Wall Street’s biggest names took to the stage on Tuesday to discuss the markets and the health of the financial industry, but their outlooks were anything but consistent.
Markets are on a roll, with the Dow Jones Industrial Average at a record high. Interest rates are very low. Inflation is non-existent. The rich have never been richer. These are very good times indeed to be a big-shot financier.
Carlyle Group co-founder David Rubenstein participates in a discussion at the New York Times 2013 DealBook Conference in New York. (Larry Busacca/Getty)
And yet. The crown rests uneasily on the heads of the titans of finance. They’re concerned about America’s past and future, they’re worried about their status, and they’re looking in all sorts of unlikely places for bliss. That’s my takeaway from spending the day at the New York Times DealBook Conference.
“Gun to my head, I’m optimistic,” said Lloyd Blankfein, the chief executive officer of Goldman, Sachs, which is not exactly a ringing endorsement of the status quo. David Rubenstein, head of the Carlyle Group, spoke of opportunities his firm was finding in Africa, India, and China—not so much at home. Ray Dalio, the head honcho at Bridgewater, the massive hedge fund with the strange corporate culture, said we’re in an era of low returns in which stocks should rise about four percent a year while bonds could lose money.
“I’m actually very confused now,” said Larry Fink, chief executive officer of Blackrock, which controls a whopping $4 trillion in assets. Why? Even though stocks have rallied impressively this year, there is still a lot of money sitting on the sidelines. Which means “we could see this incredible upward draft in the marketplace,” he said. (Good!) Alternatively, “I could see a scenario where we have a 12 percent correction.” (Bad!)
Fink ran through a litany of concerns: China, Japan, “the nonsense in Washington,” the Federal Reserve. Fink, a Democrat, generally defended the Obama administration’s outreach to the business community, citing the large number of meetings that business leaders have held with the president and other top officials. “I think they’re reaching out more than any White House in recent times” he said. Big bankers are also nervous, because, as Fink put it, “society is still angry at banks,” and because the financial penalties inflicted on them in recent years have been rather severe.
Some of the personalities causing uncertainty for big Wall Streeters were part of the conference. Like Dan Loeb, the activist investor who has been disrupting corporate boards—Yahoo!, Sony, Sotheby’s. Loeb, a yoga-practicing surfer and fitness nut, possesses the kind of certainty that eludes many of his elders. “I can’t think of a time in our experience where we misstepped,” he said. Loeb is of a breed of hedge fund investors who have a large amount of assets and a willingness and ability to use the media so that they can rattle the cages of even the largest blue-chip companies. At the conference, Loeb said he now has a position in Federal Express, the giant delivery service that is worth $43 billion.
Another source of angst took the stage after Loeb: Preet Bharara, the aggressive U.S. Attorney for the South District of New York, who has been pursuing and nailing insider traders and bankers. The audience didn’t applaud when he took the stage. (Many probably believed he would emerge from the side carrying a pike with the head of a banker.) Bharara is part of a new regulatory regime, which includes SEC Chairwoman Mary Jo White, that is taking many fewer prisoners in its quest for giant settlements and admissions of wrongdoing. But Bharara came across as mild-mannered and relatable. He won over the audience with charm, joking about his rich brother, Vinit Bharara, who sold Diapers.com to Amazon.com for $540 million. When asked by Peter Lattman of the New York Times what he would do after leaving government service, Bharara responded that he would : “walk the earth like Caine in Kung Fu,” and have “adventures.”
Weak earnings reports and a series of fire incidents finally brought down Tesla Motors’ stratospheric stock price, but somehow the company continues to defy the rules of the market.
It’s been a while since we’ve checked in on Tesla, the electric-car manufacturer that inspires love-hate reactions among investors and the public. The brainchild of serial entrepreneur Elon Musk, Tesla sells an expensive electric sports car.
A row of Tesla Model S electric sedans are displayed during a demonstration at Crissy Field in San Francisco, California on October 31, 2013. (Eric Risberg/AP)
The only thing as expensive as the Tesla Model S, which retails for about $60,000, is the company’s stock. Between October 2012 and October 2013, it rose from $31 to $190, up more than six-fold, giving the company a stock market valuation of $23 billion. That was about one-third the value of Ford and nearly one-half the value of General Motors, both of which sell about 100 times more cars than Tesla does.
To devotees of rationality in markets, Tesla was a thumb in the eye. The company is as much a triumph of electrical engineering, but also financial engineering. Tesla sales are subsidized by taxpayers in the form of hefty tax credits for green cars. The company also makes money by selling zero emission vehicle certificates to automakers who are required to produce such cars, but don’t, in certain states. In the second quarter (PDF), Tesla reaped $51 million, or 13 percent of its revenues, from such sales. In that quarter, which ended on June 30, the company sold about 2,000 cars a month and reported a relatively small ($30 million) loss.
Those results would hardly seem to warrant the massive ramp-up in the company’s stock price. Between August 7, when the company’s second-quarter sales were reported, and October 1, investors pushed the stock up nearly 50 percent. Elon Musk himself noted that investors might be getting a little ahead of themselves. On October 25, at the opening of a Tesla store in London, he noted that “the stock price that we have is more than we have any right to deserve.”
But investors ignored Musk, at least for another week or two. Then in the last few weeks, Tesla has crashed—figuratively and literally.
Last week, on November 5, it reported third-quarter earnings (PDF) The news was generally positive. Sales and production were up. But revenues from zero emission certificates fell sharply, from $51 million in the second quarter to $10 million in the third quarter. And the projection for future results was less strong than investor had expected.
The results helped spur a sharp decline in the company’s stock. Indeed, it was as if investors collectively woke up and realized they had been giving the company an insanely rich valuation.
