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Inside Putin's Recession

The Russian leader may have won some accolades for his decisiveness, strength, and overall toughness, but it’s hard to be an assertive global power when yours is the only major economy that’s shrinking.

This a pretty benign time for the global economy. Interest rates are uniformly low. The U.S., China, and Japan—the three largest economies in the world—are all growing. Developing markets in Africa are surging. The European debt crisis seems to have ended. In this climate, one of the only ways to get a recession is to engineer one.


People are reflected in a shop window near a portrait of Russia's President Vladimir Putin in the Crimean city of Simferopol April 8, 2014. (Maxim Shemetov/Reuters)

Which is precisely the trick Vladimir Putin may have just pulled off with Russia’s $2 trillion economy. And his adventurism may already have cost the Russian economy about $40 billion.

Even before the saber-rattling began last fall, Russia’s economy was not so hot. Despite its vast natural resources and the stimulus of the Sochi Olympics, Putin and his cronies have basically failed to create a modern, thriving economy. Russia may have been lumped in with Brazil, India and China in the famous “BRIC” block of emerging powers, but it has showed little of those countries’ dynamism. In 2013, Russia’s economy grew at a meager 1.3 percent rate, down sharply from 3.4 percent in 2012.

This year is likely to be no better. In its world Outlook issued this week, the International Monetary Fund downgraded its projection for Russian economic growth in 2014, blaming “the lack of more comprehensive structural reforms [that] has led to the erosion in businesses’ and consumers’ confidence.”

But the Crimea situation is making matters much worse. The World Bank now projects that given a “limited and short-lived impact of the Crimea crisis,” growth could fall to 1.1 percent in 2014. Should things get messier, however, the World Bank warns that Russia’s economy could shrink by 1.8 percent in 2014. Russian officials, the designated cheerleaders for Putin, are even more pessimistic. According to Reuters, Andrei Klepach, the deputy economy minister, now says Russia’s economy could grow at a rate as low as .5 percent in 2014—perilously close to flatlining. “The sheer market uncertainty has brought down Russian expected growth this year from 2.5 percent to .5 percent,” said Anders Aslund, senior fellow at the Peterson Institute for International Economics in Washington, D.C. “That is, the Putin aggression against Crimea and Ukraine cost two percent of Gross Domestic Product. (And with a GDP of about $2 trillion, that two percent adds up to $40 billion.)

The economic toll is a moving target because things progress quickly. In ordinary times, Russians tend to stow their money overseas—in Miami condos, Cyprus bank accounts, New York office buildings, and, above all else, in London. But when the going gets tough, the Russians really get going—to Zug, and Geneva, and Hong Kong. Since things got hairy in Crimea, companies, rich people, and ordinary Russians have hastened to turn their ruble into dollars, Euros, and Yen, and then to ship them out of the country. As Reuters reported, Russia’s central bank says that in the first quarter of 2014, $63.7 billion in cash left the country—more than the amount that left in all of 2013.

That’s good news for real estate brokers in global superstar cities. But it’s bad news for Russia’s central bankers and stock brokers. Investors liquidating Russian stocks have pushed the main stock market index down more than 20 percent since last October. When money leaves, turning rubles into dollars, Euros, and everything else, that puts pressure on the ruble. Since Putin began flexing his muscles in the Crimea last fall, the ruble has lost 10 percent of its value against the dollar. A sharply declining currency tends to push inflation higher. And sure enough, consumer prices in Russia are now rising at a 6.9 percent annual rate. What’s the Russian word for Stagflation?


Silicon Valley: You’re All Fools

When companies like Facebook drop billions on companies with no revenue but plenty of world changing hype, you know things are getting out of hand.

Be careful, investors. It’s getting bubbly out there.


The Daily Beast

In a book published several years ago, a shrewd author (OK, me) laid out the stages of investment bubbles: a few solid years of impressive fundamental growth give way to highly ambitious projections and world-changing proclamations; a host of new entrants run onto the field, oblivious to profits or many of the other basics of running a business; individuals and naïve corporations start to get in on the action with bold, aggressive moves; and in the most dangerous stage, the phenomenon crosses over into popular culture—i.e. from CNBC to NBC.

Events and portents of recent weeks show that when it comes to technology, we may be headed into bubblicious territory.

The individual investor may be largely sitting this investment boom out, but people forget that big, established corporations often spur activity by splashing out big money for dubious companies. The dotcom bubble didn’t start to burst when Uncle Joe bought 10,000 shares of No, it reached its apotheosis in January 2000 when Time Warner agreed to be acquired for AOL’s stock in a merger valuing the combined entities at $350 billion. Fourteen years later, corporations are again splashing out big bucks for hot new tech toys.

In 2014, Facebook has become an avatar, promoter, and beneficiary of the social media-related bubble. Earlier this year, it paid $19 billion for WhatsApp, a revenue-less messaging application. Then last week, it kicked $2 billion for another revenue-less company, virtual reality tech firm Oculus Rift. Rather than content himself with saying he had bought a new bauble, or that he paid out of a tiny percentage of Facebook’s valuation for something he thought was cool, Zuckerberg couched the acquisition in the characteristically bold terms of a bubble-surfer. As he noted in a Facebook post, Oculus is a new platform, a new world even. “One day, we believe this kind of immersive, augmented reality will become a part of daily life for billions of people,” he said. (And if you believe that, I’ve got a bridge in Second Life I’d like to sell you.)

Bubbles rely in large part on the greater fool theory—companies and individuals buy trendy assets on the hopes they can sell them to trendy investors for even more. Facebook, in effect, already is selling the businesses it acquires to others. The company’s stock has more than tripled since September 2012, putting Facebook’s market capitalization at $160 billion. Now, unlike Oculus, WhatsApp, and many other companies, Facebook has both revenues and earnings. But investors are paying an extremely high premium for them—$101 for every dollar of earnings.

