A 12-year-old upstart based out of Atlanta—gasp!—has bought the 220-year-old icon of capitalism, the New York Stock Exchange. Daniel Gross on how much trading has changed—and why traders couldn’t keep up.
And here we thought Big Bird was the New York-based media icon who was endangered in 2012. Turns out it was the Big Board. The New York Stock Exchange, the 220-year-old icon of American capitalism, the fortress-like building that houses the animal spirits of the nations’ investors, the place whose old-school bells signal the opening and closing of the trading day, and whose floors housing anguished faces on days of crashes, and big smiles on up days—it has been sold to ... an upstart derivatives exchange based in Atlanta that is too young for a bar mitzvah.
The deal was more of a coup de grace than a coup.
The NYSE, like some other prestigious New York-based legacy brands (publishers, retailers, newspapers) is an analog business in an increasingly digital world. Until relatively recently, stock trading in the U.S. worked the way it always had. Buyers and sellers would meet, first under a Buttonwood tree in 1792, and then on the floors, to trade stocks. People would gather around to watch the action. Professional middle-men would pocket a piece of the action. CNBC began to broadcast from the floor, vastly increasing the audience and cementing the centrality of the NYSE In our investing culture.
But massive paradigm shifts have rendered the NYSE a bit player. Over the past 40 years, technology has slowly eroded the business model and primacy of the NYSE. On the NASDAQ, which gained critical mass in the 1970s, buyers and sellers could essentially meet online, without much human intervention. It became the destination of choice for technology companies, many of which have risen from tiny start-ups to the world’s largest: Microsoft, Google, Apple, and Intel. (Today NASDAQ has a tiny physical footprint in Times Square, which is really a television studio and some computers.) Meanwhile, technology enabled the rise of discount brokers, and the trading of stocks in increments of decimal points rather than fractions. That was bad news for the middle-men, the people who owned NYSE seats and the guys in the funny jackets who worked on the floor. As was the case with so many other businesses, it turned out that machines could do the job more quickly and cheaply.
In the past decade, the technological revolution increased in pace. Alternate electronic stock exchanges, like BATS, which started in a strip mall outside Kansas City, allowed traders to conduct deals quickly for even less money. These upstarts appealed to the high-frequency traders who have come to dominate the market. The action in today’s market is no longer about a savvy mutual fund working with a specialist to place orders for a block of shares, and relying on a trusted hand to do so without tipping off the market. Now it’s computers, run by algoirthms, trading hundreds of shares—hundreds of times per minute—on a range of exchanges. That’s where the action is today. As a result, covering the “stock markets” by standing on the floor of the NYSE and looking at the action is a little like covering an election by standing at polling places—when 80 percent of the population votes by mail.
The facade of the New York Stock Exchange is framed by the NYSE holiday tree, on Dec. 20, 2012. (Richard Drew/AP)
A second trend harmed the NYSE. In the NYSE’s heyday, in the 1950s and 1960s, U.S. stocks were pretty much where the action was. These days, however, sophisticated investors and those with large pools of capital are trading in everything but U.S. equities. The hot action in today’s markets is in foreign stocks, in government and corporate bonds, and especially in derivatives of all sorts—futures, options, structured products. The volatility and spreads in these markets is far greater than it is for stocks, and therefore so is the potential for profits.
It’s not just rich corporate guys in New York who’ll take a hit when the private-equity giant pulls out of gunmaker Freedom Group. Dan Gross on how the win for gun regulation advocates hurts some civil servants.
It took a while, but the owner of Freedom Group, the weapons conglomerate that makes the Bushmaster weapon used in last Friday’s assault in Newtown, Connecticut, finally said something.
Former Treasury secretary John Snow speaks at the National Press Club on July 18, 2007, in Washington, D.C. John Snow is the chairman of Cerberus Capital Management LP. (Brendan Smialowski/Bloomberg via Getty Images)
At 1 a.m. on Tuesday morning, more than 80 hours after the event, Cerberus Capital, the high-profile private-equity firm that owns Freedom Group, issued a statement. Cerberus expressed sadness and attempted to distance itself from the assault, noting that Freedom Group “does not sell weapons or ammunition directly to consumers, through gun shows or otherwise.” It continued: “We do not believe that Freedom Group or any single company or individual can prevent senseless violence or the illegal use or procurement of firearms and ammunition.”
But you don’t need a weatherman to know which way the wind blows. Cerberus recognizes that the Sandy Hook even was a “watershed event that has raised the national debate on gun control to an unprecedented level.” And this higher level of public debate is making Cerberus uncomfortable. “As a Firm, we are investors, not statesmen or policy makers.” So rather than get involved in a messy debate, it is cutting Freedom Group loose.
“We have determined to immediately engage in a formal process to sell our investment in Freedom Group.” That way, Cerberus can give the money back to its investors, and go about its business “without being drawn into the national debate that is more properly pursued by those with the formal charter and public responsibility to do so.”
While welcome, the statement is troubling. And while it is tempting, even satisfying, to lash out at a secretive private-equity firm that profits from the sale of automatic weapons, a deeper look should cause us to pose questions to others, and to ourselves. The rich guys in New York weren’t the only beneficiaries of Freedom Group’s growth. In fact, many of the indirect beneficiaries are people of much more humble means.
Let’s start with the obvious. Cerberus claims that “as a firm, we are investors, not statesmen or policy makers.” But of course, Cerberus’s small leadership team includes statesmen and former policymakers like Dan Quayle, a former vice president of the United States, and John Snow, a former Treasury secretary. In recent years, Cerberus has purposely become involved with companies that benefit from, and rely on, public policy. One of its more successful investments has been in Air Canada, for example.
Private-equity executives, including the folks at Cerberus, have very strong opinions on matters of public policy when it comes to tax rates, the treatment of carried interest, and entitlement spending. Cerberus executives, including its founder, Stephen Feinberg, have given heavily to political campaigns (virtually all of it to Republicans). For people who chose to operate in regulated industries, who choose to invest in government contractors, and who participate in the political process at a high level to suddenly plead a lack of interest and competency in such areas now that there’s a national debate on gun control is highly convenient.