Thought the shutdown would tank the recovery? You were wrong—Friday’s jobs report was impressive. It turns out the government is losing its ability to inflict damage on the economy.
It’s been a bad 36 hours or so for American economic declinists. Twitter’s initial public offering demonstrated the ability of the American entrepreneurial engine to create an entity worth $20 billion essentially from scratch. Fannie Mae and Freddie Mac, the two mortgage-giant basket cases that were the ne plus ultra of the 2008 financial debacle, requiring an injection of $180 billion putatively irretrievable taxpayer funds, said Thursday they’d return to Treasury $8.6 billion and $30.4 billion, respectively, essentially making the taxpayers whole on the bailout, when they reported (PDF) quarterly profits (PDF). Meanwhile, it turns out that the economy chugged ahead in the summer. The Commerce Department reported Thursday that the economy grew at a 2.8 percent rate in the third quarter. On Friday, the same agency reported that personal income and savings both rose at impressive rates in September.
A job searcher holds an employment application as he attends the Choice Career Fair on November 7, 2013 in West Palm Beach, Florida. (Joe Raedle/Getty)
But the most impressive report was Friday morning’s jobs report, which gave us one of the first reads on how the economy preformed in October, a month in which the government shut down and a threat of default sandbagged demand and threw sand into the economic gears. And still it turned out the economy performed pretty well. In October, according to the Bureau of Labor Statistics, the U.S. added an impressive 204,000 payroll jobs.
The takeaway from this run of data is that the government is losing its ability to inflict damage on the U.S. economy. Yes, falling government spending and higher taxes are removing cash from the economy. Yes, the stupid sequester is unnecessarily throwing people out of work and tamping down demand. And, yes, the rolling Republican temper tantrums have acted as a malign force. But while these factors function as a powerful drag, they are not sufficiently powerful to overcome the momentum of the private sector, and of the recovering state and local government sectors.
Let’s look at the data. In August and September, private wages and salaries rose $34.8 billion and $18.8 billion, respectively. In the same months, government wages and salaries rose $2.3 billion and $8.8 billion, respectively. “Government wages were reduced by $7.3 billion in August and $7.7 billion in July due to furloughs that affected several federal government agencies,” the jobs report says. Translation: workers would have had much more money to spend if not for the furloughs, but the underlying trend of salary growth is intact—in both the private and public sectors.
Let’s look at this another way. In every quarterly GDP report, the Commerce Department describes how much each sector contributed to—or detracted from—overall growth. (See Page 6 of this release (PDF).) In the third quarter, as has been typical, the federal government, by reducing spending and investment, sapped the growth rate by 13 basis point, or .13 percent. That’s bad, but it represents an improvement from the first half of the year, when government spending cuts took a much larger bite out of growth. At the same time, however, state and local governments, whose finances have been on the mend, once again are contributing to growth. In the third quarter, their spending and investment added 17 basis points, or .17 percent, to the growth rate, which more than compensated for the federal decline.
As for employment, I noted early last month the many ways in which the shutdown could harm the economy and the jobs market. And the jobs report shows it definitely had an impact. In October, the labor force participation rate fell and the unemployment rate bumped up, in part because some 480,000 furloughed government employees were counted as “unemployed.” And yet the private sector largely shrugged off the pain. It turns out that the labor market was a little stronger than previously thought going into October. Each month when BLS reports results, it looks backs and revises the prior two months. On Friday, the August figure was revised from 193,000 to 238,000, while the September number was revised from 148,000 to 163,000. Put another way, BLS now says 60,000 more people were working at payroll jobs at the beginning of October than we previously thought. Add in the 204,000 jobs created in October, and the economy has added 635,000 payroll positions in the past three months. That’s solid.
To be sure, the government continued to exercise a malign influence on employment in October. I’ve long dubbed this expansion the “conservative recovery,” because the private sector has steadily added jobs since early 2010 while the public sector has steadily cut them, which doesn’t usually happen in an expansion. Since May 2010, the government sector has cut 1.12 million positions. But the government job-letting is coming to an end. In October, as might be expected, the federal government reduced its payrolls by 12,000. In the past year, the federal government has cut direct employment by 94,000, or 3.3 percent. But once again, state and local governments are doing better. In October, state and local government added a combined 4,000 jobs. In the past year, they’ve added a combined 68,000 positions. Modestly rising activity at the state and local level is counteracting, and almost entirely offsetting, the austerity-inducing actions of the federal government.
The social network made a huge splash with its IPO today, rocketing above its initial share price. But will the stock go the way of Facebook and Yahoo!—or Webvan and Globe.com?
Twitter staged its initial public offering on Thursday morning. It raised $1.8 billion by selling 70 million shares at $26 a piece to investors. When trading finally opened at about 11:00 a.m., the first price was $45.10—a nice 73.5 percent pop. The company instantly was valued at about $31 billion.
The deal is a huge, ginormous, all-enveloping story, in large part due to what I’d call a double example of selection bias.
What do I mean? Well, first, journalists are obsessed with the offering in a way that many other people aren’t. Twitter is our medium. Many of us live in it, and we all feel we’ve done our part to build it. And so many usually skeptical scribes are shamelessly rooting for Twitter to succeed. Twitter lists have replaced RSS and email newsletters. Tweets and retweets are the currency of buzz. We boast about our number of followers the way people used to boast about cover stories or right-lead front-page articles. (You see, kids, in the 1990s there were these things called magazines and newspapers.) Pundit Niall Ferguson constructed a Twitter-based index that calculates relative prestige as the ratio of tweets to followers. (Mine is about 2.5:1.) Twitter helps drive traffic to articles, though not as much as you would think. Lots of people, including me, retweet articles and links without actually clicking on them.