In bubbles, we typically see the rise of businesses that exist mainly for the purpose of marketing themselves and gaining customers—not for generating cash flow, or turning a profit. There are plenty of those around, and they’re getting big valuations. Box, the cloud-based storage company that recently filed for an initial public offering, had about $124 million in revenues in 2013, double its 2012 total. Not bad. But as the Wall Street Journal reported, it spent about $1.38 on marketing alone for each dollar in revenue, leading to a $186 million operating loss. What’s more, it is operating in a highly competitive field in which anybody willing to splash out a lot of money can build a competing business.

Woman Power

Christine Lagarde’s Tightrope Act

The International Monetary Fund chief runs the famously bureaucratic organization in a collegial fashion even as she challenges orthodoxy. On the eve of her appearance at the Women in the World summit, Daniel Gross explains the critical role she plays in the global economy.

The 21st century dispute between Europe and Russia over the Crimea won’t include another Charge of the Light Brigade. But the financial cavalry did come riding to the rescue, in the form of the International Monetary Fund.

In late March, the IMF agreed to offer between $14 billion and $18 billion of funding and support to Ukraine’s government, as it attempts to wean itself from the cheap financing and energy that Russia had used to keep the former Ukrainian government firmly in its thrall.

The IMF, led since 2011 by Christine Lagarde, a silver-haired French corporate lawyer who will appear this week at the Women in the World Summit, was founded, along with the World Bank, at the end of World War II. Together, the two institutions represented an attempt by the victorious allies to forge a new financial world order. Dominated by the U.S. and Europe, the IMF used its cash and financial expertise to act as a paternalistic force—helping developing countries construct budgets, organize their finances, obtain funds for needed investment, and riding to the rescue in the case of crises. In return for loans, countries must submit to the IMF’s “surveillance” (oversight) and follow its technical advice. The IMF often demanded adherence to what became known as the Washington Consensus—free-trade, fiscal austerity, and reform.

But in the past decade, the tumult of globalization has upended the IMF’s role. Rising prosperity and growth in emerging markets rendered much of its funding unnecessary. From China to India, from sub-Saharan Africa to Brazil, more and more countries were able to finance themselves and one another. With money flooding into every nook and cranny of the global economy, many of the IMF’s traditional clients simply didn’t need it anymore. By 2007, the IMF’s book of loans had dwindled to a historic low.

After the 2008 financial crisis, however, the IMF suddenly found a huge demand for its resources in its own backyard: Europe.  In 2010, the IMF emerged as a key member of the so-called “Troika”—along with the European Central Bank and European Commission—in putting together a bailout package for Greece, providing about 30 billion Euros out of a 110 billion Euro package. In the ensuing months, the IMF, which had dunned its 188 members to boost its resources in 2008, helped cobble together similar deals for comparatively wealthy countries: Ireland, and then Portugal and Spain. Last May, when Cyprus ran into trouble, it came up with about $1.3 billion in funds, or about ten percent of the total.

Since 2011, Lagarde, who ran the international law firm Baker & McKenzie before serving as France’s first female finance minister and speaks accent-less English, has been the public face of the new IMF. As such, she walks a tightrope. European governments aren’t accustomed to having groups like the IMF ride herd on their finances. Poorer countries wonder why resources are being deployed to bail out some of the wealthiest nations on earth. Governance must shift to accommodate the changing realities. “Emerging market and developing countries are contributing more to global economic growth, and the IMF needs to take account of these changes,” as Lagarde wrote in The Wall Street Journal  recently. An effort kicked off in 2010 aims to boost both the financial contributions and voting power of China, Turkey, Mexico, Brazil and other emerging powers. And that’s not going over particularly well with Republicans in the House of Representatives. Even though the U.S. is the largest and most dominant shareholder at the IMF, Republicans have been slow to approve more funding.

In some ways, Lagarde has bucked tradition. “She’s a very different type of leader for the IMF,” said Ted Truman, a fellow at the Peterson Institute for International Economics. “Her predecessors were all advanced technocrats, and she has been more of an executive.” Observers say Lagarde runs the famously bureaucratic organization in a more collegial fashion.  She has been willing to challenge orthodoxy. The IMF has often been accused of being a tool of the world’s largest banks. But an IMF report (PDF) issued Monday tabulated and railed against the massive subsidies enjoyed by too-big-to-fail banks. And Lagarde has suggested that private bondholders who invested in the debt of financially troubled countries like Greece should face losses on their holdings—a view regarded as heretical in Europe’s corridors of power.

With its offer to help Ukraine, the IMF is establishing a new precedent. Ukraine isn’t a member of the Eurozone. This time, it is the only member of the Troika offering financial aid. There’s another new precedent at work here: women may be largely driving the dynamic response to Putin’s aggression. German Chancellor Angela Merkel is leading the European political response. Yulia Tomyshenko has thrown her hat for the May 25 Ukrainian presidential election.  And Lagarde has thrown the struggling country a vital lifeline.


MH370: Putting a Price on Life

With the flight now declared lost, an even more mysterious undertaking begins—in the world of insurance. Who gets paid now?

On Monday, when Malaysian Prime Minister Najib Razak said that Malaysia Airlines Flight 370 “ended in the southern Indian Ocean,” it wasn’t simply a concession to the reality of the situation. It was a signal to the carrier’s insurance companies, and to lawyers around the world.


Family members of passengers on board Malaysia Airlines Flight MH370 protest as they head to the Malaysian Embassy from Lido hotel in Beijing March 25, 2014. (Kim Kyung Hoon/Reuters)

The official conclusion that a plane isn’t likely to be located, retrieved, or salvaged triggers a “hull loss,” which meant insurers would begin making payments to compensate Malaysian Airlines for the loss of the plane. In fact, industry sources said insurers had moved to make payments in advance of the official announcement.

