The SEC has issued a rule that forces companies to reveal how much their CEOs make compared to their employees. That’ll be fun to see, writes Daniel Gross, but it won’t change anything.
Who says class warfare is dead? Or that the Obama administration consistently sells out the left?
On Wednesday, the Securities and Exchange Commission announced a new rule that had long been sought by labor activists, do-gooders, and progressives. Publicly traded companies are already required to disclose, in exquisite detail, the compensation of their CEOs and other top executives in annual reports and proxy statements. Now, however, they’ll be forced to disclose more information about the compensation of rank-and-file employees—and then express the relationship between the two as a mathematical ratio. The rule, “required under the Dodd-Frank Act” and passed by a partisan 3-2 majority, “would require public companies to disclose the ratio of the compensation of its chief executive officer (CEO) to the median compensation of its employees.”
The insane, obscene, yawning difference between the pay of workers and bosses has long been used as a cudgel by labor groups. Shareholder activists have proposed initiatives at companies such as Walmart (where the ratio is 1,034:1) to force them to disclose the ratio. Bloomberg did its own calculation this spring, and determined the ratio at companies in the Standard & Poor’s 500 is about 240:1.
The theory behind this seems to be that CEOs will have a sense of shame, or self-consciousness, about the disclosures, that the sunlight shining on the complicated web of executive compensation will force CEOs to either cut their own pay or raise the pay of employees. That somehow forcing companies to publish a benchmark will yoke public pressure and competitive instincts to bring the ratio down, thus reducing inequality, boosting the consumption power of workers, and putting a dent in global emissions to boot.
As a journalist, and an advocate of higher wages, I’m generally in favor of this. It’ll be great fun. It’s a great rhetorical gesture, like when President Obama calls for an increase in the minimum wage or rails half-heartedly against fat cats. But it won’t do much good or change anything. In fact, it seems like the rule’s boosters really misunderstand CEO and one percent psychology.
They’re not ashamed. Everybody knows that CEOs make way more than workers. That’s the point of being a CEO. And in general, they simply don’t care. If they did care about the disparities between top earners and their workers, they’d do something about it—like raise wages. But they haven’t. Any way you look at it, corporate America has been very stingy. The Census Bureau reported this week that median household family income was $51,017 in 2012, down from 2011—and, adjusted for inflation, below what the typical household made in 1999. A McDonald’s employee earning $8.25 an hour would have to work one million hours to earn what the company’s CEO makes in a year. Since 2009, the top one percent of earners have taken home 95 percent of the nation’s income gains.
These facts extremely well-known; they’re discussed in prominent media outlets. The data can be complicated at times. But it’s unclear to me that simplifying the stark divergence of fortune between the rich and everybody else in a simple ratio disclosed in SEC filings will change much.
Chairman Ben Bernanke announced Wednesday that the Fed will continue buying bonds and mortgage-backed securities, effectively warning Republicans that their insistence on austerity is keeping him from backing off.
On Wednesday afternoon, Ben Bernanke channeled Miley Cyrus. When it comes to having the central bank conjure up cash out of thin air to buy bonds and mortgage-backed securities in an effort to boost the economy, he effectively said: “And we can’t stop. And we won’t stop.”
Federal Reserve chairman Ben Bernanke, speaking at a news conference, is seen on a television screen on the floor of the New York Stock Exchange on September 18, 2013, in New York City. (Spencer Platt/Getty)
In response, stock traders began twerking en masse. Quantitative easing, the program of buying bonds and mortgage-backed securities, has been a boon to stocks. Why? It’s keeping interest rates down and pushing people into higher-yielding instruments like stocks. The prospect of any tapering, or reduction, in the rate of purchases would push interest rates up and make stocks less appealing. Bernanke said he’d provide the fuel for the party for at least a few more months. Stocks jumped by about 1 percent after the announcement.
While not a change in policy, this marked a change in posture. In June, Bernanke and the Fed had implied they would start to reduce the pace of bond purchases in the fall and set the Fed on a path to phasing out the purchases altogether over the course of a year. But the Fed said at the time that it would depend “on the evolution of the economic outlook.” It had to see evidence that inflation would be rising and jobs would continue to be added.
But that hadn’t happened. Here’s the Fed’s the statement. While things have continued to muddle along, the Fed had not yet seen enough improvement, especially in the labor market, to start tapering. (“The economic data do not yet provide sufficient confirmation of its baseline outlook to warrant such reduction.”) Earlier this month, the Bureau of Labor Statistics reported that the economy produced only 169,000 jobs in August, and revised down the total jobs created in June and July by 74,000.
Not everybody is thrilled by the Fed’s actions. Corporations have gorged on cheap debt, but many CEOs say they’d like to see the Fed remove its artificial support. On CNBC Wednesday morning, Goldman Sachs CEO Lloyd Blankfein called for the Fed to start tapering. And hard money types—libertarians, gold bugs, inflationphobes, many Republicans—have wanted the Fed to stop doing what it’s doing. Bernanke had words for these folks, too, though they were characteristically indirect. Essentially, he said, “You’re part of the problem.”
Buying bonds is one form of stimulus, but it’s a really ineffective one, especially when interest rates are low. Higher wages—employing more people for more hours for more pay—are an incredibly powerful form of stimulus. Americans, particularly those at the bottom and the middle rungs of the income ladder, tend to spend almost everything they make every two weeks. More money flowing into payroll systems translates pretty quickly into more money flowing into the economy. But that’s not happening, or it’s not happening fast enough. Between August 2012 and August 2013, average weekly earnings of private-sector employees rose just 1.7 percent—even though companies have epic amounts of cash on their books and have been making very significant profits. There were 3.7 million job openings in the U.S. at the end of July, but companies are in no rush to fill them. In June, Bernanke had said that the tapering could start only once gains in the labor market seemed persistent and safe. On Wednesday he said that he hadn’t seen enough improvement. If CEOs want him to stop stimulating the economy, Bernanke suggested, they’d have to start stimulating the economy themselves.