Adam Lanza killed up to 27 people with the Bushmaster .223. The gun’s manufacturer—and its private-equity honchos—have said nothing, while reaping huge profits, reports Daniel Gross.
Freedom Group is having a pretty good year. The economy may be stuck in a low gear, but the company's sales are growing rapidly—up 20%, to $237.9 million, in the third quarter of 2012 compared to the same period last year. Thanks to a “considerable increase” in demand for Freedom Group’s core products, the company told investors, “the market is expanding quicker than the industry can increase production.”
Those core products? Guns and ammo.
Several .223 caliber rounds are shown near a Bushmaster XM-15. (Joe Raedle/Getty)
Freedom’s “family” includes Remington, maker of sniper rifles and shotguns; Advanced Armament, maker of silencers; Para USA, maker of 9mm pistols; and Bushmaster, the company behind the Bushmaster .223 semi-automatic rifle that authorities say Adam Lanza used to kill up to 27 people at close range at Sandy Hook Elementary School last week. “With a Bushmaster for security and home defense, you can sleep tight knowing that your loved ones are protected,” reads its website. “Bushmaster offers everything you need to ensure the safety of you and your family.”
Freedom Group, based in Madison, N.C., might have been just another American success story, quietly introducing new products, innovating, and seeking new customers, largely out of public view. But that might change in the wake of the Newtown shooting and ongoing debate about the future of guns in this country.
Same goes for a private-equity firm called Cerberus Capital. Based thousands of miles away in New York City, Cerberus owns Freedom Group. It has about $20 billion in assets, and a leadership team that includes former vice president Dan Quayle and former treasury secretary John Snow. Its billionaire founder, Stephen Feinberg, is a major Republican donor, giving $217,000 in campaign donations in the past three cycles, according to Opensecrets.org. That included $100,000 in August to Friends of the Majority, a Republican super PAC; $9,800 to Rep. Ben Quayle (son of Dan); $30,800 to the Republican National Committee in October; $58,500 to the National Republican Senatorial Committee, and $7,500 to Mitt Romney.
Cerberus itself is much like any other private-equity firm. It is agnostic about the type of business it invests in. Cerberus’s portfolio includes manufacturers, airlines, time-share companies, banks, and health-care firms. The company’s modus operandi is “centered on integrity, patience, and a unique business model that applies significant financial and operational resources across the firm’s investment strategies.” Of course, some important details are missing from the Cerberus website. It doesn’t note that two of its largest and most high-profile acquisitions—GMAC in 2006 and Chrysler in 2007—ended in disaster. (You won’t find Chrysler or GMAC, which the firm allowed to go bankrupt and left taxpayers on the hook for $1 billion and counting, in its list of case studies) And you won’t learn that one of its investment strategies has involved building a company that makes weapons—the type used by military organizations, hunters, recreational shooters, and occasionally murderers.
In this New York Times piece, Natasha Singer described how Cerberus, starting with Bushmaster, acquired several gun and ammunition brands, including Remington, Marlin Firearms, and Dakota Arms. Together, they have made Freedom Group “the most powerful and mysterious force in the American commercial gun industry today.” Typically, private-equity firms seek to cash out of their investments through initial public offerings or sales to other companies. Neither has happened with Freedom. But Cerberus, the Times noted, did receive a return on investment in 2010, when Freedom sold about $225 million in debt “to pay itself a special dividend used to buy back preferred stock from Cerberus.”
Boehner, McConnell, and other key Republicans are signaling they’ll agree to make the top 2 percent pay more. Many GOP House members still aren’t on board, but they need to realize the war over higher taxes on the rich is over, says Daniel Gross.
Fiscal cliff hostage situation, day 40. It’s taken six weeks, but President Obama has finally got the Republican House leader to make the case for a more progressive tax system. In an effort to resolve the fiscal cliff impasse, John Boehner reportedly has offered to raise income-tax rates on people who make more than $1 million a year—but if, and only if, Obama agrees to entitlement cuts. In addition, The Washington Post reported, Boehner also has offered to take the toxic debt-ceiling debate off the table for a year.
House Speaker John Boehner (center) walks to a news conference last week in Washington, D.C. (Andrew Harrer/Bloomberg via Getty Images )
Like those Japanese soldiers holed up in caves on Pacific islands in 1945, the House Republicans don’t seem to grasp that the war over higher taxes on the rich is effectively over. This war ended, of course, with the election. Because it meant there would be no President Romney to demand the continuation of low tax rates. And because the Republicans, failing to take back the Senate, had no way to move legislation on their own preserving the Bush tax cut. And because the Republicans instantly lost hope of repealing Obamacare, which levies higher payroll and investment taxes on the wealthy. And because for the second straight time, the nation’s voters elected to office a president who had campaigned on the explicit promise to raise taxes on those making $250,000 or more.
And yet, it took several weeks for the reality to set in. The initial Republican orthodoxy seemed to be that Obama’s reward for winning a second term should be to capitulate to Republicans on taxes and propose deeply unpopular entitlement cuts. But as the fiscal cliff hostage situation has dragged on, and as the Obama administration has developed an effective stiff arm, the Republican mood has shifted from denial to acceptance—especially in the Senate.
Several Senate Republicans have come out and said the best course might simply be to cut a deal with Obama to preserve the low tax rates for the overwhelming majority of taxpayers and to let the top 2 percent who earn more than $250,000 in taxable income per year shell out a little more. Even Minority Leader Mitch McConnell, the most hardened partisan warrior in the Senate, seems to be backing this plan. And that’s a pretty major concession.
But the House Republicans—a very conservative bunch who generally hail from safe districts—aren’t quite on board. And Speaker Boehner is reluctant to get out too far ahead of his caucus in advance of an impending intraparty election early next year. So his proposal to soak the very rich, while welcome, doesn’t really advance the ball much. Sure, this marks a step toward Obama’s position. But keep in mind, the president gets much larger tax increases on a broader swath of the very rich without entitlement cuts come Jan. 1.