The official language deployed in natural and manmade disasters can often be formulaic and confusing. But it often functions as a sort of code—especially when insurance is involved. In this code, an obviously lost plane isn’t officially lost until the authorities declare it so, an obvious terrorist act like the Boston Marathon bombing may not officially register as such, and a monster of a storm like Sandy may not actually be a hurricane.

Disasters have their own languages, largely due to the influence of MBAs rather than MFAs. “Insurance policies are legal contracts, which means the language has to be very precise,” said Bob Hartwig, president and economist at the New York-based Insurance Information Institute. “And every word has a definition, even if the phrase is viewed as one way in the vernacular.”

To most people, it mattered not a whit whether the National Weather Service dubbed the powerful winds and rain that lashed the East Coast in the fall of 2012 a hurricane or a superstorm. (It turned out the storm lost just enough power before hitting land to disqualify it from hurricane status.) But the distinction turned out to be worth a couple of billion dollars—to homeowners. “Many home-insurance policies have a hurricane deductible that is higher than an ordinary deductible,” said Laurie Kamaiko, a partner at the law firm Edwards Wildman. “If it applies, it means the homeowner would be out of pocket for most costs if the home is damaged.” The application of a deductible is often tied to whether the National Weather Service identifies the event as a hurricane. Insurers paid out about $19 billion to cover property damage as a result of Sandy—about $2 billion less than they would have if the storm had been labelled a hurricane.

After the 9/11 attacks, insurance companies hastened to exclude acts of terrorism from the events they would cover. So the government in 2002 created the Terrorism Risk Insurance Program The idea: Insurers would offer coverage for damages due to terrorism, but the government would pay damages above a certain amount. TRIP only comes into play, however, if the Treasury secretary deems a particular event to be an act of terrorism, and if it causes more than $100 million in damages. It has never been invoked. “For insurance purposes, the government never certified the Boston Marathon bombing as an act of terrorism,” said Bob Hartwig of the III. Although it caused immense damage to life and limb, the bombing just didn’t cause that much property damage.

In the case of aviation, several forms of insurance are involved. Airlines typically buy “hull loss” insurance, which pays off in the event a plane is damaged beyond repair or salvage. They also have liability insurance, which helps them make payments to passengers who are harmed or killed. Most airlines, including Malaysia Airlines, have signed the  Montreal Convention, which obligates them to pay a minimum of about $150,000 to passengers’ families in the event of an accident. Lawsuits can lead to further payments. (Malaysia Airlines’ announcement last week said that it would offer initial payments of $5,000 are mere down payments.)

Dollars to Rubles

Did Russia Dump Its U.S. Bonds?

The Fed’s latest data shows that its foreign account holdings dipped $118 billion in two weeks and Russia’s central bank is the likely culprit.

The conflict between the U.S. and Russia over the Ukraine is escalating rapidly. But the warfare is mostly rhetorical and financial.

Earlier this month, after the U.S moved to impose sanctions on top Russian officials and bar Russia from the G-8, Russia’s stock market plummeted and the value of its currency, the ruble, fell against the dollar. In response, Putin adviser Serge Glazyev said Russia would strike back through financial means. “We hold a decent amount of Treasury bonds—more than $200 billion—and if the United States dares to freeze accounts of Russian businesses and citizens, we can no longer view America as a reliable partner,”  Glazyev said earlier this month, per this Barron’s report. “We will encourage everybody to dump U.S. Treasury bonds, get rid of dollars as an unreliable currency, and leave the U.S. market.”


Alexsey Druginyn/AFP/Getty

And new data released this week suggests there might be some action behind this rhetoric.

Here’s what happened: Russia’s central bank, like every other, has a lot of dollars. It’s not because we have a huge trade relationship, but rather because people around the world pay for oil—one of Russia’s main exports—in the U.S. currency. “They get paid for their oil in dollars,” said David Solin, a partner at Foreign Exchange Analytics in Essex, Connecticut. Russia takes those dollars and buys safe U.S. government bonds. Those bonds in turn are held in custody accounts at the New York Federal Reserve Bank in lower Manhattan. The Fed keeps the account secure and makes sure investors get their interest payments. (Many foreign central banks also keep their gold in the basement of the New York Fed.)

Every Wednesday afternoon, the Fed releases data showing the aggregate amount of Treasury securities that sits in those account. And typically, they rise over time. Because the U.S. runs deficits, it creates hundreds of billions of government bonds every year. And foreign central banks are reliable buyers of this debt. Over the course of the 2013, the sum rose from $2.885 trillion to about $3.02 trillion, an increase of about $130 billion.

But in the last couple of weeks, there’s been a sharp, unexpected drop in the amount of U.S. government bonds the Fed is holding for foreign accounts. From $3.02 trillion in December, the total fell to $2.973 trillion on February 26, to $2.959 trillion on March 5, and $2.855 trillion on March 12. That’s a decline of $104 billion in one week, or 3.5 percent, and a fall of $118 billion in two weeks. According to the Wall Street Journal, total foreign Treasury holdings at the Fed are at a 15-month low. (The releases can be seen here.)

That’s anomalous.


Tesla’s Headed for a Crash

After years of being underappreciated by Wall Street, financial analysis’s are predicting ludicrous growth rates for Elon Musk’s electric car company.

Tesla Motors is back in the news again.

In the past year, the company has been on a continuous roll. In August, it opened an assembly plant in the Netherlands, and it now as has a functional cross-country supercharger network in the U.S. In the fourth quarter, it sold about 6,900 cars, more than expected. It ended 2013 with 22,477 cars sold, worth $2.5 billion, and a projection that it would “deliver over 35,000 Model S vehicles in 2014, representing a 55+% increase over 2013.”