Bernanke also had a message for Congress: stop being such jerks and fund the budget, get rid of the sequester, and raise the debt limit. He didn’t put it quite so simply. But it is easy to read between the lines. The modern Fed has always seen its job as counteracting the contractionary activities taking place in the economy. If companies are cutting jobs, the Fed cuts interest rates. On Wednesday, Bernanke said the Fed would have to continue its bond-buying activities because the economy faced headwinds. Among the headwinds Bernanke cited were “tighter financial conditions,” i.e., higher interest and mortgage rates. That one is partially on the Fed chief. Interest rates on the 10-year bond started spiking this spring and summer after the Fed said it might curtail its bond purchases.
An obscure product made by a company with an obscure name has markets excited. Daniel Gross on the injectable compound that gets rid of your unwanted fat.
We’ve been down on American business recently and its ability—or lack thereof—to come up with great new ideas. Last year’s brilliant Doritos Locos Taco gave way to this year’s derivative Fiery Doritos Locos Taco and the dreaded Burger King French Fry Burger. Large technology companies, which used to put money at risk to create brilliant new products, services, and economic ecosystems, can’t really think of anything to do with their cash. On Tuesday morning Microsoft announced that it would spend $40 billion to buy back its own shares and increase its dividend—two clear signs that it is out of ideas. Not surprisingly, the stock market shrugged at this reaction. Investors would rather hear what new profitable products and services Microsoft will create with its huge cash pile.
And yet. And yet. America still is a land of dreamers, risk takers, and idea generators. Microsoft’s stock was dead in the water Tuesday morning. But the stock of Kythera, a biopharmaceutical company, was soaring. In early trading it was up 27 percent, boosting its stock market valuation by $175 million. A nine-figure sum has just been conjured out of thin air. The reason for the rise was the favorable performance in trials of one of Kythera’s new proprietary products, which is aimed at combating a growing and pernicious human woe.
Now this company possesses the rare combination of an inscrutable corporate name (Kythera), an inscrutable product name (ATX-101), and an inscrutable active ingredient (“a proprietary formulation of a purified synthetic version of deoxycholic acid”) that treats an inscrutable medical condition (“the reduction of submental fat”) that the market seems to love.
But it’s actually quite simple. And once you translate the Latin and Greek, the whole situation might make you slightly less optimistic about America and the types of ideas it is generating.
First, the name. Kythera, as the company notes, is the Greek island in the Ionian Sea from whence hails Aphrodite, the Greek goddess of love and beauty. The company, founded in 2005, is based in Calabasas, California, which is squarely in the San Fernando Valley. By now, you may be able to guess where this is going.
Rather than focus on cures for cancer or diabetes, this biopharmaceutical company focuses on aesthetic applications for proprietary compounds. “Our objective is to develop first-in-class, prescription products using an approach that relies on the scientific rigor of biotechnology to address unmet needs in the rapidly-growing market for aesthetic medicine,” the company notes on its homepage. “Our initial focus is on the facial aesthetics market, which comprises the majority of the aesthetic medicine market.” In other words, Kythera is aiming to build a suite of products like those made by Allergan, a wildly successful biopharmaceutical company based in Southern California, that allow people to fight the ravages of time and human behavior without invasive plastic surgery. ATX-101, the company’s main product, could be the “first-in-class submental contouring injectable drug.”
To put it in layman’s terms: Kythera makes some stuff you can inject into your jowls to make your double chin melt away.
Still think our dysfunctional financial system hasn’t changed a bit since the day of the cataclysm five years ago? On debt, consolidation, and consumers, Daniel Gross explains why you’re wrong.
Five years ago Monday, I sprinted through Midtown to Bank of America’s headquarters adjacent to Bryant Park to watch Bank of America CEO Kenneth Lewis and Merrill Lynch CEO John Thain announce their hastily arranged merger. Lewis was enormously pleased with himself, basking in the attention from the New York media. I chased a tight-lipped Thain as he scurried through the lobby to get back to his headquarters. I then spent the remainder of the week working on the slightly infamous King Henry cover story on Treasury Secretary Paulson for Newsweek.
Protestors hold signs behind Richard Fuld, chairman and chief executive of Lehman Brothers Holdings, as he takes his seat to testify at a House Oversight and Government Reform Committee hearing on the causes and effects of the Lehman Brothers bankruptcy, on Capitol Hill in Washington, in this October 6, 2008 file photo. (Jonathan Ernst/Reuters)
Sixty months after the failure of Lehman Brothers, many of the characters have changed. Henry Paulson is a wistful memoirist, and Tim Geithner, then the New York Fed president at the heart of the Lehman non-rescue, is working on his own book. Lewis is retired, and Thain has reinvented himself as CEO of the reinvented lender CIT Group. A lot of people have moved on. And so, too, has the U.S. economy—to a surprising degree.
The conventional wisdom holds that nothing—or at the very least, not nearly enough—has changed in the dysfunctional financial system or in the credit-addled U.S. economy. But many of the people making that argument either weren’t paying much attention to what was going on in the economy at the time or haven’t been paying much attention since. I’ll grant that the banks remain arrogant, highly leveraged, largely unrepentant, and prone to violating regulations with the same frequency and ease with which you and I have a glass of wine. But by and large, the financiers, the financial system, and American consumers all think differently about debt now.
To wit: debt in the financial sector has come down significantly. Five years ago, Lehman Brothers, an unregulated financial institution that didn’t have a base of deposits and funded itself with overnight borrowings, had about $30 of debt for every dollar of cash it had on hand. So did Bear Stearns. Giant banks like Citigroup had balance sheets that weren’t much more solid. Such species don’t exist anymore. They all got taken out in 2008. Lehman failed. Bear got eaten by JPMorgan Chase. Morgan Stanley and Goldman Sachs morphed into commercial banks and swiftly dialed down their debt levels. Merrill Lynch merged with Bank of America. And Citigroup, after taking a huge bailout, raised cash and shed assets in one of the great garage sales in Wall Street’s history. According to the Federal Reserve (see chart D. 1), financial sector debt has shrunk for each of the last four years. In the fourth quarter of 2008, the financial sector had $17.1 trillion in debt. In the first quarter of 2013, that figure stood at $13.9 trillion, off 19 percent. We may still hate the banking system. But the reality is that it is much better capitalized than it has been in years. Fewer banks are failing each year, and fewer banks are in danger of failing each quarter.