The Republicans want Obama to own the unpopular cuts to Social Security and Medicare they have long wanted to impose. In exchange for agreeing to the higher tax rates on the seven-figure crowd, Boehner wants, according to Politico, “to use a new method of calculating benefits for entitlement programs known as ‘chained CPI,’ which would slow the growth of Medicare and other federal health programs and save hundreds of billions over the next decade.” Unlike Paul Ryan’s proposals, which would protect those over 55—the core Republican constituency—from any significant changes, this suggestion would affect people who currently rely on the program. The Republicans, of course, want Obama to own those changes. (I wouldn’t put it past them to then run against Democrats in coming election for making benefits more stingy.)
For his part, Obama doesn’t mind owning the higher tax rates on the wealthy. He ran on them twice. But he does want Republicans to own them, too. Obama isn’t simply waiting for his interlocutors to concede the inevitability of higher taxes on the rich; he’d prefer for them to make the case for a more progressive tax system. And not just through some vague promises of future reform and the closing of loopholes and the capping of deductions that can’t be named. No, he wants Republicans to throw the rich under the bus.
The latest data show U.S. industry shrugged off the effects of Sandy.
In recent weeks, it has been fashionable (and even rational) to fret about the U.S. industrial economy. Sure, consumers are doing better. But businesses, who are freaked out by the fiscal crisis, and who are being impacted by slow growth outside the U.S., aren’t doing quite as well. And that could put a damper on growth. Earlier this week, for example, the Commerce Department reported that exports fell in October.
Friday morning, however, we got two pieces of data that should allay those concerns, at least for now. First, Markit published its flash manufacturing purchasing managers index (PMI). This data point, which is not be confused with the more popular ISM purchasing managers index, is a relatively crude one. They call up managers at companies and ask if their business, orders, employment, and exports are expanding this month or declining. A reading of above 50 indicates the sector is expanding. A reading below 50 indicates the sector is declining.
Markit’s manufacturing reading came in at 54.2, better than expectations. This represented an eight-month high, a reversal of the recent declining trend. And it suggests that a fair amount of November’s weakness was due to the aftermath of Sandy, not to something fundamentally wrong in the U.S. manufacturing economy. The index found that new orders, exports, and employment are all growing more rapidly than they were in November.
At roughly the same time, the Federal Reserve reported its November readings for industrial production and capacity utilization. The release can be seen here. Here, again, the news was surprisingly positive. In November, industrial production rose 1.1 percent, after having fallen .7 percent in October. Compared with November 2012, industrial production was up 2. 5 percent. In other words, despite the damage caused by Sandy, America’s mines, utilities, and factories increased their output at a decent clip in November.
In addition, there was good news on the capacity utilization front. Capacity utilization refers to the amount of the nation’s productive capacity that is in use in any given month. The higher the reading the better. It means less stuff and equipment (and people) are sitting around not doing anything. Capacity utilization rose in November to 78.4 percent, from 77.7 percent in October. That’s still below the levels of 2007. But it represents progress. And it is even more impressive when you consider that industrial capacity has actually grown in the U.S in the past year. Compared with a year ago, we have more invested in productive capacity, and more of it is being used.
All of which is further evidence that the drama over the fiscal cliff has not been inhibiting work around the country to a substantial degree.
The company is being tweaked for its relatively measly investment in U.S. manufacturing. But the impact of $100 million on the economy is nothing to sneeze at, writes Daniel Gross.
Apple CEO Tim Cook created a brief stir this week when he announced the company would be making a small investment in U.S. manufacturing.
In an interview with Bloomberg Businessweek’s Josh Tyrangiel, Cook defended Apple’s reputation as a manufacturing outsourcer. “It’s not known well that the engine for the iPhone and iPad is made in the U.S., and many of these are also exported—the engine, the processor. The glass is made in Kentucky,” he said. “And next year we are going to bring some production to the U.S. on the Mac. We could have quickly maybe done just assembly, but it’s broader, because we wanted to do something more substantial. So we’ll literally invest over $100 million. This doesn’t mean that Apple will do it ourselves, but we’ll be working with people, and we’ll be investing our money.”
Critics were quick to note that, in the scheme of things, that’s a drop in the bucket. Apple’s annual capital-expenditures budget approaches $10 billion. And even a sizable investment in high-tech manufacturing won’t create a lot of jobs. The manufacturing plant could create about 200 permanent jobs, which seems like a paltry bang for $100 million bucks. As Paul Krugman noted, the construction of manufacturing plants in the U.S. these days often creates more jobs for robots than for people.
But we shouldn’t be so quick to dismiss Apple’s seemingly token investment in U.S. manufacturing. The overall impact on the economy—and on jobs—is likely to be far larger.
Manufacturing is different from other economic sectors. Set up a service like a hedge fund, or a consulting firm, and you’ll need a computer, an assistant, some office space (or maybe not), and a few service providers. Set up a manufacturing firm, however, and you call all sorts of other professions into action. You’ll be acquiring raw materials and shipping them out, buying and maintaining expensive machines. The jobs created go beyond the factory floor—factories hire people to do security, to install and fix the robots, to move goods to and from the factory, to feed workers and maintain the grounds. They buy a lot of electricity, heat, and water from local utilities; they purchase packaging and shipping materials; they fill up truck trailers and railcars. Long story short: when you make stuff, you end up having a pretty broad impact.
So, yes, manufacturing jobs have historically paid higher wages. But it’s really this ability to have a larger impact—the so-called “multiplier effect”—that gets the blood of economic development officials pumping. As this report from the National Association of Manufacturers suggests (see page 18), a dollar of sales of a manufactured products leads to $1.40 in output elsewhere in the economy.