A staff member cleans the Tesla Motors Inc. logo on the company's Model S electric vehicle displayed at the 43rd Tokyo Motor Show 2013 in Tokyo, Japan, on Thursday, Nov. 21, 2013. (Tomohiro Ohsumi/Bloomberg via Getty )

As the chart below shows, the company’s stock has soared more than seven-fold, from about $35 in late February 2013 to about $250 this week, giving it a market capitalization of $31.1 billion, compared with $58 billion for General Motors and about $60 billion for Ford.

This week, investors were, um, charged up, by two simultaneous  bold strokes. On Monday, February 26 Tesla announced it would capitalize on its momentum by selling $1.6 billion in convertible notes (a sort of debt/stock hybrid). Even better, it would use the funds to construct a futuristic $5 billion battery plant. The Gigafactory would be built somewhere in the southwestern U.S., and could employ up to 6,500 people. Taking a page from Henry Ford’s book, Tesla founder Elon Musk decided he can cut costs and gain greater control through vertical integration. Tesla has said that its ability to produce cars has been constrained by a lack of batteries from suppliers. By building its own power sources – and by building them in huge volumes – Tesla can bring the price of these vital components down sharply. What’s more, as an optimistic Morgan Stanley analyst noted, the batteries produced in the factory could have applications in related fields like energy storage and utilities.

The next day, Tesla’s stock shot up another 31 points, or 14 percent.

I’m far from a Tesla hater. I’ve championed the company as an archetype of American-style innovation, self-belief, and swagger. Founder Elon Musk has been brilliant not just in devising a new product, but in negotiating complex systems to maximum advantage – taking U.S. Energy Department loans (and then loudly paying them back years ahead of schedule), reaping significant revenues by selling zero-emission production certificates to other carmakers, and funding production by taking big deposits from customers well in advance of delivery. Tesla’s success has forced other carmakers to up their electrification game in ways that will benefit consumers and the environment.

But Tesla is getting bubbly. And we could be entering dangerous territory.


We’ve Hit Peak Cable

Cable companies can’t sign up any more people. In fact, they’re losing them to the Internet. So the only way to survive is to monopolize more of the market and up-sell subscribers just as Comcast-Time Warner Cable will do.

On Wednesday, Comcast struck a $45-billion deal to acquire Time Warner Cable. If approved, the deal would represent a giant step toward greater consolidation: Comcast has 22 million subscribers and Time Warner has 11 million. To allay anti-trust concerns, Comcast said it would divest systems with about 3 million subscribers, leaving the merged company with a combined 30 million customers—well over half of the nation’s cable television subscribers.

The deal is plainly good for shareholders of Time Warner. Time Warner’s stock was trading at about $80 two years ago, so the $159-per-share offer represents a nice double in 24 months. Comcast’s shareholders pushed the company’s shares down a few percentage points, weary of the larger amount of debt the company will take on.

But is this a good deal for consumers? Well, maybe.

The companies, of course, say this is a win-win for customers of both Time Warner and Comcast. Why? Well, it’s not mentioned in the press release, but consumers generally feel that Comcast has better customer service than Time Warner Cable.

What’s more, the companies say Time Warner Cable customers will now get access to all the awesome whiz-bang stuff that Comcast already offers its customers. With a few software updates, existing Time Warner Cable set-top boxes will get new features like “cloud-based X1 Entertainment Operating System, plus 50,000 video on demand choices on television, 300,000 plus streaming choices on, Xfinity TV mobile apps that offer 35 live streaming channels plus the ability to download to watch offline later, and the newly launched X1 cloud DVR.” For their part, Comcast customers will be able to get some of the perks of Time Warner Cable membership, including features like: “StartOver, which allows customers to restart a live program in progress to the beginning, and LookBack, which allows customers to watch programs up to three days after they air live, all without a DVR.” Comcast subscribers will also be able to gain access to the 30,000 Wi-Fi hotspots Time Warner Cable has set up, mostly in Los Angeles and New York.

So far, so good.

But this deal won’t really change the fundamental customer experience of Comcast or Time Warner Cable customers. This isn’t like Burger King buying McDonald’s, or Lowe’s buying Home Depot, in an effort to take out a competitor and carve out market share in a particular area. In essence, it’s one giant company that had a geographical monopoly on cable service in some areas of the country merging with another giant company that had a geographical monopoly on cable services in other areas of the country.

Cable companies are like utilities. The firms were granted geographic monopolies, or licenses, in exchange for making the huge, multi-year investments to build out infrastructure and for guaranteeing to offer service in every nook and cranny of a region, no matter how economically inefficient it might be. That’s how the model worked for other utilities—water, electricity, and telephone service.

President Obama’s speech won’t change the country’s sour mood about jobs and the deficit, but America is coming back faster and stronger than anyone expected.

President Obama took the podium for last night’s State of the Union Address at a time when mood of the country is sour—toward the president and toward the economy.

An objective look at the data and the record of the last several years suggests that this shouldn’t be the case.

Historically speaking, presidents get credit for the positive economic news that happens on their watch and get blame for the bad things that happen—even when they are not entirely at fault. The first George Bush had the misfortune to have a shallow recession and slow recovery come in the second half of his term. Bill Clinton had the phenomenal luck to preside over a period of economic nirvana—the end of the Cold War, the entry of China into the global trading system, the internet and telecom boom—and leave just in time.

Obama’s timing was reasonably good. The recession had started in early 2008 and the financial crisis came just a few weeks before the election. But the worst of the economic downdraft came in his first six months of office.