It’s also the rare technology/finance story that many writers understand intuitively. Many of the companies that have staged initial public offerings recently are not ones that members of the media elite use or interact act with. As a result, journalists are often caught unawares when they pop. Who among the Davos/Acela/SXSW crowd has eaten at a Noodles & Co., or shopped at a Sprouts Market? We don’t invest in or work in oil and natural gas fields or buy Teslas. And a great deal of the terminology surrounding technology—software, hardware, virtualization, the cloud—don’t mean much to mainstream writers.
So, yes, it’s a big story…for us. But it may not be for everybody else. Take a look at Yahoo!’s home page. The Twitter IPO doesn’t even crack the top 10 trending stories. On the train this morning, which was filled with people who work in finance and other industries, nobody was talking about Twitter, or even looking at it on their tablets or smartphones. You’d be surprised by how many people out there—people who don’t work in marketing, communications, public relations, social media, entertainment, digital media, political campaigns—don’t use Twitter.
That’s the upside for any of global app company like Twitter. Take the number of current users and subtract it from the number of human beings on the planet: that’s the growth opportunity. And it could well come true. Facebook, after all, has about 800 million users. Lots of people were skeptical about its disastrous 2012 IPO, and the company has thrived, both as a business and a stock.
Watch how the world reacted to the Twitter IPO.
Burger King just introduced a new burger, the Big King. Clearly a direct competitor to McDonald’s Big Mac, the burger is a fat-laden sign that fast-food joints are getting desperate.
The Burger wars are heating up.
On Tuesday, Burger King introduced its latest menu offering: the Big King The alpha male product is bigger than the whopper and is a way of giving meat lovers what they want, while also giving a noogie to McDonald’s.
Burger King's new "Big King" sandwich. (Burger King/AP)
It’s the most recent indication that the stakes for the nation’s largest burger chains seem to be rising at a time when the rewards are actually falling. Fast-food isn’t doing particularly well. The vast industry, which relies on low wages, low prices, and a low-quality dining experience just isn’t working the way it used to. During the recession and the recovery, fast-food more than held its own because of its sheer cheapness. People traded down from fast casual to quick service.
But as the economy has improved—with about 7 million new jobs since February 2010 and 51 months of growth —sales growth has faded. Americans are starting to eat out more, but they’re doing so at places other than traditional fast-food joints. They’re going to Chipotle, or flocking to new chains like Noodles & Co. People who crave beef patties have a growing array of quality burger joints to choose from. And there’s a phenomenon of burger chains that define themselves in opposition to the old school fast-food joints by paying higher wages.
The upshot is that U.S. sales for McDonald’s and Burger King, the Coke and Pepsi of fast food, are stagnating, much as sales of Coke and Pepsi are stagnating in the U.S., as Americans abjure sugar and chemical-laden fizzy drinks for water and more salubrious beverages. At McDonald’s in the third quarter, U.S. same-store sales were up just .7 percent from the year before, and in the second quarter same-store sales were up just 1 percent from 2012. At Burger King, in the third-quarter, same-stores sales in the U.S. and Canada fell .3 percent and the company closed 13 restaurants, “due to continued softness in consumer spending and ongoing competitive headwinds.” In the second quarter, same-stores sales in the U.S. and Canada fell .5 percent.
To combat the malaise, fast food joints are pursuing a high-low strategy, or, as I prefer to dub it, the “Moms and Bros” strategy. They’re trying simultaneously to appeal to higher-end consumers who are concerned about nutrition and quality (Moms) while offering their core users who crave cheap, satisfying gut bombs (Bros) new reasons to come in.
So Taco Bell simultaneously aimed to recapture some of the business that had gone to Chipotle with its Cantina Bell line, created in partnership with celebrity chef Lorena Garcia, which features whole foods, a focus on beans and vegetables, and zesty, real flavors. At the same time, Taco Bell has rolled out the Doritos Locos Tacos and the Fiery Doritos Locos Tacos. An affront to nutritionists and foodies alike, the new innovations deliver the salty, greasy punch that power users of fast-food crave.
The hedge fund SAC Capital has agreed to pay an eye-popping fine to settle insider-trading charges—just the latest scalp for a tough new regime of Wall Street sheriffs.
It’s getting more expensive to be rich. Taxes on the wealthy went up on January 1, 2013. The price of the highest-end condos in New York is rising. Tuition at elite private schools is soaring. And, so, too, is the cost of settling thorny investment-related regulatory and legal matters—which, for many in the corporate and financial world, is a cost of doing business.
A sign is displayed in front of SAC Capital Advisors headquarters in Stamford, Conn., on July 25, 2013. (Seth Wenig/AP)
The latest billionaire to pay a hefty fine to get the government off his back is Steven A. Cohen, proprietor of the much-investigated SAC Capital. SAC in March agreed to pay a $616 million fine to settle Securities and Exchange Commission investigations into its trading practices, trumpeted as the largest-ever such fine. On Monday, SAC agreed to pay a record $1.2 billion to resolve insider-trading charges. Here’s the letter from U.S. Attorney Preet Bharara describing the settlement as “the largest financial penalty in history for insider trading offenses.” (The settlement is actually for $1.8 billion, but SAC Capital is getting a credit for the $616 million it already paid the SEC.) This one is also “the largest financial penalty in history for insider trading offenses.”
SAC isn’t the only household name to pay an eye-popping fine. On Monday, Reuters reported that Johnson & Johnson will pay $2.2 billion to settle Justice Department charges that it engaged in abusive practices and paid kickbacks to market the drug Risperdal. Meanwhile, JPMorgan Chase has been a veritable fountain of cash for regulators over the last few years, paying billions of dollars in fines to settle an array of charges. Last month, the bank agreed to pay a ginormous $13 billion fine to settle (it hopes, once and for all) charges relating to the packaging of mortgages in the credit boom by JPMorgan Chase, and by two banks it had acquired—Bear, Stearns and Washington Mutual.