And even in this age of global business, a lot of that activity tends to happen close to the home of the factory. A few years ago, the technology company NCR decided to start a factory to build ATMs and kiosks in Columbus, Ga. Part of its plan is to have as many suppliers as possible within a 250-mile radius. It’s much more efficient to do business that way, even if cheaper sources could be found overseas. And so its decision to build and assemble in Georgia means more work for safe manufacturers in North Carolina and for steel and component manufacturers around the South. The heavier the equipment, the more likely the suppliers are to be local. Wind turbines are the most extreme example. It’s really difficult to ship massive blades over long distances. So when Vestas, the Danish company that makes giant wind turbines, built production facilities in Colorado and elsewhere, it was followed by many of its suppliers.
Apple CEO Tim Cook speaks during an event in October in San Jose. (Marcio Jose Sanchez / AP Photo)
It’s true—September’s employment numbers weren’t as good as we initially thought. Also in today’s report: hiring powers through Sandy’s headwinds. Daniel Gross sifts through the data.
The jobs report actually came in quite good. Even in the aftermath of Hurricane Sandy, the economy managed to add 146,000 payroll jobs in November, and the unemployment rate fell to 7.7 percent. That’s been par for the course for the past two years—decent, but not enough to pick up much of the slack in the labor force. And it is rare to have one with unambiguous good news.
Let’s start with the main number: the number of jobs created. There was great fear that Hurricane Sandy would wreak havoc on the numbers, and on the labor market in highly populated East-Coast states like New Jersey and New York. But that, and the impending fiscal cliff and political uncertainty, didn’t seem to deter hiring. Compared with a year ago, there are 1.89 million more Americans with payroll jobs today. Since February 2010, the economy has created more than 4.6 million jobs.
The economy has shown an impressive and consistent ability to create jobs in a period of enormous uncertainly and recurring crises. Last month, the growth was driven by retail (52,000 jobs), health care (22,000 jobs), and professional services (18,000 jobs). The influence of Sandy could likely be seen in the fact that the construction sector lost 20,000 jobs in the month.
One more interesting item in the payroll data. For months we’ve been discussing the “conservative recovery.” Every month for the past couple of years, the private sector has been adding jobs, occasionally at an impressive rate. And nearly every month, the public sector—state, local, and federal government—has been cutting jobs. All in, over the past two years, the public sector has cut about one million jobs. The conservative recovery continued in November. But there are signs that the effects of austerity on employment may be coming to an end. In November, government cut just 1,000 positions, after having reduced employment by 51,000 in October.
Employee Mary Mah folds flannel shirts at a Gap store in San Francisco, Nov. 14, 2012. (Paul Morris / Bloomberg via Getty Images )
Now for the bad news. The work week and wages barely budged. Over the past 12 months, average hourly earnings have risen by a meager 1.7 percent. That’s not really keeping up with inflation. More significantly, the apparently good news about the unemployment rate comes with a few caveats. The unemployment rate is calculated from the household survey, in which BLS calls up people and asks whether they have been working or not. It calculates the rate by dividing those who are working by those who say they are in the workforce. If people get discouraged, or drop out of the workforce, or stop looking, then the rate can fall even if the number of people who say they are working falls. And that’s what seems to have happened last month. The unemployment rate fell, from 7.8 percent to 7.7 percent. But that happened because the labor force fell by about 350,000, while the number of people saying they were working fell by about 122,000. That’s bad news. But the household survey data is notoriously volatile and bumpy.
One final note. Jack Welch was right. The September jobs report wasn’t as strong as it initially seemed. Each month, when it reports the numbers, BLS revises the data from the previous two months. So September’s number, originally reported as a gain of 114,000 and revised in November to a gain of 148,000, was revised downward to 132,000. The October figure, originally reported as a gain of 171,000, was revised down to a gain of 138,000. In other words, revisions found there were about 49,000 fewer jobs in the economy than previously thought.
A month after the election, the Senate is a forum for performance art, CEOs are throwing money away—and Obama and Boehner appear stalled. Things aren’t looking good, writes Daniel Gross.
Fiscal cliff hostage situation. Day 30. It was a day for dada and futile symbolic gestures.
U.S. Sen. Jim DeMint (R-S.C.) talks on the phone in his office on Capitol Hill on Thursday. DeMint announced that he will resign from the Senate to become the president of the Heritage Foundation. (Alex Wong / Getty Images)
Jim DeMint, Republican senator from South Carolina, Tea Party favorite, scourge of the Washington establishment, up and quit his post—to become head of ... a Washington institution, the Heritage Foundation. Heritage, it will be recalled, helped come up with the idea of an individual mandate for health insurance many years ago. And so DeMint, an implacable foe of Obamacare, will now get paid to run the organization that helped incubate Obamacare.
In the Senate, which increasingly resembles a forum for performance art, Americans were given a lesson in civics. Senate Minority Leader Mitch McConnell in 2011 had proposed a solution to the warfare over the debt ceiling. Congress would pass a law that would let the president raise the debt ceiling on his own. Then Congress could vote to disapprove and stop him from raising the debt ceiling. But the president could then veto that measure, and the override attempt would fail. So, everybody would be happy: the president would get his debt, and Congress would get its outrage. Today, McConnell, in an effort to taunt Democrats in the Senate, introduced the measure and challenged the Senate to vote on it. He figured Democrats would think it was a bad idea. But when Democrats took him up on the offer and agreed to vote, McConnell decided it wasn’t a good idea after all. And so he filibustered the legislation he had just introduced.
The debt ceiling, of course, has precisely nothing to do with avoiding the fiscal cliff or tax reform. And President Obama, buttressed by his newly discovered spine, has essentially said as much. As he said Wednesday: “If Congress in any way suggests that they’re going to tie negotiations to debt-ceiling votes and take us to the brink of default once again as part of a budget negotiation—which, by the way, we had never done in our history until we did it last year—I will not play that game.” So in other words, the Senate spent the day arguing about a part of the fiscal cliff deal that the president says can’t be a part of the fiscal cliff deal. (#dada)
Meanwhile, in corporate America, preparations for the fiscal cliff continued. Chief executive officers have been thronging the Home Depot and Lowe’s, buying up the biggest shovels they can find. And they are putting the tools to work, shoveling cash out the door in the form of (lightly taxed until Jan. 1, 2013) dividends. Late Thursday, McGraw-Hill, the parent company of Standard & Poor’s, said it would pay out a special $2.50-per-share dividend (about $700 million) on Dec. 27. CEOs may be a little slow on the uptake, but they can clearly see that the current low rates on dividends are not going to survive the cliff.