Things started to turn around rather quickly. I’ve been arguing for years that America is coming back better, stronger, and faster than many people anticipated, and than many of its peers. And it’s mostly happening. The stock market has gone nuts, more than doubling since its March 2009 nadir.  Gross Domestic Product surpassed its late 2007 peak in 2011 and hasn’t looked back.  (Britain’s economy has yet to return to its pre-recession size.) The U.S. economy is now closing out its 55th straight month of growth. Monthly exports—an indication of competitiveness and the utility of what we do—are at a record level and are up nearly 60 percent from the April 2009 bottom.

Virtually all the bailout money to financial institutions and car companies was paid back. GM and Chrysler are thriving, and the U.S. financial system is on solid footing, as evidenced by the pervasive decline in financial failure. The economy has added jobs for 39 straight months—beating the streak of 37 months in which the economy added jobs in the George W. Bush years—with the private sector adding a cumulative 8.2 million jobs since February 2010. The deficit, which peaked at an unimaginable $1.4 trillion in fiscal 2010, is shriveling by the day. It came in at $680 billion in fiscal year 2013, and is down about 40 percent through the first three months of fiscal year 2014. This is truly the Golden Age of Deficit Reduction.

Oh, and two more important, previously unimaginable developments have materialized in the past couple of years—thanks in no small part to Obama administration policies. Health care cost inflation is falling for the first time in ages. And housing, while still a bit wobbly, is definitively back.

All the elements of a feel-good story are here: aggressive policies that worked, the natural regenerative forces of the U.S. economy coming to the fore, competing successfully in international markets, and a continuing revolution in the energy sector. Many things that were completely FUBAR in 2008 and 2009 are fixed.

Hot Apps

Confide: Snapchat for Grownups

If you’re a professional who needs to communicate without a paper trail, Confide is for you—at least until it gets hacked or bought by a big, privacy-invading tech firm.

Confide, the disappearing-messaging app for grownups that was tabbed as one of the The Daily Beast’s hot apps for the week, has come too late for many professionals. But if you want to rag on co-workers, engage in political machinations, and swap tips about hot stocks without having to worry so much about the consequences, it’s right on time.

The media is full of stories of careers and lives laid waste by indiscreet texts, emails, and other digital communications. The New Jersey George Washington Bridge scandal reached critical mass only when infelicitous emails and texts between Governor Chris Christie’s chief of staff, Bridget Kelly, to political operative David Wildstein, and others were subpoenaed by the state legislature and leaked to the press. “Time for some traffic problems in Fort Lee,” Kelly infamously wrote to Wildstein. Her career—and possibly, Chris Christie’s presidential ambitions—has been derailed.

Meanwhile, in lower Manhattan, former SAC Capital manager Matthew Martoma is on trial for insider trading in drug-company stocks. Preet Bharara, the U.S. Attorney for the Southern District of New York has run up an impressive run of insider-trading convictions—77, with no losses—largely because prosecutors have been able to mine troves of emails, texts, instant messaging threads and other forms of digital communication. My favorite was the instant messaging thread between two easily busted jokers, which included gems like: “Jesus don’t tell anyone else,” and “I don’t want to go to jail.”

With electronic communication, in all its forms, having replaced face-to-face communications, and with digital technology having replaced analogue technology, our lives are documented and stored. Every off-the-cuff utterance, each whit of conspiracy, every misspoken phrase is laid down in bits and bytes, captured, stored, and easily accessed by employers, the government, authorities, and, ultimately, the public. On trading floors, every conversation is taped, and employees are often prohibited from using personal phones or emails—the better to ensure compliance.

That’s good news for law enforcement, but bad news for people trying to do things sub rosa, or even just confidentially.

This concern has led, in some quarters, to a revival of an ancient communications technology: face-to-face conversation. For most middle-aged big-shots, the acronym LDL is a measure of cholesterol. For people in sensitive workplaces, it means “let’s discuss live,” as in “Let’s not talk about this thing in a way that could create a paper trail that could be awkward for us down the road.” In 2007, when Goldman Sachs was devising strategies to get rid of junky mortgages, one trader cut the electronic conversation short by suggesting “LDL.”

But DL’ing is a really unwieldy way of doing business in this 24/7, hyperconnected, global economy. Imagine every communication with a co-worker had to take place face-to-face. It’s enormously inefficient.

For this reason, Snapchat caught on like wildfire. The idea, and promise, of the popular app is that the information you send—a photo, and anything you want to write on it—disappears after 10 seconds or so. Teens who had been embarassed by Facebook postings and texts, easily captured and shared an infinitum, quickly glommed onto it. Snapchat offers all the exhibitionism and daring without the threat of public disclosure.


December's WTF Jobs Report

With only 74K new jobs and the unemployment rate at its lowest since 2008, the December monthly jobs report dumped a steaming pile of caution on the red carpet of economic optimism.

The last couple months have seen a surge of economic optimism. The Federal Reserve decided the economy is strong enough to start tapering its bond purchases. The economy grew at a 4.1 percent annual rate in the third quarter of 2013 and the fourth quarter of 2013 is looking pretty good. The jobs market has been picking up steam, adding an average of more than 200,000 positions over the last four months. The deficit is shrinking rapidly.

But Friday morning, the monthly jobs report dumped a steaming pile of caution on the carpet. And while the headline jobless rate fell to 6.7 percent from 7 percent in November, its lowest level since October 2008, there was virtually no good news for the jobs market in this report.

In general, analysts expected that the economy would add somewhere between 200,000 and 250,000 payroll jobs in the month. Instead, BLS reported that the gain was a mere 74,000— the lowest single month total and the worst single-month performance since January 2011. Given the vast base on which we’re working—137 million— the difference between a gain of 74,000 and the loss of 74,000 is an infinitesimal statistical difference.