What’s behind these huge sums? A few factors.
First, five years after the Lehman Brothers collapse, regulators and prosecutors are eager to feed the public’s appetite for revenge. Millions of Americas lost their homes, tens of millions saw their 401(k)s get socked, but the reckless banks got bailed out, gorged on free money from the Federal Reserve, and then fought needed regulations. Few, if any, of the top dogs at major financial firms were prosecuted, or even held to account.
Second, there are new sheriffs in town. The swashbuckling efforts of Bharara, U.S. Attorney for the Southern District of New York, have landed him on the cover of Time. And in Washington, SEC Chairman Mary Jo White is encouraging her staff lawyers to get tough with Wall Street. A former U.S. Attorney for the Southern District of New York, White spent a decade at white-shoe firm Debevoise & Plimpton, where she did work for many financial firms, before joining the SEC last spring. White is a hard-nosed prosecutor who is eager to declare her independence from Wall Street, and to make a name for herself in the next few years.
In effect, White and Bharara are upending the cozy, hypocritical culture of settlements. Typically, rather than litigate against expensive powerhouse lawyers, regulators and prosecutors would eagerly strike deals. Companies and individuals would pay fines to settle charges, in which they would neither deny nor admit wrongdoing. And then they’d go about their business as if they had done nothing wrong.
The retail giant is as dependent on SNAP benefits as the poorest Americans. Why new cuts will be a double whammy for Bentonville—and anyone with a mutual fund.
Walmart is about to teach everybody a lesson in how austerity can affect the consumer economy—and quick.
Food-stamp benefits are being cut starting today by about $5 billion this year, or about 5 percent. The number of people enrolled in the Supplemental Nutrition Assistance Program has exploded in the last several years, in part because the recession made a lot of Americans poorer, and hence eligible for the food stamps, and in part because the Obama administration expanded eligibility for the program in 2010.
Because wages have been stagnant even as the economy has been growing for more than five years, the number of users remains extraordinarily high—at about 47.6 million. (More than half of able-bodied SNAP recipients work in the year in which they receive benefits.) That’s below the peak of 47.8 million in December 2012, but it’s still extraordinarily high. With the expanded efforts expiring, there was no move in Congress to continue the largesse. In fact, Republicans in the House want to cut the program further.
That’s bad news for the families that rely on the program to put food on the table. It’s also bad news for the huge retailers who cater to the large number of people clustered on the lower rungs of America’s income scale, including the nation’s largest retailer, Walmart.
Here’s why. Critics tend to think of food stamps as a form of welfare. They are—for the people who get them, and for the stores at which they are spent.
In Friday’s Wall Street Journal, Shelly Banjo and Annie Gasparro reported “Walmart estimates it rakes in about 18 percent of total U.S. outlays on food stamps. That would mean it pulled in $14 billion of the $80 billion the USDA says was appropriated for food stamps in the year ended in September 2012.”
Think about that for a minute. Walmart accounts for about 10 percent of total U.S. sales but gets 18 percent of the nation’s food-stamp-related sales. That means it punches well above its weight compared with other retailers. Put another way, Walmart customers are far more likely than shoppers at other stores to finance their purchases with food stamps.
The deficit shrunk dramatically in September—and that’s a piece of good news in otherwise bleak times.
It’s still the Golden Age of Deficit Reduction. Thanks to the government shutdown, the final tally for the government’s operations in September—the last month of the 2013 fiscal year—was delayed for three weeks. But on Wednesday, the Treasury Department finally its Monthly Statement for September (PDF). It confirmed the continuation of a trend. The national debt — the obligations we’ve accumulated over the past 200 years—is continuing to rise, and stands at about $17 trillion. But the annual deficit, the yearly gap between tax collections and spending, is shrinking. And fast.
A pedestrian walks past the New York Stock Exchange. (Jin Lee/AP)
In September, as is usually the case in the months in which the government collects quarterly income and corporate taxes, the federal government ran a surplus: $75 billion. As a result, the total deficit for fiscal 2013 came in at $680 billion, down 38 percent, or a whopping $409 billion from $1.089 trillion in fiscal 2012. That’s an epic amount of deficit reduction in a single year. And it comes on the heels of two successive years of reduced deficits. Since peaking at $1.4 trillion in fiscal 2009, the annual deficit has fallen by more than half.
Of course, this has all taken place in the absence of a grand bargain. In 2013, as in every other year, Democrats and Republicans failed to agree on a big plan to cut entitlements, rationalize the tax code, and get more cash from higher earners. And in 2014, they will likely fail to do so again. So long as Republicans maintain a majority in the House and a blocking minority in the Senate, there can be no grand bargain, despite what many Washington worthies would have us think.
So what explains the decline? Continued growth (however unsatisfying), higher taxes, and lower spending.
In fiscal 2013, revenue rose a healthy 13.2 percent. In September alone, it was up 15 percent from the year before. The increase is due in part to the expiration of the Social Security payroll tax holiday on January 1, 2013, in part to the expiration of the Bush-era tax cuts on some high earners, and in part to new taxes imposed on the income, dividends, and capital gains to fund the Affordable Care Act. But it also helps that the economy continues to grow and add jobs. Compared to a year ago, about two million more people are working, at slightly higher wages. That produces more income, and more taxes. Social insurance and retirement tax receipts rose $104 billion in fiscal 2013, up 18 percent. And even as they go to great lengths to avoid paying taxes, corporations have been ringing up more profits. In fiscal 2013, corporate income tax collections rose by 13 percent, or $32 billion. Growth continues to be the miracle deficit cure.
Democrats who argued that we could raise some taxes without imperiling the expansion or the market rally have been vindicated. Of course, revenues are only one side of the equation. You can’t balance budgets with tax increases alone. But there was good news on the spending front. And, here, Republicans can take some credit.
