Sunday, February 23, 2014

"Downton Abbey" Economy in the USA

  • Comments from the Economic Analysis and Research Network’s report “The Increasingly Unequal States of America” (February 19, 2014) included “between 1979 and 2007, the top 1% took home well over half (53.9%) of the total increase in U.S. income.”  Also, as “the average income of the bottom 99% of U.S. taxpayers grew by 18.9%...the average income of the top 1% grew … by 200.5%.” During the recovery from the great recession, “between 2009 and 2012, the top 1% captured 95% of total income growth… CEOs and financial-sector executives at the commanding heights of the private economy have raked in a rising share of the nation’s expanding economic pie.” 
  • By comparison, “between 1928 and 1979, the share of income held by the top 1% declined in every state except Alaska. This earlier era was characterized by a rising minimum wagelow levels of unemployment after the 1930s, widespread collective bargaining in private industries (manufacturing, transportation [trucking, airlines, and railroads], telecommunications, and construction), and a cultural and political environment in which it was unthinkable for executives to receive outsized bonuses while laying off workers.” 
  • Separately, comments by former U.S. Treasury Secretary Larry Summers in a Washington Post (February 16, 2014) included “The United States may be on course to becoming a “Downton Abbey” economy. There are valid causes for concern about inequality: sharp increases in the share of income going to the top 1% of earners, a rising share of income going to profits, stagnant real wages and a rising gap between productivity growth and growth in median family incomes. A generation ago, it could have been asserted that the economy’s overall growth rate was the dominant determinant of growth in middle-class incomes and progress in reducing poverty. This is no longer a plausible claim…issues associated with an increasingly unequal distribution of economic rewards are likely to be with us long after cyclical conditions have normalized and budget deficits have been addressed.”

These comments reinforce widely held views about today’s economic reality. Questions to consider include: 
  • what actions should be taken to address these challenges, 
  • is the current stage of capitalism harming democracy, and 
  • are the dynamics of global commerce limiting income growth for most citizens? 

Sunday, February 16, 2014

As the 2014 Winter Olympics continue ...

  • The Federal Reserve reported that U.S. industrial production dropped 0.3 % in January, with a 0.8% drop in manufacturing output as “severe weather curtailed production in some regions of the country”. 
  • RealtyTrac, a firm that compiles housing data, reported that  foreclosure filings unexpectedly increased 8% in January from December and Daren Blomquist, vice president at RealtyTrac said “the monthly increase in January foreclosure activity was somewhat expected after a holiday lull, but the sharp annual increases in some states shows that many states are not completely out of the woods when it comes to cleaning up the wreckage of the housing bust.”
  • The Thomson Reuters/University of Michigan preliminary index of U.S. consumer confidence remained strong at 81.2.
  • Federal Reserve Chief Janet Yellen’s comments to the U.S Congress included: On employment – while unemployment rate has fallen “the recovery in the labor market is far from complete….Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed, and the number of people who are working part time but would prefer a full-time job remains very high.” On market volatility – “We have been watching closely the recent volatility in global financial markets. Our sense is that at this stage these developments do not pose a substantial risk to the U.S. economic outlook.”
  • In the Eurozone, the economy grew 0.3% during the fourth quarter of 2013, up from 0.1% during the third quarter.

  • Regarding severe weather - January is often a slow month for businesses, as consumers focus on paying off holiday credit card debt. As residents in snow effected regions chant “die, winter, die”, snow removal businesses are experiencing strong demand for their services.
  • Regarding foreclosures – hopefully the surprising increase is not the start of a trend.  Regarding Yellens’ testimony - as she takes the reigns of the Federal Reserve, her approach and comments seem to be an extension of the Bernanke era.
  • Regarding the Eurozone – this data suggests that the region many be moving beyond its recession stage.
  • Bottom line – recent economic data is mixed but not ugly.  However, the decline in U.S. industrial production combined with an increase in foreclosures may suggest that winter storms is not the only thing affecting the U.S. economy.

Sunday, February 9, 2014

Another U.S. Labor Estimate Miss, and Two Digital Currency Items

A month ago, investors were shocked when the U.S. Bureau of Labor Statistics (BLS) reported that 74,000 jobs were added during December, significantly below economists' estimates of about 197,000. This past Friday, BLS reported that 113,000 jobs were added in January, below expectation for 180,000.  Also, the unemployment rate dropped to 6.6%, down from 6.7% in December and the labor-force participation rate improved slightly, to 63.0%.  Sectors with the best improvement weremanufacturing and construction, up 21,000 and 48,000 jobs respectively, while sectors declining the most were the government - down 29,000 and retail - down 13,000. 