Of course, one of the undesired outcomes of the last several years has been consolidation. A few large banks now control a disproportionate share of deposits. It’s hardly surprising. We had an epic lending bubble. And consolidation is what happens in the aftermath of bubbles. The banking system pre-2008 was more diffuse and more competitive than it is today, in part because there were many more banks running around making insane loans. Check out the data (PDF) from the Federal Deposit Insurance Corporation. At the end of 2007, there were 8,534 banks in the U.S. That figure has fallen for six straight years, thanks to hundreds of failures and hundreds of mergers, as weak and struggling banks died off or fell into the arms of saviors. Today there are 6,940, down about 20 percent from the peak. Banking has a smaller cultural, retail, and employment footprint than it did several years ago. That’s different.
There’s been a fundamental change in the way consumers regard and use debt. As noted, the financial sector has reduced its use of debt. And in many important ways, so, too, has the household sector. In 2006 and 2007, the U.S. in many ways had a false economy. Hundreds of thousands of homes were bought with mortgages on which no payments were ever made, loads of clothes bought with credit cards on which payments were never made. I’ve noted this repeatedly—this is the age of the heroic American consumer. Americans are relying less on debt to consume, and they’re doing a much better job keeping up with debt. The credit card delinquency rate is at its lowest level since 1990. Credit card balances are back where they were in 2006, even though retail sales are much higher. In 2009, according to Cardhub.com, American credit card companies wrote off $83 billion in bad debt. This year, the total is likely to be about one third of that. The New York Federal Reserve’s quarterly report on household debt and credit shows that since peaking at $12.675 trillion in the third quarter of 2008, American consumers’ debt load has fallen to $11.153 trillion, a decline of $1.52 trillion, or 12 percent. That’s debt paid down, written off, or refinanced. Consumers, who account for about 70 percent of economic activity, are driving economic growth while steadily chipping away at their mountain of debt. It wasn’t like that in 2008. The relationship between debt and consumption has changed—not enough for many people’s liking, perhaps, but it has changed.
Yes, there’s much more work to do. And the bankers, like the poor, will always be with us. The large banks should be forced to hold much more capital than they do today. If they want to get bigger, they should be forced to hold even more capital. Imbalances continue to build up—especially in emerging markets and the student loan markets. And it’s quite likely we will have another financial crisis this year or next. But it won’t start in America’s housing, investment banking, and consumer debt complex, and spread throughout the world. Rather, the risk we face today is that a debt crisis in Brazil, India, or China will infect our financial system, that we’ll import a problem rather than export a problem. That’s another difference from 2008.
Who killed Larry Summers’s shot at running the Fed? Daniel Gross narrows down the list of suspects, from Elizabeth Warren and Wall Street to the brilliant economist himself.
On Sunday night, Larry Summers—brilliant economist, former Harvard president, former Treasury secretary—withdrew his name from consideration for the post that would top off one of the Western world’s great résumés: chairman of the Federal Reserve Board.
Superficially, it’s obvious who—or what—killed the Summers nomination: the candidate himself took his name out of consideration. But at second blush, this situation is a little like an Agatha Christie mystery. There’s a victim (the dead nomination) and a host of suspects.
First, there’s President Obama. Of course, all the inside reporting tells us that Obama really wanted Summers in the post. They worked together in the crucible of the first years; they’re both Harvard men. But the president has a strange way of showing his favor. Decisive as a campaigner, Obama has been oddly indecisive and passive when it comes to emphatically naming nominees and then pushing aggressively and relentlessly for their approval. From the beginning, he has been slow to name judges and push for their confirmation, slow to name Federal Reserve governors and push for their confirmation, and slow to name nominees for Treasury and other departments. And rather than come out and declare that Summers was the man to replace Bernanke, that he should be confirmed quickly, and that he would brook no dissent, Obama simply sent out smoke signals about his preference.
Second, there are the congressional Democrats. In the Senate, Republicans can be counted on to filibuster everything, including lunch. So in order for a nominee to get approved, the 53 Democrats and the two independents who generally caucus with them have to stick together and then persuade five Republicans to let a vote proceed. Then they have to ensure that the 53 Democrats will actually vote for approval. But as time went on, and as President Obama dithered, opposition to Summers began to bubble up from within the Democratic Party. It started in the House, as the Democrats who form the party’s left wing began to agitate against Summers, citing his Wall Street ties, his support for deregulation, and the fact that he would be displacing Janet Yellen, who, if nominated, would be poised to be the first woman to head the Fed. Then last week, three Democratic senators signaled their opposition: John Tester of Montana, Sherrod Brown of Ohio, and Jeff Merkley of Oregon. Elizabeth Warren, an icon for the left wing of the Democratic Party and a former colleague of Summers at Harvard, was also said to be reluctant. Such opposition from within the Democratic caucus made Summers’s position untenable.
Third, there are congressional Republicans. If left-wing Democrats were suspicious of Summers for being too centrist and too close to Wall Street, right-wing Senate Republicans were suspicious of Summers for being too much of a socialist. After all, he was in the White House when the stimulus and Obamacare were conceived. So Texas Sen. John Cornyn said preemptively that he wouldn’t support a Summers nomination. And given that a few Democratic senators on the Senate Banking Committee had said they’d oppose Summers, he was going to need at least a couple Republican votes to get out of committee. But as of the first week of September, as The Wall Street Journal reported, “No Republican has publicly expressed support so far for any potential White House nominee for Fed chief.”
Fourth, there was Wall Street. Five years may have passed since the Lehman Brothers debacle, but that’s not enough time for the nation to forget the pathologies of the finance industry that did so much damage to the U.S. economy. And Summers, far more than Yellen, is identified with modern Wall Street. He was in the Clinton administration in the 1990s and was an advocate for deregulation. He worked for a hedge fund, D.E. Shaw, where he made a ton of money. He’s consulted for big Wall Street banks and has gotten paid to give speeches to banks. And he has been essentially unrepentant about it. Even without a Wall Streeter in charge, the Federal Reserve is always going to be overly solicitous of the financial sector’s needs. And so putting someone in charge who is a part of the system was always going to be a problematic proposition.