It wasn’t that many sectors cut their payrolls in December. It’s just that they didn’t add too many, despite steady growth and despite a large number of job openings. And those that did add jobs were primarily in low-wage sectors. Retail added 55,000 positions, and professional and business services added 19,000 jobs. Construction, which has been booming, cut 16,000 jobs in December, and health care, which, in recent years, has reliably added a large number of jobs each year, cut 6,000 positions. Most bizarrely, the motion picture and sound recording industry slashed 14,000 jobs—about four percent of its total employment in the month. Oh, and the government—public sector—continued to cut jobs, even as the budget picture at the state and local level brightens. Between them, state, local and federal governments reduced employment by 13,000 in December. Together, they employ 1.14 million fewer people than they did in May 2010.

So how is it that the unemployment rate fell? The payroll jobs number is compiled from a survey of companies and institutions. They tell BLS how many people they employ and the agency extrapolates a total for the whole economy. The unemployment rate is compiled from the household survey, in which BLS calls up a bunch of people and asks them about their employment status. The unemployment rate is compiled by calculating the percentage of people who say they are looking for a job but don’t have one as a percentage of the total number of people who say they are in the workforce.

So, what happened in December? The work force fell by 347,000 people, and is now 548,000 smaller than it was in December 2012. Now, it could be that a certain percentage of aging baby boomers are simply dropping out and retiring. But, in theory, a growing economy should pull people into the labor force, not push them out. Meanwhile, in December, the number of people who were working rose 143,000 from November—after all, jobs are being created. This combination of modest growth in the ranks of the employed and a sharp decline in the labor force made the unemployment rate fall sharply, from 7 percent to 6.7 percent.

What does it mean? The news wasn’t entirely awful. The figure will be revised in each of the next two months, and the tendency over the past year has been for BLS to revise the number upwards. For example, this month, BLS revised the October jobs gain upwards, from 203,000 to 241,000. And the long-term trend remains intact. “Though December’s job growth was less than expected, we continue to focus on the longer-term trend in the economy— 2.2 million private sector jobs added and a 1.2 percentage point decline in the unemployment rate over the course of 2013,” said Jason Furman, Chairman of the Council of Economic Advisers.

Furman’s right. But here’s the problem. If this weakness persists, then it casts doubt on the conventional wisdom surrounding a host of issues. The stock market has been buoyant, and interest rates have been rising in part because of expectations of higher economic growth. There was a widespread sense that, having weathered the shutdown and tax increases of 2013, American businesses are shrugging off some of their fear and opening their pocketbooks to hire some of the long-term unemployed. A jobs report like this makes people think otherwise.

Looking Up

Pay Raises Across America

No thanks to Congress, the minimum wage in several states and cities will rise in 2014. That will help the working poor and lift wages for even more Americans.

Here’s my bold prediction for 2014: lots of Americans will finally get wage increases.


Noah Berger/Reuters

The obsession of large companies with low wages—even amid a record stock market, record profits, an record amounts of cash on their balance sheets—has been one of the more unsavory and frustrating aspects of the current economic expansion. Lots of businesses can easily afford to pay more. But they don’t—because they don’t have to, because the labor market is weak, because they’re obsessed with boosting profits, because labor unions are almost non-existent, and because societal and cultural norms have changed significantly. For many companies, including our biggest employers (Walmart, McDonald’s), paying decent wages simply isn’t part of their mission, or goal, or self-image.

Ultimately, as I’ve argued, the refusal of profitable companies to pay higher wages—and to refuse to even aspire to do so, or to argue that crappy wages are in fact a positive good—is self-defeating. In the U.S., consumers account for about 70 percent of economic activity. For the overwhelming majority of Americans, wages are the fuel for consumption. So if employers insist on keeping a lid on pay, they’ll find that demand for their products and services is likely to be stagnant. And, indeed, this is what Walmart, McDonald’s and plenty of other firms have discovered in 2013.

The obsession with low wages is also self-defeating, because it exposes companies to the prospect of higher regulation and scrutiny. If companies won’t raise wages, and then build a business model that presumes employees will get food stamps and Medicaid to get by, they’re essentially asking for the government to act. While President Obama has been pushing for a higher minimum wage, the Republican majority in the House has essentially ensured that there will be no action on a higher national minimum wage.

But across the country, states, cities, and towns have been acting. And starting in 2014, the minimum wage will rise in a big chunk of America—in 13 states and four cities, to be exact. Let’s review. In New Jersey (population 8.9 million), a constitutional amendment approved in November bumps the stage minimum wage up to $8.25 an hour and stipulates that it should rise every wear with inflation. In New York State (population 19.95 million), the minimum wage is rising to $8.00. In Connecticut (population 3.6 million), the minimum wage is set to rise from $8.25 to $8.70 per hour. In Rhode Island (population 1 million), the minimum wage is going up to $8.00. In July, California (population 38 million) will increase the minimum wage to $9.00

In nine other states, where the minimum wage is indexed to inflation or the cost of living, the floor under salaries will also be rising by small amounts. These include places where lots of Americans live, like Florida, Ohio, Colorado, Washington, and Arizona.

Now, only a small minority of the American workforce works for the minimum wage. But these legislative acts are nonetheless important. They will force companies to pay some existing employees more—often significantly more. They’ll push companies to raise the wages of those earning just above the current minimum wage. Most importantly, they set a higher standard for businesses. In effect, these states are telling companies, large and small, that if they want to operate in certain very large jurisdictions, they will have to design their operations in such a way that allows for slightly more decent compensation.


The Economy’s Secret Success

The financial failures of the Great Recession—bank busts, foreclosures, and bankruptcies—shrank dramatically this year. And the success will feed on itself.

In 2013, the U.S. economy managed not just to survive a series of shocks—the fiscal cliff, the sequester, tax increases, the government shutdown, the advent of the Affordable Care Act—but to power through them. As we speak, the U.S. is closing out its 54th month of growth, and the headline growth numbers are as good as they’ve been in years. The stock market is at a record high.

