes long. But on the volume-based chart, in red, the first 10% of trading is already over after 17 minutes, while at lunchtime it takes over an hour to see 10% of the daily volume change hands.

I’ve only seen one of these charts so far, but at first glance it does seem as though the volume-based chart seems less volatile — smoother, somehow — than the time-based chart. I wonder what the equivalent chart for May 6 would look like.

Carl Richards has a cute graph:

The basic idea here is right. And in fact Richards understates, in his graph, just how bad things are when it comes to market forecasts: his graph curves the wrong way.

Let’s say there’s a 10% chance of any given forecast being right, and let’s say (for the sake of argument) that all forecasts are independent of each other. Then what’s the chance of at least one forecast being right? Here’s the actual graph:

By the time you get to 20 forecasters, there’s an 88% chance that at least one of them will be right. At 40 forecasters, there’s a 99% chance.

In the real world, forecasters aren’t all independent of each other — but at the same time, there’s a hell of a lot more than 40 of them. (And given the squishiness involved in what counts as “being right”, the chances of being able to say that you were right are probably closer to 50% than 10%.)

If you add together the fund managers and the economists and the TV pundits and everybody else telling you where the economy and the markets are going, you’ll get a number somewhere in the tens of thousands. The question isn’t whether one of them will turn out to be right, it’s just how many of them will turn out to have been right.

In fact, given the thousands of people in the market, it’s a statistical certainty that many of them won’t just be right once, but will be right time and time again. Such people are generally lauded as being fabulously smart and prescient, and lots of money gets thrown at them. As a general rule, it’s a good idea to make sure that money isn’t yours.

Last week, Justin Lahart presented an interesting thesis in the WSJ:

For American business, it has become a two-track economy.

While global players like industrial conglomerate 3M Co. and burger giant McDonald’s Corp. are getting ever-bigger boosts from their operations in fast-growing economies like China and Brazil, companies dependent on the U.S. market are hemmed in by recession-scarred consumers who are hesitant to spend.

The accompanying chart was one of the most incomprehensible things I’ve ever seen on newsprint:

I doubt that one reader in 20 actually understood, on looking at this chart, the information it was ostensibly trying to get across.

There are three axes here, and two colors, and all manner of confusion. It took me a while to work it out, but I got there in the end: the height of the bars represents a healthy year-on-year increase in projected revenues. They increase in volume the further that number is from zero, so that the smallest bars aren’t the companies with falling revenues, but rather the companies with flat revenues. That’s silly. And because of the 3D effect, the biggest bars have much more volume than the smallest ones, as though the product of the two variables is somehow important. (It isn’t.)

The amount of color in a bar represents the proportion of those revenues that come from outside the US. The main axis we see when we look at the chart — the one marked with a bold black line — doesn’t actually represent anything at all. Oh, and the chart claims to be “an analysis of the 30 companies in the Dow”, but it only features ten stocks.

The weird thing is that Lahart’s thesis would come out loud and clear from a simple scatter chart. Put the change in revenue on one axis, put the percentage of revenue coming from overseas on the other axis, and look for two clusters: one at the top right, with the companies active in fast-growing countries, and one at the bottom left, with the companies hemmed in by recession-scarred consumers.

It took me a while, but I eventually got my hands on the data that Lahart was using. So I decided to plot that scatter chart, to see what it looked like:

I’m not a professional designer, and this could certainly be a lot prettier, especially if I could get my fonts to work and if I remembered to get rid of those silly decimal places on the y-axis. Still, the message of this chart is much clearer, I think, than that of the one in the WSJ. It does show a clear correlation between revenue growth and foreign sales, but I can’t see much of a case that American businesses have diverged onto one of two tracks.

All of my numbers are exactly the same as the ones that the WSJ used — even the 0% of foreign sales for Verizon, which resulted in a correction. (Verizon claims it gets some revenue abroad, although it’s less than 10%.) So I’m puzzled why the WSJ didn’t include Caterpillar as one of the “five companies with largest share of overseas revenue”: it’s up there in fourth place, with 67%, higher than both Hewlett-Packard and McDonald’s.