One more thing. To a degree, Summers has been punished for the shortcomings of President Obama and Wall Street. But he’s also been punished by his own shortcomings. Let’s be clear. Larry Summers has all the academic, professional, government, and intellectual credentials and skills necessary to run the Fed. Had he been appointed and confirmed chairman, he would doubtlessly have been an excellent one. But the job is a multifaceted one. It’s not enough simply to be the smartest economist around. You have to be a consensus builder, you have to demonstrate a capacity for empathy, to take the feelings, sensitivities, fears, of all sorts of actors into consideration.
A funny thing happened on the way to the debt-ceiling battle: a big chunk of our annual budget quietly melted away. Daniel Gross on the good news you didn’t see coming.
Here we go again. The debt ceiling is approaching, and Washington is in the grips of another round of mania. Will the Republicans in the House engineer a default, or a near-default, on America’s sovereign obligations? Will President Obama agree to delay the implementation of the Affordable Care Act in exchange for a debt-ceiling increase? Will Obama and House Majority Leader John Boehner finally be able to engineer a grand bargain on taxes, spending, and deficit reduction? (The New York Times reports this morning that Boehner is appealing to Democratic White House leaders and the White House for help.)
The Capitol Dome is seen reflected in water pooled on panels of glass on the visitors center on Capitol Hill in Washington, on Sept 12, 2013, as the Republican controlled House and the Democrat controlled Senate will have to work together to to avoid a government shutdown after the 2013 budget year ends Sept. 30. (Carolyn Kaster/AP)
The answer? Maybe, no, and no.
There’s a great irony afoot. This week, there was plenty of new evidence that Washington is set to prove, yet again, its dysfunctionality on dealing with the basics of taxing and spending. But there was also fresh evidence that there has been enormous progress in the effort to cut the annual budget deficit.
In fact, we’ve long argued that we live in a Golden Age of Deficit Reduction. The August Treasury Monthly statement, released Thursday, and a Congressional Budget Office report released earlier this week, show just how far we’ve come in the space of a year.
In August, revenues were $185 billion, up 3.4 percent from $178.9 billion in August 2012. Spending was $333 billion, down 9.7 percent from $369 billion. The result: the deficit for the month of August was $147 billion, down 22 percent from $190 billion in August 2012. Some of the decline in spending is due to timing issues – benefits paid on the 31st of the month one year that aren’t paid until the 1st of a different month the following year. But the broader trend is intact: more people are working at higher wages, and wages are being taxed at a higher rate. Through the first 11 months of fiscal 2013, which ends at the end of this month, revenues are up 13 percent and spending is down 3.6 percent. The deficit for the first 11 months, at $755 billion, is off $409 billion, or 35 percent, from $1.164 trillion in the first 11 months of fiscal 2012. The picture is likely to get better, because in September, the government typically runs as a surplus as companies and individuals pay quarterly taxes due. Last year, the surplus for September was $75 billion. Should the September 2013 surplus come in at the same amount, the full year deficit would come in at $680 billion. That would represent a decrease of $409 billion, or 37 percent from last year. All in the absence of a grand bargain.
Many professional deficit hawks have argued that this year’s deficit reduction has come in the worst way possible. There hasn’t been any rational grand bargain or tax reform, and the sequester has functioned as an indiscriminate meat cleaver. But that’s not entirely true. A lot of the deficit reduction has come in the best way possible – from taxing those who can most afford to pay, from economic growth, from cutting spending on defense, and from falling spending on recession-era entitlements like unemployment benefits. According to the CBO, some $24 billion of the reduction comes from a decline in spending on unemployment benefits, because the number of people filing claims and receiving benefits has plummeted as the labor market improves. Because companies are earning more profits, they’re paying more income taxes—$216 billion through the first 11 months of fiscal 2013, up 16 percent from the first 11 months of fiscal 2012. That accounts for another $30 billion in deficit reduction. Individual income taxes are up $160 billion so far this year, because people are earning more and because the very rich are now paying higher taxes. And social insurance receipts (basically the Social Security and Medicare payroll taxes) are up by $101 billion so far this year, in part because the two-year cut on the Social Security payroll tax expired on January 1, in part because of the Obamacare excess payroll tax on Medicare, and in part because two million more people are on payrolls today than last year. The cuts attributed to the sequester, about $75 billion this fiscal year, account for only a small portion of the deficit reduction we’ve experienced this year.
And so as Washington continues to dither about the debt ceiling, funding the government, and a grand bargain, the annual deficit quietly melts away.
The international yoga apparel retailer is a hot company with a ton of stores and great sales. But now Wall Street thinks it has grown too fast and saturated the market, says Daniel Gross.
Breaking: trends are trendy.
Case in point: Lululemon Athletica. The high-end yoga apparel retailer has enjoyed astronomic growth as the craze for stretching, striking poses, and uttering Hindi phrases has gone national. It’s hard to negotiate the streets of New York these days without being knocked in the head by a yoga mat strapped onto a backpack.
Its shares, as shown by the chart below, soared from the single digits in 2009 to a peak of $82 in June.
But trends can get taken too far. Companies get overconfident. Consumers are fickle. In fashion, as Heidi Klum says on Project Runway, “One day you’re in, the next day you’re out.” LuluLemon isn’t quite out. But it’s not quite as in as it used to be. The company has had a rough 2013, as Erin Cunningham documented in these pages last month. There were the see-through pants that had to be recalled, the resignation of its chief executive officer, and accusations that the company discriminated against plus-sized women because it doesn’t make clothing larger than size 12.
Thursday morning, Lululemon suffered another blow: disappointing third-quarter earnings that led the stock to fall more than six percent in early trading. Since June, the company has lost about 21 percent of its market capitalization. Its shares have assumed the dreaded “downward stock” pose.
The revelations in the earnings report are likely to be more damaging to Lululemon’s brand than the revealing pants or the executive turmoil. Fashion bloggers don’t pick up much on things like same-store sales and gross margins, but the numbers help explain why Lululemon has fallen out of fashion, at least as an investment.
Here are the fiscal 2013 second quarter. At first blush, the numbers look pretty good. Net revenue was up 22 percent year over year, and same-store sales (the preferred metric for retail analysts) were up a healthy eight percent. “Direct to consumer” revenue (online sales?) rose 39 percent from the year before, and now account for 14.3 percent of revenues. Income from operations were up 12.5 percent from the year before to $79 million. So, a profitable company with rising sales.
