The Whiteboard - Most Recent
Today's numbers: good news in disguise
Today we had a slew of numbers for December: personal spending; personal income; consumer confidence and - the Fed's favorite - the core personal consumption expenditures price index.
Spending was down. Boo.
Prices were up. Boo.
Income was flat. No change there, then.
Consumer confidence was down, although not as badly as people had expected. Yay, I guess.
These indicators provide a pretty accurate picture of the economy right now. And they hang together in a way that numbers often do not. I mean, if prices go up, and I can't get a raise, I'm probably going to spend less money and you can bet I'm going to complain about it.
So this means the economy still sucks, right?
Well, maybe not. Spending was down very little, and in fact the number was better than economists had expected. So we're still buying stuff, which is important in our ridiculously consumption-focused economy (never mind we paid for all that shopping by dipping into the piggybank: savings are down and falling).
What about those price increases? Well, they were only slightly higher, and in line with expectations. And it's not necessarily a bad thing that we're seeing some inflation. Marketplace's David Gura recently quoted David Blanchflower, the Dartmouth College economist, saying at the moment, for the economy, a little bit of inflation is our friend, not our enemy. Or, as Matt Boesler put it over at BusinessInsider, inflation reports are the new jobs reports.
So this is going to sound weird – but pray for prices to keep rising. Just a wee bit.
What investors love about the Treasury's new toy - it floats!
The U.S. Treasury rolls out a brand new toy today. Now, we're talking about the Treasury here, which means the toy is a kind of bond, but investors are excited for a couple of reasons. It's the first new product the Treasury has released in years, so there's a novelty appeal. And, unlike all of the rest of the Treasury's products, this toy floats!
Q. OK, you've got me intrigued. What is it?
The new product is a so-called "floating rate note," with a maturity of two years. A note is essentially the same thing as a bond, but under a different name. Any Treasury debt that has an "intermediate" maturity of 2-to-10 years gets the name "note."
Q. And why are we hearing about it now?
Treasury needs a floating rate because it wants to raise more money, and this kind of debt will attract a different kind of investor. Also, some investors are worried about buying too many Treasuries right now because Treasury bonds, notes, and bills come with fixed interest rates. And that means they lose value when inflation kicks in, or if interest rates go up (which they almost certainly will). A floating-rate note offsets those problems.
Q. I'm following. But all this stuff can be so complicated. Does this thing work?
Picture, for a moment, a peaceful bay in the Caribbean... Ah, yes.
Now watch the tide: it goes in and out, which means that in the center of the bay, the distance between the surface of the water and the sandy bottom beneath is constantly changing.
What's that floating in the middle of the bay? A pirate ship! With a real, live pirate!
The pirate is hanging out in the crow's nest, which is 250 feet above the surface of the water. But his elevation above the sea bottom changes with the tide.
He's floating, in other words -- at a fixed distance from the water, but a varying distance above the sea floor.
A floating-rate note works in the same way. The interest rate on the note is like the pirate in his crow's nest. It floats a fixed amount above a reference rate, which varies constantly. It goes up and down, just like the distance between the sea bottom and the water's surface as the tide goes in and out. The reference rate goes up? The interest rate rises a fixed rate above it. The reference rate goes down, and the interest rate lowers accordingly.
The reference rate can be anything that is based on a market rate. Sometimes it's the prime rate; sometimes it's the infamous LIBOR; sometimes it's the federal funds rate.
Floating rate notes are a great investment -- if you think interest rates are going to rise. Say you buy the note when it pays 2 percent above LIBOR. If LIBOR is 1 percent, you're making 3 percent. If LIBOR increases to 2 percent, suddenly you're making 4 percent. Awesome!
With interest rates at historic lows, interest rates are pretty much bound to rise. Good news for inv ...
Why the trouble in emerging markets isn’t the end of the world
Yes, the U.S. stock market fell out of bed on Friday (and still looks bruised today) as the selloff in in emerging markets hit lemming-like proportions, but just because the Dow got dinged is no reason for us to panic.
So what happened in emerging markets last week?
Basically, investors decided to pull out a lot of the money that they had parked in those economies. They had bought a bunch of stock; last week, they decided to sell it.