In fiscal 2013, federal government spending fell by 2.4 percent, or $84 billion. That’s a real, rare decline in government outflows. We can thank the Budget Control Act of 2011, which kept spending levels low, and the sequester, which, starting in March, cut tens of billions from the budgets of many agencies. Policy played a role, too. The winding down of the wars in Iraq and Afghanistan meant the Pentagon had to spend a lot less on its operations. In fiscal 2013, spending by the Defense Department fell $43 billion, or 6.6 percent. That accounted for about half the decline in total government spending.
People talk about the decline of U.S. influence. But go to Europe, and you’ll notice something quick: No other country has the chutzpah we do when it comes to starting new companies.
Vienna, the seat of the once-mighty Habsburg Empire, is a good place to contemplate the rise and fall of global powers. And just now, the talk of American decline is growing louder—Washington is dysfunctional, the wealth divide grows every day, our infrastructure is falling apart, and we can’t manage to provide basic health insurance to all our citizens. But, as was pounded home to me as I spent a day this week in the sprawling Hofburg Palace in the heart of Vienna, the U.S. still has at least one thing going for it: start-ups.
I came to Vienna to moderate an event at the 2013 Pioneers Conference, an annual start-up/tech conference in Vienna. It is the sort of event that happens pretty much every day in New York, San Francisco, and Los Angeles, but is a rare occasion in Euro-land.
I interviewed Phil Libin, chief executive officer of Silicon Valley-based Evernote, the cloud storage company that has risen from zero users to about 75 million in several years (many of whom are paying customers), with offices in several countries, multiple rounds of venture capital funding, and a reputed $1 billion valuation. Of course, Evernote is one in a dozen-odd stories that could have been featured in a marquee event at a global start-up conference: Facebook, Instagram, LinkedIn, Tumblr, Pinterest, Snapchat, Evernote, Tesla. Other key presenters included executives from Google, Microsoft, and start-ups like Pebble.
To be sure, there were plenty of European companies represented on the program—the U.K.-based music company Shazam, for example, and lots of small German and French companies. But there was a very conscious, earnest effort here to mimic the American start-up culture. The Pioneers Conference was boisterous. Several espresso-mobiles (a brilliant innovation) were set up to keep the crowd caffeinated. A hip-hop dance troupe from Graz performed at lunch time. Young people in casual dress swapped business cards and chatted boisterously. The events were conducted almost entirely in English. In short, this wasn’t your great, great grandfather’s Congress of Vienna.
Here’s the irony. When it comes to style, art, the high-life, and summer homes, the American elite looks to Europe. But when it comes to models for creating wealth, it is clear that ambitious Europeans look to America.
It shouldn’t be this way. After all, Europe has everything that is needed for a start-up culture: tech-y looking dudes with facial hair, bike-sharing programs, a highly educated workforce, cool cities, and money. But it’s missing the spark that turns intelligence into fortunes and products. One way to describe the difference is that continental Europe lacks (or suppresses) the mix of hubris, recklessness, competence, greed, and vision that enables start-ups to boom, again and again, in Europe. A more wonky way of putting it is that Europe doesn’t have the ecosystem of funders, engineers, serial entrepreneurs, professional service providers, and financial institutions that have turned America’s technology industry into a wealth-creation machine.
It’s true that some important physical infrastructure components are lacking. Pension funds and private endowments, which provide cash for venture capital, don’t really exist in Western Europe. In Europe, wealthy individuals tend to invest conservatively, rather than plow their fortunes, Bill Gates-like, into building new ones. When Ernst & Young ranked the 20 largest countries by the relative ease with which entrepreneurs could gain access to capital, the U.S. was at the top, and Germany was 14th.
McDonald’s announced it will no longer serve Heinz ketchup after the condiment company hired Burger King’s former CEO. Daniel Gross on the Brazilian business boom that’s behind all of the burger joint drama.
In this photo illustration, customers order food from a McDonald's restaurant on October 24, 2013 in Des Plaines, Illinois. (Scott Olson/Getty)
There’s less—and more—than meets the eye. The less part? McDonald’s says it only uses Heinz ketchup in the Pittsburgh and Minneapolis markets. So this isn’t a major business disruption for either party. The more part? The relationship between American business icons is being torn asunder by a strange and interesting wrinkle in globalization: the advent of Brazilian investors as major forces in the U.S. market.
A little background. McDonald’s and Heinz are both corporate American royalty. Heinz traces its lineage to 1869 and first started making ketchup in 1876. And while they’re both based in the Midwest (Chicago for McDonald’s and Pittsburgh for Heinz), and while few companies have done more than McDonald’s to promulgate the use of sweet, salty, processed tomato goop around the world, the two firms haven’t had all that much to do with one another over the years.
So why the split? McDonald’s cited “recent management changes” at Heinz.
Heinz has indeed undergone significant management changes. Earlier this year, it was bought for $23 billion by legendary investor Warren Buffett and Brazilian private equity firm 3G. Most Americans have heard of Buffett, and he’s one of the least objectionable corporate personalities around. Few people have heard of 3G Capital, which is based in Brazil and has only made two acquisitions to date.
Founded by Jorge Paulo Lemann, a Harvard graduate, 3G is following in the footsteps of highly sophisticated Brazilian investors and managers, many of them who were educated in the U.S. They have prospered during Brazil’s boom, gained sophistication in an array of markets and are using their balance sheets and knowledge to push into new markets. To Brazilian investors, American companies with global footprints are extremely appealing. The trend started in 2008, when InBev, run by Carlos Brito, a Brazilian executive, acquired Anheuser-Busch for $52 billion (PDF). Brazilian meatpacking company JBS bought Pilgrim’s Pride, a chicken processor. And Marfrig bought Keystone Foods, a major distributor to the fast food industry. “Look out for the Brazilians and the Indians,” the chief executive officer of a consumer products company told me when I wrote about this trend in 2010. A few years later, his company was sold to a Brazilian company.
