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| November 3, 2009 |
Issue 24 | |
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"Preparing you for the financial road ahead" | |
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Economy: A Joyless Recovery ? |
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On October 29th the U.S. government reported that gross domestic product ("GDP") rose 3.5% in the third quarter as compared to the second. GDP measures the output of goods and services produced by labor and property located in the US.
As a result, many economists will conclude that the recession that started in December 2007 is over. However, that official announcement will be made in coming months from The National Bureau of Economic Research ("NBER"), which has the job of determining officially when the recession ended.
Regardless, the depth and sustainability of the recovery is in doubt. The government's cash for clunkers program and $8,000 tax credit for first-time homebuyers fueled much of the economic expansion, consumer spending fell in September for the first time in five months, and consumer confidence fell in October. Only 35% of respondents in a survey done by the Economist think the economy is getting better; 28% think it is getting worse.
In addition, for most people, the recovery will not feel real until jobs are plentiful and the housing market improves. The current recession is the worst employment setback since the Great Depression. Since December 2007, the nation has lost more than 7 million private sector jobs. From 1980-2000, the US gained 35.5 million private sector jobs. Contrast that job creation to the current decade, when America overall has lost more than 1.7 million private sector jobs.
In evaluating when the recession has ended, the NBER looks at five factors; GDP, real income, employment, industrial production and wholesale-retail sales. It will be a tough call (with no instant replay). Given the current average 33 hour work week, we might not see a real improvement in employment for years, as firms simply ramp up worker hours towards a fuller 40 hour work week, as opposed to hiring. It may be that we are just beginning a joyless recovery.
For more information from The New York Times, click here: New York Times | |
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Business: Some Interesting Changes In The Post-Boom World |
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The economy has wreaked havoc across almost all industries in the last two years. Many businesses have been surviving by slicing employment and cutting costs. Yet, at the same time there have been a few bright spots. Let's look at a few of these and then look at some examples of cost cutting employed by businessess.
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British airlines EasyJet (no frills) reported year-over-year traffic is actually up 5.3%. Ryanair is also up but British Airways continues to struggle.
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Skype is transforming the telecommunications industry and bringing the continued existence of the fixed-line phone company into question. Bowing to consumer pressure, AT&T will now allow subscribers to use Skype on iPhone. While voice quality at Skype is not always optimal, Skype has become the world's largest international voice carrier.
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E-books may be starting a revolution. Amazon sold more copies of Dan Brown's Lost Symbol in Kindle e-book format than the hardback in the first day of release. E-books cost about 1/3 the price of hardcovers, though one must first invest in the Kindle or other e-book reader. For avid readers, they're much more convenient to transport reading material, particularly on a trip.
At the same time, there has been some interesting cost cutting happening in the marketplace:
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A burger restaurant in Houston is now charging for ketchup.
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Toilet paper companies have shrunk the width of a tissue.
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Packets of cheese have gone from 24 to 22 slices.
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And, the New York Times reports that the $300 pair of designer jeans have now been "preshrunk" to $200 per pair, courtesy of the recession. Oddly enough, sales of designer jeans remain high but prices have been "reset". The recession took some froth out of the luxury market.
For the mass market, it comes down to price. All of the above examples demonstrate that the common consumer looks to stretch their dollar as far as it can go in a downturn. For wealthier consumers, perhaps it is more about perceived value. Either way, it is interesting to watch the changes that are occurring and how some companies are actually doing quite well, thank you very much.
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Bailout: Banks Are Booming on the Back of Public Support |
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Goldman Sachs is set to award staff a near record $20 billion this year. Firms making losses for shareholders, such as Citigroup and Bank of America, are still paying hefty bonuses.
Such rewards, in the face of public protest, feed the impression that banks have been "captured by employees". The top ten investment banks at the start of 2008 made an average return on equity of just 8% between 1999 and 2008. Four made cumulative losses. Yet, staff got four times as much as shareholders did in profits.
When times got tough, these banks got capital (much of it now repaid), short-selling bans on their shares, and rescues of counterparties, such as AIG. Today, according to the Economist, they enjoy laxer accounting, loose collateral rules, explicit debt guarantees and asset-purchasing schemes. And, most importantly, they can borrow at cheap rates because they are deemed to big to fail.
Obviously, the America taxpayer is upset with the situation. As a result, the Obama administration will soon order the nation's biggest bailed-out companies to drastically cut the pay packages of 175 top executives. Pay czar, Kenneth Feinberg, who was in charge of compensation to the victims of 9/11, constructed the plan for the top 25 executives at the seven largest bailout recipients. It will cut salaries and cash bonuses by an average of about 90 percent from what they received last year. Some of that lost cash would be replaced by grants of stock and other deferred payments to align executive long-term interests with those of shareholders.
The action could have some symbolic value but may in the long run matter little. First, this program only affects Citigroup, AIG, Bank of America, General Motors, Chrysler, GMAC and Chrysler Financial. What about Goldman Sachs, JP Morgan Chase, Wells Fargo and others? Furthermore, the New York Times reports that even with Mr. Feinberg's program, 14 of Citigroup's highest paid executives still stand to make $5 million to $9 million each.
Nell Minow, a fierce proponent of executive compensation reform, feels the only way to change the system is to make directors more accountable to the company's shareholders. She feels a pay czar shouldn't control pay. That's a job reserved for shareholders, the ones who own the company.
Paul Volcker, who was Federal Reserve Chairman before Alan Greenspan and is the current head of the president's Economic Recovery Advisory Board recently weighed in on the subject. Mr. Volcker feels the problem is a direct result of Glass-Steagall Act being revoked in 1999. Glass-Steagall was passed in 1933 and restricted banks to commercial banking and prohibited them from engaging in risk Wall Street activities. Volcker argues that regulation by itself will not work. Sooner or later, the giants get in trouble and we taxpayers come in to bail them out.
Volcker's plan would break up the giants. In his resurrection of Glass-Steagall, commercial banks would take deposits, manage the nation's payment system, make standard loans and even trade securities for their customers-just not for themselves. The government, in turn, would rescue banks that fail. On the other side of the wall, the investment banks would be on their own without access to federally insured deposits. None would be too big to fail. And, if one did fail, the government would supervise an orderly liquidation.
Unfortunately, the administration has said no to Volcker's proposal. That's too bad.
For more information, click here:The Economist
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| -Market Update- |
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