As the Winter Olympics started in Sochi, Russia; Russia’s government clarified its view on Bitcoin and other alternative currencies saying that “Russia’s official currency is the ruble. The introduction of other types of currencies and the issue of money surrogates are banned”.  Separately, following speculation that the U.S. Postal Service might implement digital currency transaction services to help boost revenue, Joseph Corbett, its financial officer said “At the moment, we have no current plans to be involved in that market,” but that the agency would “continue to look at it.” Postmaster General Patrick Donahoe said, “As we’ve 


  • Regarding U.S. Labor reports - With economists missing estimates two months in row, in both cases citing winter weather, perhaps the phrase the fog of war (the sense of uncertainty a solder has about his capabilities during battle) should be adapted to economists, where the “fog of investing” applies to the uncertainty of spreadsheet analytics performed independent of changing economic and environmental factors.  With leadership and policy changes taking place at the Federal Reserve – the fog of investing may become even foggier. 
  • Regarding Bitcoin in Russia - the government’s actions are not surprising – now the question is will suppression reduce or acceleration Bitcoin’s use in the region.
  • Regarding the U.S. Postal Service – it makes sense to allow the digital currency market to mature before engaging in it more actively.  it makes sense to allow the digital currency market to mature before engaging in it more actively.  At the same time, their interest highlight the potential for digital currency in funds transfer activities.

Friday, February 7, 2014

Bitcoin, Digital Currency and the Internet of Money: Innovations in Global Commerce

Click here to access the full report, which includes a history of currency, “Bitcoin 101: A Few Basics”, initiatives by global regulators, a timeline of notable events, firms developing digital currency products and services, and innovations supporting the development of the “Internet of Money”. 

“Virtual currency could ultimately have a number of benefits for our financial system. It could force the traditional payments community to “up its game” in terms of the speed, affordability, and reliability of financial transactions. I think many consumers – myself included – are perplexed that, in a world where information travels around the globe in a matter of milliseconds, it can often take several days to transfer money to a friend’s bank account.” Benjamin Lawsky, New York State Superintendent of Financial Services Virtual Currency Hearings, January 28-29, 2014

Report Highlights
  • The history of money is driven by seeking better ways for exchanging products and services. This process often includes applying recent advances in technology. Digital currency represents such a technology advance, and Bitcoin as the market leader, is increasing our understanding of its potential to drive innovation in global commerce.
  • Digital currencies should introduce healthy competition into the monetary system that 1) brings lower cost and operational improvements to typical credit and banking transactions, as well as interbank and cross-border fund transfers, 2) expand the opportunities for micro-finance, 3) serves as an alternative to unstable currencies, and 4) create new classes of applications and programmable services. 
  • Bitcoin’s position as the market leader has drawn significant attention as both a form of currency to store value and as a global payment system that provides a cost effective way to transfer value. Its success will be more dependent on the trust and support of its global community of users rather than the efforts of central bankers.
  • The Bitcoin architecture may be as transformational to global commerce as the World Wide Web’s Hypertext Transfer Protocol (HTTP) and HyperText Markup Language (HTML), which changed the process of digital content creation and distribution. This platform may evolve to support programmable services and manage other digital assets while enhancing our view of what digital currency is and how it is used.
  • Digital currencies should benefit from the growth of on-line global commerce. Long-term success will require 1) executing transactions in a secure and timely fashion, 2) providing services that are easy to use and access, 3) adapting to a growing community of users, 4) addressing the challenges of cyber-crime and 5) confronting competition from incumbent players as well as payment service introductions by firms such as Alibaba, Amazon, Apple, Google, PayPal, Starbucks, Square and Tencent. 
  • Many rules still have to be written, but Bitcoin, digital currency and the “Internet of Money” will likely become an increasing part of how we engage in global commerce.

Sunday, February 2, 2014

A Bumpy Start for 2014

As January ends, some investors are wondering what the 3.5% drop in the S&P 500 means and how markets will perform for the remainder of 2014. Other investors are more concerned about the equity declines in other regions such as Colombia -12.2%, Russia -9.8%, Turkey -9.0%, Japan -8.5%. Brazil -7.5%, Chile -7.4% and China – 5.5% (regions with positive year-to-date performance include Greece +8.6%, Egypt +7.6%, and Indonesia +4.3%.) Some weakness relates to rising inflation and concerns about financial stability.

In addition, China’s Purchasing Managers Index (PMI) declined to 50.5 in January, down from 51.0 in December, suggesting that its economy may be stagnating. Note: A PMI drop below 50 suggests economic contraction.

In the U.S., the Department of Commerce reported that the economy grew at an annual rate of 3.2% during the fourth quarter of 2013, driven by consumer spending, and the Federal Reserve reported that it would continue to reduce its stimulus efforts.

  • Regarding global equity markets – There are increased concerns that economic stress in countries such as Argentina, South Africa, Turkey and the Ukraine), along with China’s PMI results will negatively impact on other regions as well.
  • Regarding the U.S. economy – The positive economic results are helpful, and while the Federal Reserve’s reduction in stimulus may suggest increased confidence in the U.S. economy, it is likely that its stimulus efforts have reached the point of diminishing returns. 
  • Note: When the U.S. Department of Labor announced that December’s employment trends were significantly lower than expected, economists suggested that unusual winter weather was a contributing factor. This Friday, January’s results will be released; there will be significant attention on determining if December was an anomaly or the start of a trend.