In Washington, we are told, formal talks between the two parties that must make a deal—Obama and House Speaker John Boehner—resumed after a week of silence with a telephone call. Staff-level talks continued. Very little word leaked out. It could mean that they were doing nothing. But it could also mean that they are doing something. As Rick Klein of ABC News (@rickklein) tweeted: “Very litle news committed on #fiscalcliff today. which probably means the most productive day yet on negotiations.”
As the sun set on day 30 of the fiscal cliff hostage crisis, I went out into the front yard, scared off the deer, and tied a yellow ribbon around the old oak tree.
As Beijing rejiggers its economic strategy and lets its currency weaken, Japan is likely about to become to the top foreign holder of U.S. Treasuries. What does this mean?
You hear it all of the time. The problem is that the government is borrowing from China to fund our stupid spending programs, or popular subsidies, or tax cuts. Mitt Romney (remember him?), in a presidential debate, defined his criterion for deciding whether spending is worthwhile thusly: “Is the program so critical it’s worth borrowing from China to pay for it?” Big Bird famously didn’t meet that test. In the vice-presidential debate, Paul Ryan criticized subsidies for electric cars, and wondered “Was it a good idea to borrow all this money from countries like China and spend it on all these various different interest groups?” Democrats do it, too. Pollster Mark Mellman, writing in The Hill, described how he used the “borrowing from China” line in a recent poll.
Kazuhiro Nogi, AFP / Getty Images
Subtle, this isn’t. Politicians of all stripes warn that it’s a bad idea for Americans to borrow from a rival, a potential enemy, a country with a fundamentally different and authoritarian political system. Relying on China as a lender will reduce our freedom of movement, harm our values, and diminish the country. And in recent years, our massive trade deficit has led to ever-increasing Chinese purchases of U.S. government debt. For much of the past two decades, China’s central bank has hoovered up all the dollars we sent to purchase plastic stuff and clothes, and then used it to buy dollar-denominated assets, the better to keep its currency weak against the dollar. A year ago, China was far and away the largest foreign owner of U.S. debt; it sat on a $1.27 trillion stockpile.
But the global economy is a dynamic place. Things change. And today, it’s highly likely that the biggest foreign holder of U.S. debt isn’t the snarling Asian tiger of China. Rather, it’s the wounded, unthreatening kitty cat of Japan.
That’s right, Japan. Twenty years ago, Japan occupied the place that China now does in our commercial imagination—the aggressive, swashbuckling, mercantilist power from the east that was bent on global economic domination. But the past two decades haven’t been kind to Japan. Hampered by low growth, demographic decline, a constipated political system, a scarcity of energy resources, a massive debt overhang, and a crippling 2011 tsunami, Japan has become the sick man of Asia. The country still remains wealthy, and has a high savings rate. And its central bank and private investors always had a huge portfolio of U.S. government bonds.
In September 2011, China held $1.27 trillion in Treasury securities, or 26 percent of the total owned by foreigners, while Japan held $984 billion, or about 20 percent. But something has happened in the past year. China’s export growth has slowed, and the country is trying to move toward a consumption-driven economy. At the same time, China’s central bank has let its currency decline in value against the dollar. Between September 2011 and September 2012, in fact, its U.S. debt holdings shrank to $1.155 trillion, down nearly 11 percent. (For a deeper historical dive, go here.)
Meanwhile, Japan’s holdings have risen. Investors seek relative value. And while American bonds may not pay much interest, they pay more than bonds issued by Tokyo. One man’s low-yielding bond is another man’s high-yielding bond. But there are also mercantilist motives at work. “Japan has done some intervention to keep the yen from appreciating against the dollar,” said Ted Truman, senior fellow at the Peterson Institute for International Economics, in Washington, D.C. In addition, Japan may have bought U.S. bonds as a way of diversifying away from the troubled euro. And so between September 2011 and September 2012, Japan’s holdings of Treasury securities rose to $1.13 trillion, up $146 billion, or 15 percent.
President Obama on Wednesday took his campaign to raise taxes on the top 2 percent of earners to opponents at the Business Roundtable, as some Republicans are talking surrender.
Fiscal cliff hostage situation. Day 29. It’s starting to get like the Donner Party. The weaker members are starting to succumb.
Delaware Governor Jack Markell (L), Chair of the National Governors Association's Executive Committee, US President Barack Obama (2L), Oklahoma Governor Mary Fallin (3L), Vice Chair of the National Governors Association's Executive Committee, U.S. Secretary of the Treasury Timothy F. Geithner (4L), Wisconsin Governor Scott Walker (5L), Minnesota Governor Mark Dayton (3R), Utah Governor Gary Herbert (2R), and Arkansas Governor Mike Beebe (R), and others wait for a meeting in the Roosevelt Room of the White House Dec. 4, 2012, in Washington, D.C. Obama and Vice President Joe Biden met with state governors to speak about impending tax hikes and speeding cuts dictated by the Budget Control Act of 2011 if Congress cannot compromise on reducing the budget's deficit. (Brendan Smialowski / Getty Images)
Tony Fratto, the former Bush press official and power-tweeter, sent out a 140-character plea for surrender of a sort. “I don’t think Clinton tax rates are ideal, but we did live with them for eight years. Just return to them and start over next year.” Rep. Kay Granger, a Republican from Texas, said it might make the most sense just to extend the Bush-era tax cuts for everybody except the top 2 percent of earners, and move on. By nightfall, Granger had yet to be challenged to a duel.