3G made a splash in the fall of 2010 when it bought Burger King—the perennial Pepsi to McDonald’s Coke. And, having set up shop at Burger King’s headquarters in Miami, the Brazilians are moving aggressively to remake the company. They’re assaulting (get it?) McDonald’s head-on by introducing new French fries, for example.
That glowing new bestseller, that Friday stock bump, that rosy Christmas outlook—they can’t hide that after 20 years, the company still hasn’t managed to turn a profit. Daniel Gross on whether it ever will.
Amazon.com and Jeff Bezos, its founder and chief executive officer, are having a moment. They are the subject of a new, admiring bestselling book, The Everything Store, by Brad Stone. Bezos just plunked down $250 million to buy The Washington Post. The buoyant stock, up 64 percent in the past year, got a nice jolt on Friday as investors were enthused about its third-quarter results: revenues were up 24 percent from a year ago, and Amazon issued a positive forecast for the Christmas season. The company is killing it in books and retailing goods, has a rapidly growing cloud storage and computing business, and is getting into original content and devices. It sports an impressive market capitalization of about $166 billion.
The company, first founded in 1994, still doesn’t make any money. In the third quarter, it reported a $41 million net loss.
Historically speaking, it is rare for a company to be in hypergrowth mode when it is nearly 20 years old and has annual sales of about $65 billion. That’s why investors love Amazon. But historically speaking, it’s also very rare for a company that has been around for 20 years—large or small—not to make money, to run on margins so thin that they can easily be eaten up by interest cost, or capital expenditures, or the loss of value in an investment like Living Social. (Amazon.com had to write down its investment in the daily deal company by $169 million in the most recent quarter.)
Indeed, when you look back through history, it’s very hard to find an analog. Many years ago, about the time that Amazon launched, I wrote a collection of great business stories in American history. (It’s still in print, if you want to check it out at Amazon.com.)
One thing many of the historically great companies share is reliable, decent operating margins. By the 1920s, 20 years after Henry Ford founded the Ford Motor Company, Ford was racking up profits of about $90 million per year. Between 1893 and 1901, John D. Rockefeller’s Standard Oil threw off $250 million in dividends alone. The company was so profitable that Rockefeller didn’t know what to do with the profits and was forced to invent modern philanthropy just to get rid of it.
Some more recent examples: Intel was founded in 1968 and operated in a highly competitive, capital intensive industry. Yet in 1988, Intel earned $452.9 million on $2.87 billion in revenues—a fat 16 percent profit margin. The first Walmart opened in 1962. In 1982, 20 years into its life, Walmart had sales of $2.4 billion and profits of $55.7 million, a razor-thin 2.5 percent margin but a profit nonetheless.
Jeffrey Zients was just appointed to fix Healthcare.gov. Daniel Gross on why the hire is an uncharacteristically brilliant move by Obama.
By any stretch of the imagination, the rollout of Healthcare.gov, the federal health insurance exchange, is going poorly. Three weeks into its existence, it doesn’t seem to work. Slow to anger and cast blame, the Obama administration is now taking action. It is bringing in a SWAT team, staging a technology surge, calling on “the best and the brightest,” as the Department of Health and Human Services noted in a blog post.
J. Scott Applewhite/AP
Health Department Secretary Kathleen Sebelius lacks the technology and management chops to bring this project home. So Obama has called in Jeffrey Zients, whom White House Spokesman Jay Carney called “an expert in the field of effective management.” Zients, who cut his teeth as a management consultant at Bain & Company, helped David Bradley build the Advisory Board Company, a health care consulting firm, into a juggernaut, and grew rich after it went public. Zients has served as a super capable Geek-on-Call, helping to fix programs that have gone awry and stepping in to fill crucial rolls. He worked on the Cash for Clunkers program in 2009, served as Chief Performance Officer at the White House, and served two stints as acting head of the Office of Management and Budget, from July 2010-November 2010, and from January 2012-April 2012.
It’s possible—even likely—that Zients will turn Healthcare.gov into a model of efficiency and high functionality. The problem for the White House—and it’s a recurring one—is that someone with Zients’s capabilities, stature, and record wasn’t running the operation from the beginning.
President Obama has shown a remarkable ability to get hyper-effective, brilliant, and public-spirited executives to come serve in the administration. But few of them have stayed for long. That’s in part because a job inside the White House is so exhausting, and it’s in part because the financial pressures outside the White House are simply too great and irresistible. So former Treasury Secretary and Harvard President Larry Summers came to run the National Economic Council, and stayed for about two years. Peter Orszag, another great economic mind, served as OMB Director—for about a year and a half. Gene Sperling, perhaps the longest-serving senior member of the economics team, joined Treasury in 2009—and just left after nearly five years. He looks as if he’s aged ten years.
It’s great the “best and the brightest” are willing to serve. (Of course, after the way the “Best and the Brightest” performed during the Vietnam Era, you’d think Democratic administrations would eschew the term on a permanent basis.) But what Obama needs isn’t an archetype from the Kennedy years. He needs an archetype from the Roosevelt years: a heroic, committed administrator with a long attention span, a bleeding heart, and a desire to achieve great things. Somebody who is fully committed and willing to stay the course, who regards a high-level government position as the culmination of a career, not as one of many stops. Someone who sees making government projects work for people as his or her life’s work, as a journey. He needs, in short, a Righteous Pilgrim. Someone like Harold L. Ickes.