Apple’s new ‘low-cost’ iPhone is still pretty expensive, which is bad news for profits in an economy where wages are stagnant and truly cheap options are plentiful. Daniel Gross on the stock market’s punishing response—and the bleak outlook in Asia and Africa.
Well that was an expensive product launch. On Tuesday, Apple unveiled two new iPhones, the “cheaper” 5C and the whiz-bang 5S, or as my colleague Winston Ross dubbed them, the “cheap” and the “fancy.”
Several versions of the new iPhone 5C are displayed in Cupertino, California, on September 10, 2013. (Stephen Lam/Reuters)
Tech fanboys and fangirls marveled at some of the new features—new colors for the shell! Thumbprint security! But investors were less impressed. The company’s stock, which was trading at $505 in the middle of the day, closed at $494.64. On Wednesday morning, after investors slept on it, they decided to dump the shares like a cheap BlackBerry. By noon, the stock was off another $29, at $465.55. That decline—from $505 to $465.55—is a fall of 7.8 percent in about 24 hours, and a reduction of $35 billion in Apple’s market value.
What accounts for the fall? It could be that this was another case of investors buying the rumor and selling the news. Apple’s stock had run up sharply in the last few weeks as anticipation built surrounding the big reveal.
But I’d suggest something else is at work. It could be that investors are coming to grips with the problem facing the present—and the future—of the iPhone. It’s a rather expensive device. In the wealthy, developed economies where Apple has the strongest market positions, incomes of typical consumers aren’t rising. In the huge developing markets where Apple has a minimal presence, incomes of typical consumers are rising—but they’re nowhere near sufficient to enable them to afford Apple products. And Apple isn’t (yet) willing to meet customers where they are.
Let’s review. In the U.S., the new iPhone 5C costs $99 with a contract, while the new iPhone 5S costs $199 with a contract. That sounds cheap. But don’t be fooled. Those prices are only available when you sign up for a lengthy voice and data contract. At Verizon, such plans can cost $100 per month and up. Apple sells the device to the phone company, which recoups the cost of the device by marking up the cost of its voice and data service. The cost of the device, in other words, is embedded in the contract. In order to get the $99 iPhone, a customer must commit to spending $1,000 or more with a service provider over the course of a year.
The actual retail cost of the phone is much higher. According to Ian Sherr and Greg Bensinger of The Wall Street Journal, an iPhone 5C sold without a carrier subsidy will cost $549 in the U.S. That’s a lot of money when you consider that the typical American worker makes $829 per week. Worse, as I’ve written many times, the failure of American companies to raise wages for typical workers over the last several years has rendered workers increasingly unable or unwilling to afford the products and services that American companies make, market, and sell. Well-off Americans can buy a lot of iPhones and iPads. But if you want to be a mass business, and you want to keep growing off a very large base, it’s very hard to post impressive numbers if underlying incomes aren’t rising. Especially when you make a discretionary product. Everybody may need a mobile phone in America, and many people may need a smartphone. But very few people really need an iPhone. The pricing of these new products doesn’t do much to alter this equation.
Apple also faces a much worse problem in larger and more rapidly growing markets overseas. For the first time, yesterday, Apple formally held a product launch in Beijing. This was a recognition by Apple that the world’s largest country (by population) and second-largest country (by size of its economy) is a vital market. But Apple is poorly equipped to compete in China—and in other developing economies where lots of potential consumers live.
In its biggest shakeup in nearly a decade, the elite Dow Jones industrial average booted manufacturers and welcomed companies that specialize in services and assembly. Daniel Gross on how the move reflects the new economy.
On Tuesday, three big changes were made to the Dow Jones Industrial Average. Out went Bank of America, Hewlett-Packard, and Alcoa. In came Goldman Sachs, Visa, and Nike.
Traders work on the floor of the New York Stock Exchange on August 27, 2013. (Richard Drew/AP)
The news was of more interest to students of finance history rather than to practitioners of finance. Yes, the 30-member club gets pride of place among indices when market summaries are reported. But investment firms design products to mimic the performance of broader, more diversified indices like the Standard & Poor’s 500 and the NASDAQ 100.
Symbolic as it may be, the Dow, which dates back more than a century, is supposed to hold up a mirror to the U.S. economy. It assembles an exclusive group of 30 of America’s largest and most valuable companies, with representatives of every major sector. The Dow, like all valuation-based indices, is an imperfect tool, in large part because markets themselves are imperfect. At times, they boost the value of one sector or company irrationally (hello, Tesla!), and at other times they irrationally knock down the value of others (Apple’s stock was worth only a few billion dollars 10 years ago). Indices like the Dow tend to bring in companies after they’ve had a large, prolonged run-up, and tend to drop them only after they’ve suffered a significant, prolonged decline.
Still, the roster of guests checking in and out of the Dow Hotel tells us something about who is up and who is down, what sectors are thriving, and what has changed about the U.S. economy. At first blush, there wouldn’t seem to be much change happening today. One huge bank in, one huge bank out; one California-based technology firm out, another California-based technology firm in; one global manufacturer out, another global manufacturer in. But there are some significant differences between those exiting and those entering. And these moves say a lot about how the economy has changed: fewer makers and more takers, less manufacturing and more services, less building and more assembling.
Let’s take them in order.
Bank of America may seem like just another gigantic bank. But it’s got an interesting backstory. A.P. Giannini, the son of Italian immigrants, in 1904 founded the Bank of Italy in San Francisco to provide banking services to the “little fellows.” Not part of the East Coast establishment, Bank of America thrived far from Wall Street. It took deposits and lent them out so people could buy and build stuff. Its postwar growth surge was made possible by one of the first sustained efforts to provide consumer credit to middle-class borrowers. In the modern era, Bank of America strayed from commercial and consumer banking into investment banking, and merged its way into gigantism—and into trouble. It acquired Merrill Lynch in 2008 as part of the empire-building efforts of former CEO Kenneth Lewis. His successor, Brian Moynihan, has shrunk the bank’s footprint as it continues to dig out of the financial muck.