So, what really happened here? Did Lahart know that a clear chart would somewhat undercut his headline talking about a “two-track economy”, and therefore contrive something messier instead? Or was there just an overenthusiastic new kid at the WSJ who hasn’t read his Tufte? Either way, it would be great to see a stronger emphasis on clear information design at the WSJ. Financial publications have an especial responsibility to do this kind of thing well, given the highly-quantitative nature of what they’re writing about. The NYT has fantastic information designers; let’s hope the WSJ tries hard to compete on that front.

Update: Andrew Burton points out there’s actually a Wall Street Journal Guide to Information Graphics, by Dona Wong, available on Amazon in hardback for $19.77. I wonder what she would have to say about the WSJ’s chart.

I love Kristina Peterson’s profile of Briargate, an algorithmic prop-trading firm (it’s an anagram of “arbitrage”) which has more or less given up on trading during the middle of the day.

High-frequency strategies like Briargate’s work best when there’s maximum liquidity, and that’s definitely during the first and last hour of the trading day. So instead of babysitting their computers at noon, Briargate’s principals go for long walks, or visit their children’s schools, or go out for pizza — and don’t even notice when something like the flash crash happens. (They were at the movies at the time.)

All of which makes me wonder whether we shouldn’t be presenting intraday stock charts a little bit differently. Right now, they invariably construct the x-axis so that every given unit of time (one minute, one hour, whatever) takes up the same amount of horizontal space. Underneath that you sometimes see a volume graph which shows you the important parts of the chart to look at.

Does anybody publish charts where the x-axis has a constant volume chart along the bottom, spreading out high-volume trading periods and skipping over low-volume periods relatively quickly? Is there a way of publishing data so that every tick, or every 1,000 shares traded, takes up an identical amount of space on the x-axis? The axis could still be labeled by hour or minute, it’s just that those labels would no longer be equidistant.

I’m pretty sure that such a chart would provide an interesting and fresh perspective on how stocks move. But of course it would be hard to generate in Excel, so maybe that’s why I’ve never seen one.

If Matt Yglesias can wonk out with meditations on the velocity of money, then I can wonk out with a chart:

The red line, here, is the total US money supply, and as you can see it’s started leveling off recently. (Source data here.) In fact, in many months it has actually declined — a rare occurrence, historically speaking. The blue bars are the month-on-month change in M2; it declined as much as 0.65% in January 2010, and in the first five months of this year — all that we have data for so far — it has fallen in three and risen in only two. The money supply in April 2010, at $8.5 trillion, was lower than it was in November 2009: it’s almost unheard-of for the money supply to shrink over so many months.

More generally, I’d take issue with Matt’s assertion that the Fed’s response to the crisis has “involved a sharp increase in the M2 money supply”. Yes, M2 rose in the wake of the crisis. But the sharp rise in M2 dates back much further than that — in fact, you can trace it all the way back to the mid-1990s. The red line doesn’t start rising more sharply when the crisis hits, nor do the blue lines get noticeably larger. There’s one big jump in M2 between August 2008 and January 2009, right at the height of the Lehman collapse, during which it rises from $7.79 trillion to $8.32 trillion, a rise of just under 7%. But we’ve seen that kind of thing before: between November 2000 and May 2001, M2 grew by more than 5%, and then between May 2001 and October 2001, it went on to grow another 4% on top of that.

But I do agree with Matt that we should start publishing M3 data again. If America’s economic statistics are “arguably the most robust in the world”, as Emily Kaiser says, then we should be able to know what’s happening to broad money, without using narrower money as a proxy. These things are very wonky, and only one part of a much bigger puzzle. But they’re still important.

Thanks to Johannes Bruder of Hamburg University for sending me this intriguing chart:

I suspect that the pattern would continue were you to include non-European countries as well; what’s interesting to me is the way in which there’s much more variation among eurozone countries than there is at the bottom of the scale, between Germany and countries like the UK and Switzerland which set their own interest rates.

As for trades, I wonder whether the chart might be pointing to a long-Ireland, short-Italy relative-value trade here. That trade has a positive carry, and if the two countries even so much as converge, you end up making a nice profit. Ireland has already shown that it’s politically grown-up enough to be able to implement tough fiscal austerity. I don’t think anybody really believes that of Italy.