Most politicos today probably are more familiar with his son, Harold M. Ickes, a combative campaign operative who worked in the early Clinton White House. But with all due respect to the son, the father was far more influential, and a far more towering figure in his day.
Nearly 20 years ago, when I interviewed Harold M. Ickes in his White House office, I saw a photograph on the wall. It showed Harold L. Ickes and a bunch of people at a groundbreaking for a huge building. The inscription read: ““Harold, stop making mud pies. Franklin Roosevelt.”
Today’s delayed employment report wasn’t very good, but it had some glimmers of hope. Daniel Gross on the signs that the forces holding down job growth are beginning to lift.
In the old days, the personal was the political. These days, the personal finance is the political as government policies, Washington dysfunction, and brinkmanship wreak havoc on the markets and the economy.
The government’s heavy hand has been visible in the monthly jobs report for the last several years. On the left, analysts have generally pointed to the Bureau of Labor Statistics release and noted that austerity—reduced government spending at the state, federal, and local level—is tamping down employment. On the right, analysts have combed through the same report to find evidence that regulation and the advent of the Affordable Care Act are pushing more Americans into part-time work.
Hundreds of job seekers wait in line with their resumes to talk to recruiters at the Colorado Hospital Association health care career fair in Denver. (Rick Wilking/Reuters)
In the ultimate sign of D.C.-induced economic dislocation, the September jobs report, which was supposed to be released on the first Friday in October, was delayed due to the shutdown. It was released Tuesday morning. And, ironically, the post-shutdown jobs report showed that the two big political talking points surrounding the jobs report are becoming inoperative.
First, the basics. The government reported that in September, as businesses nervously cast their eyes to the Beltway, the economy didn’t add many jobs. According to the establishment survey, in which companies are asked how many people are on their payrolls, 148,000 new positions were added, which is pretty lame and significantly lower than the pace to which the economy has become accustomed. The unemployment rate, which is determined by the household survey, in which individuals are asked about their working status, fell to 7.2 percent. The workforce grew in September from August, but the number of people reporting themselves as working rose by a slightly higher margin. All in, a very meh report.
But there were two interesting tidbits. For years, we’ve had what I’ve dubbed the +“conservative recovery.” Every month since February 2010, the private sector has added jobs—about 7.5 million in total. And virtually every month since May 2010, the public sector—state, local, and federal government—has cut jobs. That does not typically happen in a normal recovery. Thanks to austerity, about one million government positions have vanished, many of them at the state and local level. In Washington, the furloughs, the sequester, and the general drive for lower spending has helped keep a lid on federal employment. In September, the federal government cut 6,000 positions. It has reduced employment by 87,000 job in the past year.
But at the state and local level, something is beginning to change. We’ve noted that the fiscal picture in states and cities has been brightening. Thanks to tax increases, reforms, and economic growth, state revenues have risen for 12 straight quarters. And dozens of states, many of which cut jobs to close their annual deficits, are now reporting surpluses. As a result, state, cities, and counties are finding they are able to hire or re-hire, teachers, police officers, and other workers. In September, state governments added 22,000 positions while local government added 6,000 posts. State governments have added jobs for two straight months—33,000 in August and September. And local governments have added jobs for six straight months—74,000 since February. Local governments actually employed 43,000 more people in September 2013 than they did in 2012. That’s an important shift.
The data also revealed another interesting trend. For months, conservative analysts have been decrying the fact that a great deal of private-sector job growth seems to come in the form of part-time jobs. The supposed culprit is obvious: Obamacare (which forces companies that employ people for more than 30 hours per week to offer them health care), and the Obama administration generally. But the data in today’s report shatter upends that talking point. As Michael Strain of the American Enterprise Institute notes, the number of people who report themselves as working part-time “for economic reasons”—i.e. they’d rather be working full-time, but aren’t because their employer won’t give them the hours—has actually fallen in the past few months and in the past year. In September, some 7.926 million Americans fell into this category. That’s down from 8.226 million in July, and down from 8.607 million in September 2012. That’s a decline of 681,000, or 8.5 percent, in the past 12 months. If employers were cutting people from full-time to part-time status in anticipation of the Affordable Care Act, that number would be going up, not down. While the figure of Americans working part-time for economic reasons is elevated compared with the height of the last expansions, it’s actually below where it was in January 2009, and is well off the September 2010 peak of 9.226 million.
Is a $13 billion fine to settle mortgage misconduct by two of the bank’s 2008 acquisitions really persecution? JPMorgan was happy to make the deal at the time—and now must face the consequences, says Daniel Gross.
Over the weekend, it was reported that JPMorgan Chase had agreed to a $13 billion settlement over the sale of mortgage-backed securities during the credit boom. The tentative deal would settle charges that the bank, along with institutions it ultimately acquired in 2008—Bear Stearns and Washington Mutual—misrepresented the quality of loans that had been packaged into mortgage-backed securities.
This deal would be the biggest in a long series of settlements in recent years that have spurred the bank to push more and more cash into legal reserves. In the most recent quarter, the bank had to put so much aside to deal with legal problems that it wound up reporting a loss for the first time in years.
To a degree, we have become inured to these settlements. And inevitably, a certain degree of fatigue is settling in. At some point, can’t the regulators move on? In an editorial, The Washington Post fretted that the latest investigation was a “backward-looking attack” on the bank for the types of securities it sold in the boom era. In JPMorgan’s defense, the Post noted that “roughly 70 percent of the securities at issue were concocted not by JPMorgan but by two institutions, Bear Stearns and Washington Mutual, that it acquired in 2008.” Indeed, a common talking point among the company’s defenders is that it did the financial world, the government, and the whole economy a great service by wading in to save two troubled institutions—and that it is now being repaid by being dunned repeatedly for nine- and 10-figure sums.