Goldman Sachs has always been a different creature. It’s an investment bank, not a commercial bank. Based on Wall Street, not in California, it has always served other institutions and high net-worth individuals, not middle-class investors and borrowers. Goldman makes money in a lot of different ways. But many of them involve taking a piece of transactions. Underwrite a stock offering or a bond offering, take a 7 percent commission. Advise on a deal, get paid a commission. Manage money, and take a percentage of total assets as the fee. Do a transaction, and take a couple of basis points as a commission. Yes, Goldman often puts its own capital to work. But to a large degree, investment banking is a service business whose success rests on taking a little piece of every transaction that comes its way.
Is it me, or did the first-term Massachusetts senator sound like a presidential candidate at her big AFL-CIO speech this weekend? It’s not as crazy as it sounds.
Did Sen. Elizabeth Warren sound the first volley of a 2016 campaign Sunday?
Elizabeth Warren speaks at the AFL-CIO 2013 convention in Los Angeles on September 8. (AFL-CIO)
Warren’s stemwinding speech to the AFL-CIO convention in Los Angeles was lost in the flurry of news and live events: the opening day of the football season, the U.S. Open finals, the talk of potential attacks on Syria. So it didn’t get much ink.
But it’s worth reading and watching (here’s a snippet). Because as the next election cycle approaches, we might be hearing a lot more of it.
Warren is a hero of the left—for creating the Consumer Financial Protection Bureau and removing Scott Brown from the seat formerly occupied by liberal icon Ted Kennedy. What’s more, she delivers a forthright, knowing, and articulate critique of big business and government, from the left. But what makes her interesting as a potential candidate is that a decent chunk of her indictment involves the economic record under President Obama. And unlike the two presumed candidates for 2016, Vice President Joe Biden and former secretary of State Hillary Clinton, Warren was never a part of the inner circle. They can’t very well run hard and comfortably against the economic record of the past six years. And they won’t implicitly take some swipes at the Obama administration.
The Wall Street, Council on Foreign Relations, and Davos types that have dominated Obama’s economic-policy team regard populism as a dirty word. But Warren is forthright about her populism. She represents, in Sen. Paul Wellstone’s phrase, “the Democratic wing of the Democratic party.” And, as she points out, many of the populist critiques of the nation’s current economic and financial arrangements are quite popular.
The former Harvard Law School professor started her speech on Sunday with a shout-out to “the operating engineers—my brother’s union for many years,” then launched into some good old-fashioned class warfare. “When important decisions are made in Washington, too often, working families are ignored,” she said. “Those with power fight to take care of themselves and to feed at the trough for themselves, even when it comes at the expense of working families getting a fair shot at a better future.”
She gave a brief dissertation of the triumphs of the Democratic Party and organized labor in the 20th century: outlawing child labor, establishing minimum-wage laws, the New Deal, Social Security, civil rights, the Family and Medical Leave Act, the Lilly Ledbetter Act. Then Warren introduced herself into the narrative:
So you thought $12 an hour for a burger place was revolutionary? Try $15. Daniel Gross talks to the owners of Detroit’s Moo Cluck Moo as they supersize starting wages.
In August, I spoke with the owners of Moo Cluck Moo, a Detroit-area burger and chicken fast-food joint that is aiming to do something revolutionary: pay far more than the minimum wage. In an industry that treats labor as a commodity, co-owners Brian Parker and Harry Moorhouse decided to turn the conventional wisdom on its head. They’d start workers at $12 an hour, and design their business so that it could run profitably at those wages. Rather than take advantage of the epic slack in the Detroit-area labor market, they’d aim to set a slightly higher standard.
A meal from Moo Cluck Moo. (K Manley)
In exchange for paying higher wages, Moo Cluck Moo’s owners got better service, more skilled and committed employees, and a lot of free publicity. After our article, Moo Cluck Moo was featured on outlets like Huffington Post and MSNBC. Meanwhile, executives at other chains were crouched in a defensive pose as workers walked out over low wages.
Now, Moo Cluck Moo is doubling down on its high-wage strategy. Brian Parker says that beginning October 1, the company will start employees at $15 an hour. That’s a 25 percent increase from $12, and it represents the living wage level that workers are demanding and that many critics regard as foolish.
Why $15? “We always wanted to be at $15 an hour,” said Parker. “It just feels human to do it.”
Very few businesses would seek unilaterally to increase the cost of their main input by 25 percent. For companies operating on slim margins, that would be self-defeating. But Parker said there’s a method to this madness.
First, he believes his employees deserve it. Working at a quick-service restaurant is a difficult, demanding job. People have to multi-task. They’re coping with long lines and expectations of rapid service. These are the people who take care of the customers, and this is a competitive business in which customer service matters a great deal. “It’s not an easy job to do,” said Parker. “We’ve got a line out the door.”
And while Moo Cluck Moo has only been in business since the spring, Parker believes higher wages lead to better results. “We’ve had very low turnover,” said Parker. “Of the people that are working for us, we don’t have anybody disgruntled.” Over the weekend, three customers came up to Parker, without prompting, and thanked him for the quality of the customer service. Paying people more means you spend less time firing, hiring, and training. And Parker and Moorhouse would prefer to spend their time thinking about the business than supervising employees. “If I have to babysit these people, I’m a high priced baby-sitter.”
The U.S. created only 169,000 jobs in July, fewer than expected. What’s worse, the labor force shrunk. Daniel Gross on why today’s report should send a warning signal to Washington.
What a difference a year makes. Last fall, the Bureau of Labor Statistics’ monthly employment reports assumed a totemic importance in the political season. The noisy, frequently adjusted figures had the capacity to move presidential polls. The financial markets could afford to ignore the latest upticks or downticks in the unemployment rate, but the political markets couldn’t.
This fall it’s a different story. Given the backdrop of foreign turmoil, the prospect of war in Syria, and an economy chugging along in a low gear, the monthly status update on the labor market barely resonates in the nation’s political capital. But financial markets have been eagerly awaiting the data. Why? The Federal Reserve has been telegraphing for the last several months that it could start to dial back its efforts to stimulate the economy. Should the jobs picture improve and the unemployment rate continue to tick down, the Fed could start to taper its purchases of bonds and mortgage-backed securities as early as September. And that move would be hugely consequential for markets, influencing the price of bonds, stocks, commodities, and gold. The conventional wisdom: a blow-out, highly positive jobs report would hasten the Fed’s efforts to taper, while a crappy one would mean the Fed would hold off for several more months.