Why was all that money in emerging markets in the first place?
There’s a rule of thumb in finance: Money always flows to the place where it will make the biggest return for the smallest risk. Emerging markets are usually seen as pretty risky, but because of the low growth, the low interest rate environment we’ve been in since the financial crisis, investors were having a hard time finding investments that would make money. So they got creative, and money flowed to places that investors usually fear to tread, such as junk bonds and emerging markets.
OK, so why sell now?
Well, money has been flowing out of emerging markets for quite a while now, but the outflows peaked last week for a couple of reasons. First: Reports that China’s economy may be weakening. Concerns about the country’s debt levels had the bulls pulling in their horns, because China is such a big trade partner with many emerging nations. Then, there’s speculation about U.S. Federal Reserve reducing its bond-buying program: The program has been such a stimulant to emerging markets that investors worry that if it is reduced too far too fast, it could stunt those economies’ growth. Investors worry that the end of the program means a stronger dollar (which hurts countries reliant on external financing), and higher interest rates (which will make it more attractive to invest in places other than emerging markets).
Where did all the money go?
It’s hard to say. It certainly didn’t flow into the U.S. stock market, as we saw. Instead, investors looked as though they sought refuge, probably opting to hold cash and buying U.S. Treasuries, which did see a lift last week.
How can you be so complacent about the fact that these economies are melting down?
OK, I don’t mean to be complacent: This is bad news for these economies, and market volatility is never a good thing, for anyone. But the affected economies are not exactly “melting down” at this point (well, maybe Argentina). They are seeing some pullback in investment, which is not good for their growth, and they will experience some short term pain, but it doesn’t necessarily follow that the US will suffer terribly as well. For one thing, their problems do not appear to pose a systemic risk, in the way that the Asian Fi ...
Should we really care whether bankers work their fingers to the bone?
The public hand-wringing by banks about the hours their junior staffers have to work seems a little... disingenuous.
Let's be real here: These banks don't really care about those of their interns and first-year analysts that are working themselves to the point of collapse. They only care about getting the job done, whatever it takes.
In fact many bankers will tell you (off the record, of course) that they LIKE the fact that their bank is seen as a particularly grueling and brutal place to work. They went though it, the argument goes, so why shouldn't the new lot go through it, too?
The memo sent out by Goldman Sachs at the end of October, encouraging junior bankers to take weekends off, was met by skepticism within the industry. The news the following month that the death of an intern at Bank of America could have been triggered by overwork appeared to push other banks to join Goldman. This PR flurry was ostensibly aimed at ensuring that the banks wouldn't lose their best recruits to private equity, or some other arm of the finance industry that doesn't have quite the same notoriety when it comes to working hours.
But as John Gapper points out, the fact that investment bankers are overworked isn't news, and yet Goldman Sachs received 17,000 applications for the 330 jobs as analysts.
So, if senior bankers like the way things are, and ambitious junior bankers don't seem too bothered, why should we care?
One reason: as the FT's John Gapper points out, it's inefficient.
"Many junior bankers end up working in the evening because a partner who has been out pitching to potential clients all day returns to the bank late in the afternoon, and tells them to prepare a document immediately based on the sortie. Although they have been at their desks for hours, they start to work intensively only then."
Bankers cost money, and if the banks are using them inefficiently, shareholders should get upset.
Another reason, from The Guardian's Helaine Olen: it's sexist.
"... the wo ...-byJan 17, 2014
Why the Qualified Mortgage could be our best defense against another financial collapse
God bless the Volcker Rule. While it's been out there, taking withering fire from Wall Street's big guns, the hero of the hour has managed to evade the enemy and escape almost unscathed. I'm talking, of course, about the Qualified Mortgage. It's taken some flak from lobbyists and it's the subject of a hearing in the House Financial Services Committee, but otherwise the qualified mortgage is in good shape and ready to defend America.
Q. This is our hero? If so, what exactly is the Qualified Mortgage?
It's a mortgage that will meet certain standards, designed to protect borrowers.
Q. What kind of standards?
For a mortgage to be qualified, it can't include certain features:
- It can't extend more than 30 years.