This won’t do. As Dean Baker notes, while Bear Stearns and Washington Mutual were responsible for a lot of the mortgage misconduct, JPMorgan Chase concocted about 30 percent of the securities at issue. That’s not nothing. The bank, which wanted us to think it simply performed better, was involved in all the same practices as the institutions that blew up. Meanwhile, we’ve learned that even in the years since the crisis, JPMorgan Chase’s compliance efforts are subpar. The London Whale debacle took place in 2012. For the most part, the bank has been punished for actions by JPMorgan Chase employees at a time when CEO Jamie Dimon was overseeing them and when the executive team was taking great credit for the profits the bank was reaping.
The line of argument misses another important point. And it typifies the heads-I-win, tails-you-lose mentality that gets so many Americans angry at Wall Street. When you buy a company, or a piece of property, you don’t just acquire the assets. You acquire the liabilities—the contracts, the leases, the bank debt, the environmental problems. The price you pay isn’t just for the good stuff, in other words. Anybody who has negotiated the process of buying a home knows this. You settle on the price, and then, when the inspector says the roof is pretty much done, you adjust the price accordingly. That’s why it pays to conduct due diligence, whether you’re buying a condo or a giant bank.
While the Bear and WaMu deals were conducted hastily, and amid market turmoil, the rules still apply. In agreeing to take the good, JPMorgan Chase agreed to take the bad. And make no mistake, the bank was really pleased to do both deals. It was perfectly happy to acquire the functional businesses of Bear Stearns and the deposits and branches of Washington Mutual. A reasonable person might have assumed there were some serious problems at Bear Stearns, which competed in many of the same market sectors and whose headquarters were just a couple of blocks from JPMorgan Chase’s headquarters. For years, people referred to the bank as Bear Sleaze. Hedge funds it owned, which had employed vast leverage to bet on subprime bonds, loudly blew up in the summer of 2007. Its septuagenarian CEO, James Cayne, was spending a lot of time playing golf and going to bridge tournaments, where, Kate Kelly alleged in The Wall Street Journal, he was known to spark up a doober. (Cayne emphatically denied the charge.)
What’s more, we should dispense with the notion that JPMorgan Chase deserves some legal and regulatory slack because it was doing everybody a favor and because it had done the deals at the instigation of the government. Sure, Treasury Secretary Henry Paulson and other regulators were pleased that JPMorgan Chase agreed to take over faltering Bear Stearns. But I was there at the time. And JPMorgan Chase people thought they were getting a steal, the value of a lifetime. The price paid, $10 a share, came to about $1.2 billion. But the value of Bear Stearns’s headquarters building at 383 Madison was pegged at $1 billion. As Charlie Gasparino, then of CNBC, reported in the spring of 2008 Steve Black, the co-head of investment banking at JPMorgan Chase, said the bank “got something that has far more value than the price we paid” and that it expected to earn $1.1 billion from Bear Stearns businesses in 2009.
It’s not going gangbusters, but the Connecticut system hasn’t broken down yet amid headlines blasting the HealthCare.gov glitches nationwide, the state exchange’s CEO tells Daniel Gross.
At the national level, the rollout of Obamacare has gone poorly. The big federal health-care exchange, HealthCare.gov, is a poorly designed, badly functioning mess.
Outreach and eligibility associate Shannon Bali, left, helps Boguslaw Dudek, right, enroll in the nation’s new health insurance system at the Community Health Center, in New Britain, Conn. on October 1, 2013. (Jessica Hill/AP)
But many states have embraced Obamacare as their own and have been working diligently on indigenous systems to enroll people through homegrown exchanges, either by enrolling them in Medicaid or helping them set up accounts to purchase health insurance. Kentucky has been an early, noteworthy, success. Washington, for its part, has already enrolled more than 40,000 state residents in the expanded Medicaid program, slashing its population of uninsured by nearly 10 percent in two weeks. No train wreck there.
Connecticut would seem to make a pretty good laboratory. It’s a highly Democratic, wealthy, small state (population: about 3.6 million). It has a relatively low rate of uninsured people, about 9 percent. And it is home to a lot of health insurance companies and professionals with knowledge of the industry. Gov. Dannel Malloy has been an avid backer of the plan. And while most of the state’s moderate Republicans are no longer in office, the land of steady habits isn’t exactly a hotbed of Tea Party Obamacare obstructionism.
Thus far, the progress has been solid, but not spectacular. Counihan says the system is noteworthy in part for what it hasn’t done: break down. “We’re the only state to have a consistently stable IT system,” he said. “Beginning two weeks ago, we’ve never been down.” The state contracted (PDF) with Deloitte to build the system for $44.1 million. And Counihan said the system was designed to be as simple and self-sufficient as possible. Rather than ping the federal data hub—which amalgamates all the income, citizenship, employment and other federal data needed to confirm eligibility—at the end of the application, the Connecticut system does so as each piece of information is entered. And it bundles the requests together. “That puts less pressure on the hub,” he said.
The state isn’t simply relying on its website. Connecticut has hired 309 internal assisters and navigators, and has trained more than 700 brokers. It is in the process of opening storefronts in population centers where people can come in to learn about their options.
Here’s the challenge. The state has about 344,000 people without insurance living within its borders. The best that can be hoped for is a reduction in that number to 70,000, Counihan said: “Even in states with universal health care and European countries with national health, there’s a 2 percent rate of uninsured.” That means the state has a goal of enrolling about 275,000 people over a three-year period. Counihan said he believes that between 50,000 and 60,000 people in Connecticut will be eligible for expanded Medicaid benefits. In addition to signing people up for Medicaid, therefore, the state will have to convince between 175,000 and 200,000 residents to purchase insurance through the exchange.
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.
Hailed as a perfect answer to the evils of fiat money, the virtual currency has come crashing down because the invisible hand is paralyzed without government.