Sunday, April 13, 2014

Today's Links

1--Who Spends Extra Cash?, House of Debt

(Distribution matters)

Imagine we dropped cash on every household in the country. Who would spend it? Who would save it? The answer to this question matters a great deal given the rise in inequality before the Great Recession, and the fact that the economy is likely to be demand-constrained during severe downturns, especially if the economy hits the zero-lower bound on nominal interest rates. If all households reacted to a cash windfall the same, then the distribution of income or wealth wouldn’t matter much for cyclical policy.
We argued in a previous post that  lower income/wealth households have a much higher propensity to spend out of cash windfalls....

For the poorest households, the marginal propensity to consume was close to 70%. For the richest households, the MPC was only 35%. So even more evidence that lower income/wealth households spend a much larger fraction of cash windfalls.

4---Just don't call it a bubble, Testosterone Pit

But it’s not a bubble.”
That’s what Savita Subramanian, Head of US Equity and Quantitative Strategy BofA Merrill Lynch Global Research, wrote on March 21. Then she went on to describe what exactly it was, namely a bubble:
We have witnessed a recent surge in media attention on the topic of equity bubbles, citing various signs of evidence: Biotech stocks have risen 300% over the past five years, and Internet stocks have returned more than 400% over the same period. And most IPOs this year have been for unprofitable companies trading at high valuations.... The recent sell-off in high-fliers has investors worried that the deflation of this “bubble” could take down the overall market, similar to what occurred in 2000.
But no. “We think not,” she wrote. BofA Merrill Lynch makes lots of moolah pushing overpriced stocks to exuberant retail investors who’ve been driven by the Fed’s interest rate repression into the razor-like claws of risk. And besides, “the frothy spots appear well contained,” she added in central-banker lingo. And then the old saw: “Equity bubbles rarely happen when everybody is talking about bubbles.”

In late 1999 and early 2000, just before the bubble imploded spectacularly, “bubble” was the only thing everyone was talking about. Everybody tried to ride it up all the way and then get out. With predictable results. Repeat in 2007 and 2008.

That’s what analysts are doing. They see the bubble, and they benchmark it against the bubbles that blew up in 2000 and 2007, and they pull rationalizations out of thin air why this time it’s d.... Oops, they’re not using the d-word, which would make them the laughingstock of TP readers. They’re using logical-sounding arguments that border on superstitions – “Equity bubbles rarely happen when everybody is talking about bubbles” – to explain why it’s different. Exuberant retail investors are expected to swallow it hook, line, and sinker.

Meanwhile, the Smart Money is selling.
This week, it was once again private-equity mastodon Blackstone Group which dumped one of its LBOs, hotel chain La Quinta, into the lap of mutual funds and retail investors via an IPO. Blackstone has been busy dumping its LBOs. Other PE firms have been busy too. Valuations are enormous, and PE firms need months, sometimes years, to get out from under their priced possessions. So they plan ahead. And they’ve been selling everything that isn’t nailed down for over a year.
And hedge funds are bailing out of equities. Still in an orderly manner.
“We saw net exposure come way down,” explained Jon Kinderlerer, managing director at Credit Suisse’s prime brokerage business that deals with hedge funds. Hedge fund exposure to stocks in the US is “actually at the lowest level since August 2012,” during the euro turmoil before ECB President Mario Draghi saved the day with his whatever-it-takes pledge. “Funds have trimmed exposure, and they’ve added hedges.” The sharpest cuts occurred over the past month, he said. Hedge funds are “battening down the hatches to weather the storm

5---Wall Street and Multinationals Get Theirs While America Suffers, economic populist

Bonuses increased 15% and are back to their pre-financial crisis excesses  Corporations hording cash offshore increased 11.8% in 2013 to a whopping $1.95 trillion.
According to the New York State Comptroller, the average bonus paid on Wall Street was $164,530 in 2013, the third highest on record.  Below is a graph of Wall Street's average bonus and as we can see the greed and excesses just continue.  The average 2012 salary on Wall Street was $360,700.  This is 5.2 times larger than the average New York City private sector salary of $69,200.

average wall street bonus

The 2013 bonus pool was $26.7 billion spread over 165,200 workers  If an individual works 50 weeks, 40 hours a week for the $7.25/hr minimum wage, the gross annual income is $14,500.  Wall Street accounts for 22% of private sector salaries in New York City while being only 5% of those employed.

If Wall Street bonuses weren't bad enough, shipping good jobs overseas is clearly quite profitable for multinational corporations.  According to Bloomberg, corporations are stockpiling cash, tax free, abroad and added $206 billion to their coffers in 2013.  The offshore cash holdings now are $1.95 trillion.  Three of the biggest labor arbitragers and offshore outsourcers of them all, Microsoft, IBM and Apple, account for 18.2% of the 2013 offshore cash holdings increase.  All of these companies have fired top tier Scientists and Engineers and replaced them with cheaper foreign guest workers as well as moved R&D jobs offshore.  Their actual production and manufacturing jobs are long gone to India and China.  These companies also repackage copyrights, trademarks and patents into SPVs and park them offshore in the Cayman's and other tax havens.  According to a Congressional Research Service report, multinationals reported 43% of their 2008 overseas profits were in such tax havens.  Profit shifting is what it's all about instead of contributing to America and even innovating new products.
Bloomberg created a graphic, reprinted below.  Their visual really tells the story on how multinational corporations don't give a damn about America or even their own employees.  They live and breathe for their tax avoidance weasel game.

offshore corporate profits Bloomberg graph

6---Putting The "Bank Loans Are Rising & Animal Spirits Are Reviving" Meme In Context, zero hedge

(enjoy it while it lasts)

Much has been made of the "sharp acceleration" in bank lending in the last few months promulgated by the status quo huggers that 'animal spirits are reviving' and, despite a collapse in equity market valuations for 'growth' stocks, that escape velocity growth and that so-longed-for surge in Capex is just around the corner. However, when put in context... when looked at over more than a few months, and when considered against the typical economic cycle... this is anything but sustainable and merely reflects on the inventory-stacking mal-investment debacle of Q4 that is now unwinding en masse as hoped for 'aggregate demand' shows no signs of appearing...

The recent uptick corresponds with the economic push in the last quarter of 2013. It is very likely, given the recent economic weakness both domestically and internationally, that the recent surge in activity may well be very short lived.

7---"We can’t grow by adding more restaurant jobs,” Morici said in a phone interview., Marketwatch

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