Paddy Hirsch is a Contributing Editor at Marketplace. He is he is the creator and host of Marketplace Whiteboard, a video explainer of financial and economic terms, and he is the author of the book Man vs Markets, Economics Explained, Pure and Simple.
Hirsch joined Marketplace in 2007, just as the credit crunch that preceded the 2008 financial crisis began to take hold. As editor of the New York Bureau and the entrepreneurship desk, he spearheaded Marketplace’s financial markets coverage throughout the crisis and as the economy fell into recession. He was awarded a Knight Fellowship at Stanford University in 2010, and he returned to Marketplace in July of 2011, when he was appointed Senior Producer of Marketplace Money. He published his first book, Man vs Markets, in August 2012.
Hirsch got his start in journalism with an internship at the BBC in Glasgow, Scotland. He became a field producer for CNBC in Hong Kong and later was a consultant to the Open Broadcast Network in Bosnia. He has been an editor for Direct Capital Markets, Institutional Investor Newsletters, Standard & Poor’s, and the Vietnam Economic Times. Prior to becoming a journalist, he served as an officer in the Royal Marines.
Hirsch attended Campbell College in Belfast and received a bachelor’s degree in French and International Studies from the University of Warwick. He is a Knight Fellow and was a Webby honoree in 2009.
Features by Paddy Hirsch
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 investors. And good news for a Treasury that wants to raise more money. But just like the tide, LIBOR, or any other reference rate can go down as well as up. And leave investors stranded.
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 Financial Crisis did in 1997. For another, the pullback is patchy: Brazil dipped because it’s such a big trade partner with China; Argentina dropped because of its currency disaster; South Africa slumped on fears of a platinum miners’ strike; the Ukraine has credit market issues and Turkey has currency problems. But other emerging market economies, such as Mexico, appear unscathed, and may even be attracting investment.
So why did our stock market drop on Monday?
For one thing, investors got nervous. And when they're nervous about one thing, they get nervous about everything. So there's a spillover effect there. But also bear in mind that emerging market nations are big customers of the big multinationals that trade on the US stock exchanges. Some companies, like GE, IBM, Dow Chemical and Ford depend on overseas markets for more than 50 percent of their revenues. If things are going bad in these emerging econmies, it means the people there will likely spend less on the goods sold by these multinationals. And, therefore, those companies will make less money.
Shouldn't we be worried about contagion in these emerging markets?
We should always be worried about contagion, and there’s quite a debate raging about whether contagion is likely in this case. Certainly some countries that were awash in cash thanks to the Fed’s bond buying program will now be left high and dry, and looking for bailout help from international institutions. The problem is that investors often lump economies together in the emerging market basket regardless of their fundamentals, and may be prompted to sell off the whole lot in a panic. So far, that doesn't seem to be happening, but if it does, that’s when contagion will really kick in. And then, yes, we will have a problem.
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 world of employment has all too often remained wedded to a traditional model, where employees who want to make it to the top need to all but sacrifice their personal lives in their twenties and thirties to make it big in their forties. I’m sure you don’t need me to tell you that this puts women at something of a disadvantage, since that’s also the prime age for women to have children. If they don’t do it then, it’s quite possible they never will."
The process of changing working hours group-think on Wall Street -- as well as in the medical and legal professions, by the way -- will be a marathon, not a sprint. Several generations of bankers will have to pass through the lower-tiers of their businesses before any new approaches become institutionalized. As CNBC's John Carney notes, that road will probably not be smooth, and you can expect some more senior bankers to undermine any attempt to change.
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 barrier to indiscriminate lending and reckless borrowing.
Q. But not all the way?
No. Lenders can - and do - still make interest-only loans, and loans that drive the borrowers debt to income ratio above 43 percent. But they won't have robust legal protection from borrowers if things go wrong.
Q. Is it going to be harder to get a loan now?
For someone with poor credit, almost certainly. Although the CFPB says that 92 percent of the mortgages in the market today are qualified mortgage compliant. So we're on the right track. The qualified mortgage is all about keeping us there.
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.
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 fraud alert makes it harder to extend credit to you. Anyone wishing to take out a loan under your name will have to prove they are you. The alert lasts 90 days, and the credit agency you notify will call the other agencies.
Q. I’m still kind of wigged out about this. Should I just say 'to hell with it!', and cancel my card?
Before you do this, speak with your credit card company. They will talk you through your situation. If after that you’re still feeling squirrely, then go ahead and cancel your card. Your card company will send you a new card in a few days and then you can spend the holidays changing your account details with everyone you do business with.
In a word, no.
At least, not yet. And even then, not by much.
The Federal Reserve announced today that it's tapering off its quantitative easing program: Buying just $75 billion of bonds, instead of $85 billion, starting in January. But it also committed to holding interest rates down, saying it will keep the "exceptionally low" target range for the federal funds rate to between 0 and 0.25 percent. What's more, the Fed said it expects to keep rates that low rate:
"[W]ell past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal."
This means that the interest rate that banks charge to lend to each other will stay low.
But what does it mean for you and I?
It means that the interest rate that lenders charge people like us to borrow money to buy cars, houses and educations will not move by very much for quite some time. Even if unemployment drops below 6.5 percent, which some observers reckon could happen next year, the Fed will keep those rates low.
Fidelity Investments contradicted a report today that said the company was offering customers the chance to put bitcoin into their IRAs.
The manager of Bitcoin Investment Trust said in an interview that Fidelity customers would now be able to invest their retirement money in his fund.
I'm a Fidelity customer, so I called to ask about this, and was told the company does not have any such arrangement.
A few hours later Fidelity announced: "On an individual basis, we allowed an investor to invest in that Bitcoin Investment Trust. We are no longer allowing that.”
Never mind. Still interested in buying a little bitcoin?
Q. You betcha! How can I get some of that action?
A. Well, before we get to that, do you understand what bitcoin is?
Q. Ummm….? [silence]
A. Fortunately, there are a lot of good explainers of what bitcoin is and how it works out there.
Try this video:
This written explainer:
"A Bitcoin is a unit of currency, launched in 2009, that only exists online and isn't controlled by any kind of central authority, like the US Federal Reserve. You can send Bitcoins to anyone who has a web connection (or hand someone your hard drive containing the currency.)"
Q. OK, so I'm ready dip my toe in the waters. What's the first step to buy some?
Well, there are a number of ways:
1. You can sell some stuff and ask for bitcoin in return, instead of dollars.
2. You can buy bitcoin "over the counter," which means buying them with cash from another party in a face-to-face transaction, in the same way that you might buy baseball cards. Or diamonds.
4. You can use your phone to buy bitcoin. Definitely a fee.
5. You can use a gift card. Most definitely a fee.
6. You can sign up for Second Life and use Second Life Lindens (that’s the virtual world currency) to buy bitcoin.
7. You can buy Bitcoin through an exchange like Coinbase.com, Blockchain.info and MtGox.com. If you do it this way, you have to pay the exchange a fee, just as you pay a stock exchange when you trade securities.
8. You can make Bitcoin part of your retirement account by investing in SecondMarket’s Bitcoin Investment Trust. But there’s a $25,000 investment minimum, and you have to pay a bunch of fees – as much as 5 percent – just as you do in any fund.