The Democrats, emboldened, didn’t shrink from delivering their message directly to audiences that might be somewhat hostile. Treasury Secretary Tim Geithner went on CNBC, which has been running a campaign urging Congress and the White House to “rise above” the fiscal cliff, and reiterated the administration’s stand that taxes on high-income earners must go up. If not … well, then the administration was prepared to join the Thelma & Louise Caucus. In response, the stock market rose. Go figure.
President Obama went into what might be considered more hostile territory. He ventured out to the Business Roundtable, a group whose CEO members likely spent lots of time and effort trying to defeat the president earlier this fall. Obama told them that, in effect, there were no hard feelings. However, he was really intent on seeing that taxes on CEOs rise—and fast. “So what we’ve said instead is let’s allow higher rates to go up for the top 2 percent—that includes all of you, yes, but not in any way that’s going to affect your spending, your lifestyles, or the economy in any significant way.” Later in his remarks, he assured them that “We’re not insisting on rates out of spite, but rather we need to raise a certain amount of revenue.” (Pro tip: when someone says they’re not doing something out of spite, it’s probably a safe bet there are a few drops of spite involved.)
Obama went on to tell the dealmakers that if he could get Republican leaders to realize the reality that higher revenue could be paired with entitlement cuts, “then the numbers actually aren’t that far apart.” He continued: “Another way of putting this is we can probably solve this in about a week; it’s not that tough.” (Full disclosure: I’m short Republican leaders realizing reality.)
The Obama administration went out of its way to present a hardened position. White House spokesman Jay Carney noted that the Office of Management and Budget is preparing for the sequester that would take place in the event we went over a fiscal cliff. No serious talks were reported. Boehner held a press conference in the afternoon and pleaded for the president to submit a revised proposal. “We’re ready and eager to talk to the president and work with him,” Boehner said, in a less-than-convincing tone.
There was a brief fillip in the afternoon when it was reported that Obama and Boehner had spoken on the phone. My guess? It was a case of butt-dialing.
Don’t focus on the so-so November sales. The real news is fuel efficiency, with hybrids and electric cars surging, writes Daniel Gross.
November 2012 may not have been the best month for sales of cars in recent memory. Some 1.14 million cars were sold in the month. Analysts expect about 14.4 million cars will be sold in the U.S. this year, and that sales will rise again in 2013. That’s an impressive comeback, but it doesn’t approach the sales levels of 2007.
But it is most likely to be the best month for fuel efficiency–quite possibly ever.
Yes, the Prius did well. Toyota sold 16,505 of the iconic hybrids, up about 8 percent from November 2012. But the difference between now and then is that the Prius–and the hybrids–are just the beginning. Competition, concern over gas prices, innovation, and new standards calling for higher gas mileage are combining to give consumers many more choices. And they are taking it up.
There are cars that run only on electricity, like the Nissan Leaf, which sold 1,539 units.
There are cars that run on electricity and gas, like the Chevy Volt, which sold 1,159 units. There are several new hybrids, and plug-in hybrids, on the market. Overall, Toyota sold 24,682 hybrids—there are four different Prius models plus Lexus hybrids–in the month, accounting for 15 percent of the sales, up from 28.7 percent from the year before. Ford’s new C-MAX hybrid, which debuted in October, and offers a plug-in hybrid option, sold 4,848 units.
And increasingly, cars that rely purely on the old-fashioned combustion engine are more efficient. General Motors offers “Eco” versions of models like the popular Cruze. Ford offers “Eco-boost”—a six-cylinder engine with more sophisticated electronic controls—as an option on many of its models, including pick-up trucks. “About 43 percent of the new Ford-150s sold use this engine,” notes Alan Baum, principal of Baum & Associates, a market-research firm specializing in the auto industry and fuel economy, in West Bloomfield, Mich.
Chrysler, which has been behind the curve in innovation, is playing the fuel economy game by rolling out smaller cars that get eye-popping mileage. In November 2012, Chrysler sold 4,489 Dodge Darts, which can get up to 41 miles per gallon; last November, the Dart didn’t exist. Chrysler’s sales of the gas-sipping Fiat 500 also shot up in the month to 3,603, more than double the November 2011 total of 1,618.
This is all good news for the economy, and for the environment. The U.S. car fleet, which has an average age of 11 years, is like a “rolling junkyard,” as Mazda executive Jim O’Sullivan recently put it. Each month, a certain number of clunkers simply conk out. That’s bad news for the owner. But it means that the typical car leaving the showroom simply gets better mileage than the typical car that is being traded in or junked. As people realize that gas prices may be here to stay, all kinds of manufacturers are marketing fuel efficiency across their portfolios. We may have progressed to a stage where turnover and new car sales make the U.S. car fleet more efficient.
Obama took his case to Twitter, the GOP made a counteroffer, and a right-wing think tank elbowed its way into the debate. Yet still no progress! Are we screwed? By Daniel Gross.
It’s Day 27 of the fiscal cliff hostage situation. Republicans made a counteroffer to the president’s intentionally offensive opening gambit, outlining $600 billion in cuts to entitlements and spending and $800 billion in revenues—to be raised without raising tax rates.
U.S. President Barack Obama speaks at The Rodon Group manufacturing facility on November 30, 2012 in Hatfield, Pennsylvania. Obama made a case for action on "fiscal cliff" legislation and urged congress to work together for a solution. (Jessica Kourkounis / Getty Images)
The president responded by doing what so many bored people in D.C. do to while their way through the long hours of the workday afternoon: he took to Twitter. The irony? The president’s mid-day announcement that he would take fiscal cliff questions at 2 p.m., using the hashtag #my2k, was only the third most interesting thing to happen Twitter that day. First, the pope signed on, choosing as his handle @pontifex Then, news broke that Kate Middleton was pregnant with what may be a British monarch 60 years hence.