Wall Street

Richard Drew/AP

This confluence of events remains something of a mystery. The U.S. is a consumer-driven economy, but consumer confidence remains at recessionary levels and wages have hardly budged. Companies are hoarding cash. The Federal Reserve has continued to support the economy with unprecedented levels of bond-buying but with diminishing returns. And government continues to weigh on the economy.

There is one overlooked factor that can help explain the comparative buoyancy of the U.S. economy: the decline of financial failure.

Financial failure comes in many forms: the shuttering of banks, defaults on mortgages, credit-card charge-offs, corporate and personal bankruptcies, and mass lay-offs. Each is damaging as an event on its own. But, like rocks tossed into lakes, their impacts cause larger ripples. Because the American financial system piles debt upon debt, one small financial failure can lead to a larger number of financial failures. Because humans are, well, human, they tend to react to failures around them by becoming more financially conservative—even if their own livelihood isn’t in danger. Put another way, failure is pro—cylical—a company going bankrupt fires a worker, who defaults on a mortgage, which causes a sharp decline in value on a mortgage-backed security, which can help push a bank toward insolvency. And that’s part of the reason the recession of 2008-2009 was so deep and harsh. Failure begot failure.

But the forces work in the other direction. For the reasons cited above, success (or a mere decline in failure) can lead to further success (or further declines in financial failure.) And to a large degree, this was the story of 2013.

Fewer companies failed this year than in previous years. Corporate bankruptcies in the third quarter of 2013 (PDF), at 8,119, were down 12.2 percent from the third quarter of 2012. In fiscal year 2013, which ended in September, corporate filings were down 17 percent from the year before—and down 42 percent from fiscal 2009. Yes, companies continue to restructure, revamp, and rightsize, often in very public ways. Through the first 11 months, large companies publicly announced 478,428 job cuts, according to Challenger, Gray & Christmas. But that’s down 2.5 percent from the first 11 months of 2012. Overall, there was generally a lot less firing in 2013 than in 2012. As a result, the weekly pace of first-time unemployment claims declined over the course of the year. In the second half of 2013, on a seasonally adjusted basis, about 330,000 Americans experienced the trauma and psychological blow of filing for unemployment benefits each week. In the second half of 2012, about 380,000 Americans did so.

Declining separations combined with modest growth in hiring meant that the U.S.—especially the private sector—added about 2 million jobs in the first 11 months of 2013. And the fact that more people were successful at finding jobs, or holding on to jobs they already had, meant that significantly fewer consumers experienced financial failure.  In fiscal 2013, personal bankruptcy filings—at 1.072 million—were down 12 percent from fiscal 2012, and off 30 percent from 2010 Americans did a much better job keeping up with their mortgages, too. In the third quarter of 2013, only 6.41 percent of all residential mortgage loans were delinquent—down from 6.99 percent in the second quarter of 2013 and down from 7.40 percent in the third quarter of 2012. Americans haven’t had this much success staying current on their mortgages since the spring of 2008. Consumers are doing even better when it comes to staying on top of their credit card debt. According to TransUnion, this summer, credit card delinquency rates fell to a 20-year low.


Send in the Drones

How did this holiday go so wrong? From Black Friday overload to ecommerce’s last-minute delivery disaster, this sure-thing shopping season was a major turnoff for customers.

This was a strange holiday shopping season. There’s  disappointment among the bricks-and-mortar retailers who saw traffic fall, and even more for those last-minute online shoppers who had to explain some empty spots under the Christmas tree.


Charlie Riedel/AP

In theory, this should have been one of the best seasons in recent memory. The economy is growing rapidly. Despite tax increases and the government shutdown and sequester, consumers were buoyed by rising housing prices and an improving jobs market. A year ago, Americans were dealing with the prospect of the fiscal cliff and great uncertainty. This December, by contrast, the data flow for the final weeks of the year has been relentlessly upbeat.

But the early returns have been less than encouraging. A survey commissioned by the National Retail Federation found that the amount spent on Black Friday weekend fell 2.3 percent from 2012. According to MasterCard, which tallies actual activity at cash registers, sales for the weeks between Nov. 1 and Dec. 24 were up 2.3 percent from the year before. That’s decent, but it’s still below the increases that retail sales have been enjoying.

One likely reason for the gloomy numbers: Much of the romance, fun, and joy has been wrung out of the Christmas shopping experience. Desperate to get a head-start on the season, stores have been pushing Black Friday sales into Thanksgiving Day. The aggressive come-ons lure crowds that can turn violent and frenzied. The mood is often more dark than light, which turns some people off. Difficult weather also turns people away.

At the same time, more goods than ever are available through ecommerce, and more people who came of age on the Internet are starting to have more consuming power. With online sales growing at a 15 percent annual clip—some four times the rate of total retail sales—ecommerce is gaining market share against bricks-and-mortar sales. The convenience is pretty irresistible. For many, it’s become a point of pride to complete holiday shopping without ever having to step foot in a mall or deal with the hassle of finding a parking space in a slushy lot.

Indeed, in the last few weeks, Americans seemed to be making a point not to go to stores. According to ShopperTrak, U.S. store visits in the week ending Dec. 22 were down a stunning 21 percent from a year ago. If that number holds true, it’s possible that 2013 might mark something of a tipping point. Time was, stores that struggled in the first three quarters could rely on floods of customers in the last six weeks to help salvage the year.  At some point every December, procrastinators would usually realize they needed to go get a bunch of stuff for the people on their lists—and nothing offers immediate gratification like a mall. This year, it seems that even the last-minute and impulse buyers were turning to and the Internet to get their late-season shopping done.

Yet just as some bricks-and-mortar retailers may have alienated customers by pushing Black Friday ever earlier, online retailers may angered just as many by edging the shopping season ever closer to Christmas.