- If it's larger than $100,000, it can't carry more than 3 percent in upfront points and fees.
- It can't have interest-only payments or payments that are less than the full amount of interest so that the home loan debt grows each month.
- It can't be a "balloon loan", where the borrower has to make a big payment when the loan matures.
- It can't drive a borrower's total debt load above 43 percent of his or her monthly income. (Unless it's backed by Fannie Mae, Freddie Mac, or a federal housing agency like FHA or the VA.)
Q. Sounds good for borrowers. How do lenders feel about it?
Quite positive. Qualified mortgages come with legal protection for lenders, too. Depending on which type of qualified mortgage they make (there are two types), they're insulated frm borrowers filing lawsuits.
Q. Does this mean lenders will be able to get away with anything?
No. If lenders break any consumer law related to the handling of the mortgage etc, they are still liable.
Q. Why does this make the qualified mortgage such a hero?
Because many economists and analysts reckon that the financial crisis was in large part caused by lenders making "toxic" loans to consumers: loans that were almost guaranteed to fail. The qualified mortgage goes a long way from preventing lenders extending loans to anyone with a pulse. It creates a regulatory b ...
Why Janet Yellen should worry about 6.7% unemployment
Unemployment is down to 6.7 percent.
Ordinarily, that should be cause for celebration: The number of people out of work is falling, and we're getting close to the magic number of 6.5.
A 6.5 percent unemployment rate has become the signal for the Federal Reserve to start unwinding some of its extraordinary support for the economy.
But the people over at the Fed aren't popping corks just yet. Remember the Fed's dual mandate: to ensure maximum employment and stable prices (control of interest rates is No. 3). And while the unemployment number did indeed fall in December, very few jobs were created. As we've been hearing all day, this means that large numbers of people are dropping off the unemployment rolls. They've been out of work for so long, or there's so little hoping of getting work, that they've given up looking.
And that's a whole new headache for Janet Yellen. The unemployment rate was 7 percent in November. Having dropped to 6.7 percent in December, it's not inconceivable that the rate could fall to 6.5 percent in January.
Per Ben Bernanke's pledge, that should trigger the Fed to begin dismantling all the extraordinary support the economy has had up until now. But the fact that we're not creating many jobs should give Yellen pause. This month's number implies we're creating a large and growing body of long-term unemployed, and the "jobless" number is providing a smokescreen for what amounts to a timebomb at the heart of the American economy.
Yellen needs to be careful: Raising interest rates and withdrawing support for the economy at this point could be the match that lights the fuse.
What you should do if you’re a Target shopper
News of the theft of tens of millions of credit and debit card numbers and associated data is causing confusion amongst customers and prompting lots of questions:
Q. How many cards have been affected?
Roughly 40 million.
Q. I shop at Target. Has my data been stolen?
It depends when you shopped there. The breach appears to have occurred over the Thanksgiving weekend. If you shopped at Target between Nov. 27 and Dec. 15, yes, your data may have been stolen.
Q. OK, now I’m worried. I bought a pack of onesies for my cousin’s new baby. What do I do now?
1. Don’t panic.
2. Check your credit card statement. Most card companies will call if they see unusual spending on your account. But because it’s the holidays, they may miss something. So check. Either call your card company and ask them to run down any expenditures since Nov. 26, or go online and check there.
3. Pay attention to the details. Thieves often run a test on a stolen card, charging a small amount to see if the card works and if you notice.
4. Call your card company.Let them know you shopped at Target during the time in question. Ask them what their policy is. My card company has a recorded message telling me right up front that they’re aware of the data breach, that I’m not liable for fraudulent charges and that they’re tracking my card spending.
5. ...But don’t rely on your card company. Keep checking your account. If you don’t have online access, get it. That way you can check your account every couple of days or weeks. Make it a routine.
Q. OMG! There’s a charge for $6,000 worth of gasoline bought in Alaska! I live in Chicago! What do I do now?
1. Don’t panic!
2. Call your card company. Inform them about the charge, and ask for your account to be reviewed, and the charge reversed.
3. Call a credit bureau. You don’t have to call all three. Just get one of them to put a fraud alert on your account.
Q. Does a fraud alert mean my card is canceled?
No. A f ...