With only 28 days left until a perfect storm of tax increases and spending cuts hits the economy, why is the President spending his afternoon on Twitter? Any deal to avert the fiscal cliff will be an inside job. If it happens, it will have to come down to a deal made between Obama and House Speaker John Boehner. But the two of them aren’t meeting regularly. And so the president has taken to playing an outside game. Last Friday, he took a campaign-style trip to Pennsylvania to discuss taxes. On Sunday, he dispatched Treasury Secretary Tim Geithner to the talk shows to speak aggressively. The White House is trying to push the country into pressuring Republicans to compromise—or to soften public opinion in the event that we do, in fact, go over the cliff.
The Twitter press conference was essentially partisan warfare by other means. Before it started, House Majority leader Eric Cantor played his usual role of being a non-constructive jerk: “Mr. President, time to get serious. Let’s protect small businesses and families from a harmful increase in tax rates and cut spending,” he tweeted from his handle, @GOPLeader. Note that Cantor’s tweet was not, in fact, a question. It was a statement. And it highlighted the general Republican modus operandi throughout these budget talks: don’t show any sign of actual engagement, just grandstand and repeat talking points.
For much of 2012, the institutional right believed it could overwhelm the president’s popularity and incumbency through the relentless application of third-party money. That didn’t work out too well for the Romney campaign. But they haven’t given up. The Heritage Foundation, the right-wing think tank, earlier in the day deployed some of its donors’ capital to buy up the designated #my2K hashtag so that it could use it to promote its own tweets. And so when people logged on, the top of their feed would contain tweets like this one, from @Heritage:
The Twitter conference started a few minutes late:
It’s Day 26 of the fiscal-cliff hostage situation, and it’s clear that GOP negotiators have lost touch with reality. Daniel Gross on their astounding lack of a counteroffer to the Dems.
Adrenaline-filled, aggressive combatants paraded around on national television and started trash-talking, aiming to intimidate their opponents and get inside their heads. Oh, and the National Football League also played some games.
(L) Win McNamee / Getty Images (R) J. Scott Applewhite / AP Photo
Sunday, Dec. 2, was Day 26 of the fiscal cliff hostage situation. And the Democrats, who gained an immense advantage in the negotiations over future tax rates by virtue of their victories in the election, seem, finally, to be developing some swagger. Their tone toward the Republicans has become somewhat patronizing. First, there was President Obama’s mid-week invitation of Mitt Romney to lunch at the White House, which was simultaneously magnanimous and a pretty naked power move. Romney couldn’t refuse to come without looking like an extremely sore loser. The single photo released, which quickly went viral, showed Obama giving Romney the kind of good-try handshake that coaches deliver to their opponents after a thorough spanking.
In the past, the modus operandi from the White House on tax and spending issues was a tone poem of tortured frustration, self-criticism, and bargaining. They’d make a middle-of-the-road proposal and then very quickly move off it, failing to appease Republicans and demoralizing the base. But this time is different. Now, the Republicans are compromising and demoralizing their base. The Obama White House is largely standing back and watching with glee as congressmen line up to abandon Grover Norquist’s no-tax pledge. (My personal favorite is Rep. Chris Gibson of New York, who said his pledge doesn’t count anymore because, thanks to redrawing of the map, he now represents a different district.) Republicans have generally conceded that a deal will have to include more revenue, but insist now that new revenue arises solely from closing loopholes and capping deductions.
The Democrats are essentially pocketing the Republicans’ capitulation on revenue and asking for much more—they’ve adopted the old GOP strategy of simply repeating their desires as a method of bargaining. The first proposal, which Obama offered late last week, asked for lots of tax increases, plus some stimulus measures, and offered close to nothing on entitlements. Its chief plank was for marginal rates on high incomes to rise. And this time, the Democrats are confident that the Republicans’ cave on revenue is just the beginning. “I don’t think Republicans are willing to shut down the government over 2 percent of the country,” said top economic aide Jason Furman at an on-the-record briefing last week.
The psychological warfare can also be seen in the patronizing tone Democratic officials are now taking toward the Republicans. The Republican leaders, who used to throw terror into Democrats, are now objects of pity. There was Sen. Claire McCaskill, fresh after dispatching Tea Party loon Todd Akin, on Meet the Press. “I feel almost sorry for John Boehner,” McCaskill said. “There is incredible pressure on him from a base of his party that is unreasonable about this. And he’s gotta decide, is his speakership more important, or is the country more important.”
Treasury Secretary Tim Geithner took to the Sunday talk shows, too. For the last several years, Geithner has occupied perhaps the most unenviable position in Washington. He’s been like a quarterback operating behind an offensive lined composed solely of rookies. Time after time, he’s been blitzed—from the right and the left—on the bailouts, aid to the auto industry, and slow movement on mortgage aid. But on Sunday he was the one expressing empathy for poor John Boehner. “They’re in kind of a tough position now,” Geithner said on Fox News Sunday. “They’re trying to figure out how to find a way to support things that they know they’re gonna have to do. That’s going to be hard for them.” (Note: the very willingness of Geithner to appear on a Fox program is a sign of the administration’s newfound confidence.) Geithner pounded home the Obama administration’s talking point: we’ve put forward our plan. If the Republicans don’t like it, they should put forward their own.
In response, the Republicans countered with an offense that resembled that of the feckless Arizona Cardinals on Sunday. The passes were all over the map and failed to connect. Some key players were fatalistic. Sen. Lindsey Graham and Boehner both conceded that we may well go over the cliff. Others denied they had a role to play. Appearing on ABC’s This Week, Rep. Tom Cole said, “I don’t think we need to put a formal proposal out on the table.” Dan Senor, a Romney foreign policy adviser, proclaimed that Obama’s proposal, the one that caused Mitch McConnell to laugh out loud, and that “flabbergasted” Boehner, was too far to the left.
It’s Day 24, and the Republicans still have no plan. Daniel Gross asks, Who are the chumps now?