This morning, however, the Bureau of Labor Statistics served up a meh burger, slathered with blah sauce. And the offering is unlikely to clear up lingering confusion as to whether and when the Fed will ease up on its quantitative-easing efforts.
First, the headline. The U.S. economy created 169,000 payroll jobs in August. That’s neither too many to get excited about nor too few to get seriously bummed about. The unemployment rate, which is compiled from the separate household survey, ticked down to 7.3 percent from 7.4 percent. But there’s less than meets the eye to that figure. The payroll jobs number is compiled from a survey in which the BLS asks companies how many people they have on their payrolls. The unemployment rate is compiled from the so-called household survey, in which the BLS asks people whether they’re working, out of work, looking for work, etc. The unemployment rate is calculated by dividing the number of people who are out of work into the number of people who are in the labor force. So if the labor force shrinks—if people drop out, or quit looking—while the number of people working essentially holds steady or even falls, the unemployment rate can fall as well. And that’s precisely what happened in August. Check out this table. The size of the labor force actually fell in August by 312,000, while the number of people employed fell by 115,000. The labor force participation rate (the percentage of able-bodied adults in the workforce) fell as well.
Put another way, aside from the illusory decline in the unemployment rate, the data coming out of the household survey was quite poor. The Fed’s work stimulating the economy is hardly done.
There was also bad news in the payroll survey. Yes, the U.S. economy added 169,000 jobs in August. That’s the 42nd straight month of gains. Since February 2010, the economy has added 6.8 million jobs. But these monthly reports are only the first estimates. And the data is revised in each of the subsequent months. The revisions the BLS released Friday for June and July were disappointing. The June figure, previously thought to be a gain of 188,000 jobs, was revised down to a gain of 172,000. And in a somewhat ominous sign, the July figure, initially reported as a gain of 162,000, was revised to a gain of only 104,000. Put another way, the BLS looked back and found there were 74,000 fewer jobs than previously thought. Again, this is a sign that the Fed’s work stimulating the economy is hardly done.
There were a few mildly positive signs. Manufacturing added 14,000 positions. As has typically been the case, health care (32,000), retail trade (44,000), and professional and business services (23,000) added jobs in the month. And there are signs that government austerity—at least at the state and local level—may have run its course. I’ve dubbed this expansion the “conservative recovery,” because every month the private sector adds jobs while the public sector (federal, state, and local government) cuts them. That doesn’t usually happen in expansions. Between May 2010 and July 2013, government cut 1.177 million jobs, while the private sector added 7.07 million positions.
The sequester has put a dent into federal government hiring. But as states and cities move from deficits to surpluses, they’ve started to add positions after years of cuts. And in August, for the first time in recent memory, government employment significantly increased—by 17,000 positions. Federal government employment was unchanged, and states cut 3,000 jobs. But local governments hired 20,000 people—virtually all for educational jobs.
It looked like a busy weekend for big company deals—Verizon, Nokia, Microsoft, CBS, Time Warner Cable. But ignore the fuss, writes Daniel Gross, it’s all a bunch of nothing.
It may have been Labor Day weekend, but some highly paid laborers were working around the clock. Bankers, lawyers, strategy types spent the last weekend of the summer putting the finishing touches on three big deals in the vast telecommunications/media complex: Verizon acquired the chunk of Verizon Wireless that it didn’t already own from Vodafone for $130 billion; Microsoft bought Nokia’s handset business for about $7 billion. And Time Warner Cable and CBS settled their long-running dispute.
Nokia CEO Stephen Elop, left, shakes hands with Microsoft CEO Steve Ballmer, right, during a briefing in London on February 11, 2011. (Leon Neal/AFP/Getty)
Deals, mergers, acquisitions are often covered like contact sports—men powered by adrenaline, urged on by bankers and cheerleaders, hunting for trophies and big scores. But in each of these cases, the moves were defensive and wimpy, aimed at preserving eroding positions and not getting hurt. Welcome to the age of the defensive deal.
Let’s take each one in turn.
First, the largest. Verizon, the big phone company, owns most of Verizon Wireless, the giant mobile phone company. Vodafone, the European phone giant, owns 45 percent of Verizon Wireless. On Monday, Verizon said it would pay $130 billion to purchase Vodafone’s stake in Verizon Wireless. Whee! It’s officially the most boring big-business deal in history. (This is the third-largest buyout ever.) There was nothing financially innovative about the transaction, as was the case with the RJR-Nabisco deal of the late 1980s, which was memorialized in Barbarians at the Gate. And it wasn’t an audacious, out-of-the-box strategic move that united companies in disparate fields, like the giant AOL-Time Warner deal of 2000, which was memorialized in volumes like Stealing Time and Fools Rush In. It’s a safe bet nobody will write a book or a movie about the Verizon-Vodafone deal. A phone company that owns most of a phone company is buying the rest of that phone company from a different phone company. The merged entity won’t offer a fundamentally different set of services to customers or present a different profile to investors.
So why do it? The move is an acknowledgment that the landline business is largely dead and the mobile phone has saturated the world. There are really very few markets left to crack. It is expensive to maintain and build the type of networks that customers expect. And it’s difficult to raise prices. So if you’re not going to get higher earnings from new business or fatter margins, the only way to keep investors happy is to pay a fat dividend and continually buy back shares. To do that, you need cash. By buying out Vodafone and taking full control of Verizon Wireless, Verizon will get full access to the profits that Verizon Wireless continues to crank out.
Next, Microsoft said it would buy Nokia’s handset business and its patents for about $7 billion. Steve Ballmer described the deal as “a bold step into the future.” I’d describe it somewhat differently: struggling, once-dominant tech giant based in geographic area with Scandinavian-like gloomy weather buys struggling, once-dominant tech giant based in geographic area with actually Scandinavian gloomy weather. For this is actually a pretty lame move by a lame duck. Ballmer announced last month that he’ll be leaving the company after 13 years at the helm.