It’s All Good

Declinists, Admit Defeat!

Believe it or not, the economy is showing signs of serious growth. Will the catastrophist diehards learn to stop worrying and accept the recovery?

It’s been a bad week or so for the economic catastrophists.

Never mind that the S&P 500 is near a record high, that the economy has been expanding for 53 months, and that payrolls have risen by nearly 7.5 million since February 2010.

Many still continue to believe that disaster is right around the corner. Why? The narrative goes something like this. There’s Obamacare, which is supposed to inhibit hiring, consumption, and the general enjoyment of life. Then there’s the Federal Reserve, supposedly required by the economy’s perennial weakness to buy $85 billion of bonds a month forever, never exiting from its quantitative easing policy—which would set up a disastrous inflation. And should the Fed exit, interest rates will soar, and the stock and housing markets will crash. Consumers, hamstrung by low confidence and a weak recovery, are reluctant to spend and borrow. That inhibits consumption, which accounts for 70 percent of economic activity. Growth, which has been stuck at about 2 percent, will never accelerate. Meanwhile, Washington is incapable of doing anything except inflicting damage on the economy.

But the surprise data flow and events of the past week have gone against this narrative.

To wit. On December 12, the Census Bureau reported that retail sales rose a healthy .7 percent in November from October, and were up 4.7 percent from November 2012. So far this year, retail sales are up 4.3 percent from 2012. More people are working at slightly higher wages, and so they’ve got more fuel for consumption. Meanwhile, something else seems to have changed. Since the financial crisis, American consumers have been hacking down at their mountain of debt—through foreclosure and default, yes, but also through paying down credit cards, home equity lines, and credit cards, and by stopping themselves from taking on new debt. Generally, the amount of revolving debt (i.e. credit cards) is back to the level it was at in 2006. But this is changing. Earlier this month, the Fed reported that in October, revolving credit rose at a 7.5 percent annual rate. Americans are gingerly releveraging. (Matthew Boesler at Business Insider dubbed a chart showing this increase “the most important chart of 2013.”) That’s good news for consumption, so long as people can maintain their debts. And guess what? Debt service as a percentage of disposable income is at an extremely low level.

As for Washington, last week Congress struck a deal essentially to fund the government for two years—at higher levels of spending. The Ryan-Murray compromise, which undoes much of the sequester immediately in exchange for higher revenues over the next ten years, has a two-fold benefit. First, it means that America won’t suffer a debilitating, confidence-destroying shutdown in the near future. Second, by undoing cuts and actually boosting spending—even by only a few percentage points—government spending and investment will again become a consistent contributor to overall growth. Yes, the debt ceiling looms again early next year. But I think we all know how that is going to play out (Republicans stomping their feet, yelling, threatening, and ultimately caving.)

On Wednesday, Ben Bernanke, in his final press conference, dropped a surprise. In January, the Fed will start to scale back—taper—its bond purchases, from $85 billion per month to $75 billion. That’s a small amount, but it’s a significant first step, that, if repeated, would bring that program to a close next year. In response to the news that the Fed would be removing a crucial source of support, the markets...went nuts. Stocks soared as investors took heart from the underlying strength of the economy. Long-term bond prices floated upward, but still remain below three percent. The price of gold, a barometer of economic fear, plummeted.

Why did the Fed act? Essentially, Bernanke concluded that the underlying forces propelling the economy forward are stronger than people think. And Friday morning, we got confirmation of this hunch. The Commerce Department, in reporting its second revision of third quarter growth, revised the growth rate up from 3.6 percent to 4.1 percent. (For comparison’s sake, the first estimate of third quarter growth, released just six weeks ago, pegged the rate at a non-impressive 2.8 percent. Overall, the report presented a picture of an economy in which both consumer and business activity is rising smartly. Even government chipped in a little, adding eight basis points to the growth rate. This is the first time the quarterly growth rate has risen above four percent since the fourth quarter of 2011. The pace of fourth quarter growth is nowhere near as torrid – about 2.3 percent according to Macroeconomic Advisers.


IAC Creates Match Group

Greg Blatt, IAC’s CEO since 2010, will lead the new Match Group housing online dating ventures and more.

IAC is reorganizing and rationalizing. Greg Blatt, who has been chief executive officer of the company since 2010, will become chairman of the newly created Match Group, which will house the firm’s online dating businesses,, fitness site DailyBurn, and the company’s interest in Skyllzone. (IAC is the parent company of The Daily Beast.) CEO Sam Yagan will serve as CEO of the newly constituted Match group. Search & Applications is headed by CEO Joey Levin.

Simon Dawson/Bloomberg, via Getty

The move is part of a rationalization of the many operating units of IAC into three groups: the newly formed Match Group; the search and applications business, which accounts for about 60 percent of IAC’s revenues; and media businesses, which include Vimeo, The Atavist, and The Daily Beast.

“For the last three years Greg has served as CEO of IAC and during this time our stock price has doubled and profits have increased more than 180%,” IAC Chairman Barry Diller said in a statement. “As Chairman of the Match Group, he’ll be integral in exploiting new opportunities and continuing the growth trajectory that he himself has helped pilot.”

“Businesses like, DailyBurn and Skyllzone all require a common set of skills that Match has deployed so effectively,” Blatt, a 10-year veteran of the company, told employees. “Basically, I’m coming into a situation that already has great leaders in place and strong business momentum.”

Recognizing that many of its businesses don’t need central oversight, IAC does not plan to name a new CEO. “Greg and I agree that a less centralized operating structure, pushing talent and decision-making closer to the businesses, is now the best way to achieve our growth objectives,” Diller said.

About the Author

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Daniel Gross

Daniel Gross is a columnist and global business editor at The Daily Beast.

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