Fiscal cliff hostage situation. Day 24. A lot happened. But nothing happened. At Treasury, Secretary Tim Geithner, who, like his predecessor Hank Paulson, wears a training watch, went through a rigorous cross-fit routine and mainlined Red Bull in preparation for his upcoming Sunday Show Marathon. On the hill, Senate Minority Leader Mitch McConnell LOL’ed at the president’s proposal, which includes lots of tax increases as well as Gene Sperling’s holiday policy wish list. CNBC’s Rick Santelli, reacting to the flood of companies issuing dividends before tax rates rise, conducted what seemed to be an on-air audition for Fox Business Network. The Daily Beast’s fiscal cliff countdown clock went live.
Speaker of the House Rep. John Boehner (R-OH) speaks during a news conference November 30, 2012 on Capitol Hill in Washington, DC. (Alex Wong / Getty Images)
House Speaker John Boehner staged a brief press conference and pronounced a “stalemate” and that the two parties were “almost nowhere.”
It’s much too early to declare failure, however.
The fiscal cliff hostage crisis is soon to enter its fourth week. But really, the talks about ransoming the hostage haven’t even begun. Typically in a hostage situation, the party holding the hostage sets out its demands. President Obama has finally done that, with Treasury Secretary Geithner personally presenting the plans to Congressional Republicans on Thursday. There’s nothing surprising about the Republicans’ dismissive response.
There is something surprising, however, about the Republicans’ failure to offer an alternative. To be sure, there has been a well-documented, and sudden outbreak of real-keeping among Congressional Republicans, with dozens of legislators abandoning Grover Norquist’s no-tax pledge and acknowledging the need for more revenues. But the guys who want to liberate the tax cuts being held hostage have yet to propose an offer.
And the leadership still does not seem to grasp what is happening. This is not August 2011, or August 2012. The choice before McConnell and Boehner is not between the really unattractive proposal President Obama is offering and their preferred solution, which is the status quo on taxes plus huge cuts in discretionary spending and immediate action on entitlements. Rather, the choice is between what the President is offering—i.e. lots of tax increases paired with small spending cuts and very modest entitlement reform—and the 24-pack of whoopass that the fiscal cliff will deliver in about five weeks: much larger tax increases, plus much larger spending cuts, and no entitlement reform whatsoever.
Yes, President Obama wants to avoid the fiscal cliff. But he also wants to avoid being made to look like a chump, as repeatedly happened in his first term. And so rather than make a proposal and then respond to a stiff arm with a better offer, he is refusing to negotiate with himself. Instead of compromising on his initial offer—and hoping that meeting the Republicans half way with an initial offer will help bring them to the table—he went the other way. The president moved his goalpost further to the left. And rather than try to play an inside game and issue pleas for comity and compromise from the White House, he’s taking his popularity on the road.
Trading stocks on whether there’s a deal by January 1 is a fool’s errand. In the long run, the market just doesn’t care about that stuff, writes Daniel Gross.
Thursday marked Day 23 of the Fiscal-Cliff Hostage Situation. Vanquished Republican presidential candidate Mitt Romney came to lunch at the White House. House Speaker John Boehner and Senate Majority Leader Harry Reid stuck out their tongues at one another. The hostages—the Bush-era tax rates on income, capital gains, and dividends, and the defense and other budgets subject to sequestration— remained locked up in Washington. And in New York, investors reacted poorly to the news. “Stock gains dented over twists in budget talks,” as the MSN Money headline put it.
Let’s step back for a minute.
If you’re trading stocks based on whether you think taxes will go up on January 1, 2013, or whether it seems more or less likely that Congress and the Obama administration will strike some grand bargain on entitlements and taxes in the next few days—well, you’re not too sharp. And if you’re in turn basing those decisions on what public officials are saying about the prospects of such a deal, then you’re kind of a dope.
Stock trading is a fool’s game to begin with. Very few investors can beat the market. The market is dominated by insane, hyperactive machines that frequently don’t know what they are doing. Professionals mostly fail at beating the indices. And a bunch of those who do, we’re learning, are clumsy cheaters. (Pro tip: if you’re IM’ing about insider trading, don’t use phrases like “I don’t want to go jail.”)
Watching and reacting to what Congress people say about the cliff negotiations and the prospects of a deal won’t give you an edge—regardless of what the headline writers say. Why? Well, the overwhelming majority of stuff that elected officials say to the public is bulls--t. What they say has no bearing—frequently on the truth, or on whether a deal will get done. When someone says they’re optimistic about something about to happen, they could be genuinely optimistic—or they could be full of it.
Also, investors don’t seem to be very good at figuring out who really matters in these debates. The other day, CNBC’s Michele Caruso-Cabrera told a Democratic House member, Raul Grijalva, that his remarks against concessions on entitlements were making the stock market go down. Grijalva is a member of the minority in the House; most investors had likely never heard of him before his appearance.
More broadly, the market—and many of those who interpret the market’s mind on our behalf—have an extremely simplistic and wrongheaded view of what is good for it. The conventional investing wisdom assumes that a deal—any deal—to avert the fiscal cliff will be good for stocks and the economy at large. That may be true. It may also not be true. In fact, I suspect that at the end of the day the people who are agitating most ardently for a big deal are going to be very disappointed. Compared with a few weeks ago, we are much less likely to have major entitlement reform and more likely to have large tax increases on the rich, with marginal rates rising, taxes on capital gains and dividends rising, and the rich losing some of their cherished deductions. The investor class has been begging for a resolution. The resolution they’re likely to get could be a sharp slap in the face.
Will that be good for stocks in 2013 and beyond? Who knows? In fact, hiking taxes significantly on investors may not influence the markets at all. My colleagues in the politico-financial industrial complex vastly, vastly overvalue the relation of government policy and marginal tax rates to asset prices in the stock market—especially my colleagues on the right side of the aisle.
With an Ohio Walmart hosting a holiday food drive for its own workers, The Daily Beast's Michael Tomasky criticizes the notoriously stingy company for not paying them more.
A bipartisan proposal to trim the sequester and forbid shutdowns for the next two years means Washington may finally be ready to quit kneecapping growth.