For most of the past two decades, Microsoft has continually missed the next big thing—the Internet, search, smartphones, tablets. Yes, the company continues to mint money on its core software products. But technology investors like growth and innovation. And Ballmer hasn’t delivered. Even though the company has engaged in the defensive maneuvers of instituting a dividend and buying back shares, the stock hasn’t budged much. For its part, Nokia has suffered something like a meltdown. The firm once dominated the mobile phone market the way Microsoft dominated the operating systems market. Nokia became so large that it effectively was the Finnish economy. But the same forces that laid Blackberry low have contributed to a (sorry) Helsinking feeling at Nokia. The era of the smartphone has not been kind to Nokia. The company’s stock, which stood at about $40 at the beginning of 2008, fell to as low as $1.70 in July.
Burger King’s French Fry Burger may be the lamest fast-food invention yet. Daniel Gross asks, is this the best you can do?
Last week I fretted that America—and American business, in particular—seemed to be running out of ideas. On Sunday, in a drive-through lane just off Exit 28 of I-84, outside Southington, Connecticut, I received further confirmation of this hypothesis. God help me, I tried Burger King’s new French Fry Burger.
Burger King’s French Fry Burger. (Burger King/AP)
And as much as fast-food innovation can sometimes inspire awe and confidence in this great nation (like Taco Bell’s Doritos Locos Tacos), it can also leave one full of questions about the future of our common enterprise. Burger King’s French Fry Burger falls into the latter category.
To back up a little, Burger King, like the lower end of the food food-chain, is suffering. Its low-quality, low-wage, low-price business model is in trouble. There’s a lot of competition from above in the burger space. The people who eat at Burger King, like the people who work at Burger King, don’t have a lot of disposable income to spend at places like Burger King—in part because places like Burger King aren’t paying them enough. Labor dissatisfaction is spilling over into strikes.
And so the business in the U.S. is actually shrinking. In the first quarter of 2013, same-store sales in the U.S. and Canada fell 3 percent from the year before, and the net count of restaurants open in the U.S. and Canada fell by 29. In the second quarter, same-store sales in the U.S. and Canada fell 0.6 percent compared with the year before. Because the company closed a bunch of restaurants, the net count of restaurants open in the U.S. and Canada fell by 31.
Now under the control of a Brazilian private-equity firm, Burger King is trying to modernize stores, improve operations, expand around the world, and introduce new, more au courant menu items like sweet-potato fries. And it is doubling down on the provision of cheap food. The French Fry Burger, launched September 1, is part of a fall menu campaign aimed at reviving growth.
But this is a pretty weak effort. The price may be right—the French fry burger costs $1. But the execution—and, more important, the concept behind it—is all wrong. My version was assembled with great indifference. It was a basic hamburger, with fresh lettuce and tomato (a plus), slathered with a sloppy oversize dollop of mayonnaise. For good measure, a few french fries were thrown into the mix.
What’s wrong with this picture? To begin with, I hold with the conventional wisdom that Burger King, while it has superior burgers to McDonald’s, trails badly in the french-fry competition. Burger King’s fries lack the combination of crispiness, saltiness, and oily satisfaction that the Golden Arches’ spuds deliver. They have some sort of coating on them. ( I disapprove of the innovation of coating French fries with stuff.) From my youth, I’ve believed that the optimal meal at Burger King is, in fact, a chocolate shake and a Whopper, no fries. So from the outset, the notion of adding fries to the burger is the opposite of gilding the lily—it takes a passable experience and makes it materially worse.
The IRS says it will recognize all same-sex marriages—regardless of where the couples live. Daniel Gross on why tax law is often the true heart of civil rights.
Benefits. Vision care. Discount cards. Joint tax returns. This is hardly the stirring language of great leaps forward in civil rights and human dignity. And a day after the 50th anniversary of Martin Luther King Jr.’s “I Have a Dream” speech, such talk seems especially mundane. Form 1040-ES is not exactly the stuff of soaring rhetoric.
And yet it is incredibly important. We’ve noted that the case that led to the Supreme Court overturning the Defense of Marriage Act was, at root, a tax case. When Thea Spyer died in 2009, her partner, Edith Windsor, was angered that she was liable for federal estate taxes on assets left to her by Spyer. Because the tax code wouldn’t recognize her as a spouse, Windsor had to pay more than $363,000 in federal estate taxes. And so she went to court—and won. Earlier this week, Walmart quietly, belatedly joined the growing number of large corporations that offer benefits to employees’ domestic partners.
Of course, there’s a long way to go. Gay marriage is legal only in 13 states. The Republican-controlled House of Representatives is profoundly uninterested in passing legislation that would expand the rights of (and obligations to) gay Americans. But the striking down of DOMA has empowered the federal government to act on its own where it can. And with a type of urgency rarely seen in the Obama administration. Earlier this month, the Pentagon announced that starting next week, same-sex spouses will be eligible for the same type of benefits that opposite-sex spouses enjoy (housing, health care, etc.). Earlier this week, the Department of Health and Human Services said same-sex couples can gain access to the same type of Medicare benefits that opposite-sex married couples enjoy. For example, they can now get coverage to pay for nursing-home costs in the same nursing homes where their spouses live.
In the latest such move, on Thursday, the Internal Revenue Service announced that same-sex married couples can file joint federal tax returns—regardless of where they live. Even couples who live in states like Texas or North Dakota, which don’t yet recognize gay marriage, can file joint federal returns as long as they marry in a state like California or Iowa, which do. The move “assures legally married same-sex couples that they can move freely throughout the country knowing that their federal filing status will not change,” said Treasury Secretary Jack Lew.
It may sound like a small thing, but it’s actually a big thing.
It’s common to hear people joke that with the growing legality of gay marriage, gay couples will officially be able to enjoy the same misery and travails that married heterosexuals do. Just so, gay married couples will be able to face the same frustrations with the tax code that married heterosexual couples do. Some will find that they pay higher taxes as a result of a joint filing, thanks to the marriage penalty. But more will find that they benefit from filing jointly—their combined income may be taxed at a lower rate than if they were to file separately. They’ll be able to take two exemptions instead of one. And so on.
Ultimately, though, the significance of the IRS’s move isn’t about the money that gay couples may save (or lose). It’s about what taxes signify. Taxes, after all, are the price and cost of citizenship. Tax breaks are a perk of citizenship. Being taxed to the fullest extent of the law, and enjoying tax breaks to the fullest extent of the law, are markers that the government accepts and regards you as a full citizen. And until now, the federal tax code hasn’t recognized gay couples as fully participating citizens.
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.