The Rich Getting Richer

While the rich continue getting richer, more and more American workers are losing jobs from the effects of the 2008 recession.

            The recent trend of bank CEOs benefitting even while others suffer seems to be continuing. Wells Fargo announced Thursday both that its CEO, John Stumpf, would be receiving restricted bonds worth $1 million as a bonus on his 2013 pay and that it would be laying off 700 more mortgage works nationwide, including 25 in Charlotte, my hometown.

            Josh Dunn, a Wells Fargo spokesman, said that the layoffs were made to “better align with the market and increase the efficiency of our organization.” The market changes Dunn is commenting on are those that accompanied extremely low interest rates. The rush of mortgage refinances that accompanied historically low interest rates drove up the demand for workers in bank’s mortgage units. Thus when rates rose in 2013, less and less homeowners were refinancing their homes and demand fell for these units.

            While drops in the market are understandable and layoffs are not surprising, the timing of Wells Fargo announcements are terrible. In regards to public relations: Following the demonization of top bank executives over the past couple years, why would a bank announce a $1 million bonus package for your CEO and layoffs on the same day? The announcement of such a large bonus also seems more questionable after more than 5,800 Wells Fargo layoffs occurred nationwide this year; 450 of these occurred in Charlotte.

            Although the two occurrences are connected and the layoffs were likely to occur, the timing of the two incidents appears like a very poor public relations decision. Couldn’t Wells Fargo wait at least a week before rubbing in a $1 million bonus in the hundreds of people they laid off?

                                            His Majesty, John Stumpf, CEO of Wells Fargo
-Det Beal

http://www.charlotteobserver.com/2014/02/27/4728495/wells-fargo-ceo-gets-1m-in-stock.html#.UxDoSHllNU0

http://www.charlotteobserver.com/2014/02/27/4727352/wells-fargo-laying-off-more-mortgage.html

Feels Like 1929? Not So Much.  

By Lat Peak

            It may be February, but it’s beginning to look like Christ-…. the start of another Great Depression?

            According to Mark Hulbert of MarketWatch.com, this claim may not be so far-fetched after all.

            “There are eerie parallels between the stock market’s recent behavior and how it behaved right before the 1929 crash,” Hulbert said.

The evidence? A graph that has made the rounds on Wall Street compares the Dow Jones Industrial Average of 1928-1929 to the present day market of 2013-2014. And the similarities are frightening.

            The Dow Jones Industrial Average was invented in 1896 by Charles Dow. It is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the tech heavy Nasdaq. Along with the S&P 500, it is one of the most heavily watched indexes in the world from Wall Street fat cats to stay-at-home traders.  

            When the above pattern was first identified in late November, it was met with heavy skepticism. According to Hulbert, the biggest objection was that the chart was a “shameless exercise in after-the-fact retrofitting of the recent data to some past price pattern.” In other words, Tom DeMark, who is credited with discovering the trend, was trying to manipulate current market data to match that before the Great Depression.

            “Originally, I drew it for entertainment purposes only,” said Demark. “Now, it’s evolved into something more serious.”

            To the amazement of Wall Street and investors everywhere, the market since November has very closely followed the 1928-1929 pattern. So, should Americans everywhere cash out their 401 (k)s and make a run on their local bank?

            “While investment history doesn’t necessarily repeat itself, it does rhyme.” said Doug Kass, hedge fund manager of Seabreeze Partners. “The correction might have just started.”

            In my opinion, while the graph is a bit eerie, it is nothing more than a spooky coincidence. After suffering from one of the worst market downturns since the Great Depression, US stocks have been on an upward surge since 2008. Investors who left their money in the market during the downturn have seen significant recovery in their portfolios.  While many analysts predicted a market correction last year, the S&P 500 rose 33%.

            What has caused this inflated, overpriced stock market? Many Wall Street analysts attribute it to the Federal Reserve’s aggressive QE monetary policy, which has fueled the rise in stocks.

            In conclusion, will there be a market correction in 2014? History suggests that stocks are at their absolute peak at the moment, but only time will tell. But, the chances of the stock market crashing this April? I would say slim to none. Many global financial institutions came shockingly close to collapsing in 2008, just six years ago. Credit standards have been tightened, and Wall Street banks have curbed their once reckless appetite for risk. So, my guess is the chances of another credit meltdown are probably less than 1%.  

            We’re all going to be fine.  I hope.

 

Source: http://www.marketwatch.com/story/scary-1929-market-chart-gains-traction-2014-02-11

CBO Report on Minimum Wage

The Congressional Budget Office released a report this week detailing the effects of a $10.10 minimum wage. The White House reacted with skepticism about sections of the report.

First, the facts. The CBO estimated that raising the minimum wage to $10.10 by 2016 would raise wages for 16.5 million Americans. The increased wages would also result in 500,000 lost jobs.

This data informs the important debate about the minimum wage that politicians in Washington should be talking about. Decisions regarding a minimum wage hike come down to a cost/benefit analysis; how many jobs are we willing to give up for a given increase in wages?

Instead of engaging in this discussion, however, the White House lashed out at the respected and non-partisan CBO. The administration argued that the employment numbers did not align with current economic theory.

The CBO responded that their job-loss estimate was actually conservative compared to what the literature suggests. Citing “publication selection bias,” the CBO revised their estimates down from what the published empirical evidence shows.

A White House blog about the report detailed the positive wage effects for American workers if the minimum wage were to be increased. In addition to increasing wages for 16.5 million workers, it would bring 900,000 Americans above the poverty line and provide an economic benefit via increased consumer spending.

The White House failed to mention the 500,000 lost jobs, instead referring to it as a “0.3 percent decrease in employment … CBO acknowledges that the employment impact could be essentially zero.” It is disappointing that the administration clouded the debate by only presenting numbers that align with the president’s political agenda, while leaving out data which is necessary for an informed debate.

So much for transparency out of the Obama White House.

 

Jonathan Howe

 

Sources:

Yahoo News

White House Council of Economic Advisors

NC Tobacco Not Worried

While consumers may not be stubbing out cigarettes purchased from CVS any longer, the North Carolina tobacco industry doesn't see sales flaming out either.

On Wednesday, CVS Caremark announced that it would stop selling cigarettes by October 1st in 7,600 stores nationwide, including 210 in North Carolina. Yet tobacco producers and companies in North Carolina are not too concerned with the move.

David P. Howard, a spokesman for the historical tobacco giant R.J. Reynolds Tobacco Co. in Winston Salem, North Carolina, commented on the value of the companies relationship with CVS and added that they respect CVS's decision. While respectful, Howard also subtly expressed doubt that the change would make any real effect: out of all the cigarettes sold in 2012, only 3.6 percent were sold at pharmacies as compared to 48 percent at gas stations.

Although CVS has chosen to stop selling cigarettes, I also doubt this move will have any real affect on industry sales as a whole. Tobacco production and consumption has declined in recent years with the nation's health kick, yet it still remains a large industry in North Carolina and will continue to be so.

North Carolina produces more than 80 percent of the nation's tobacco annually, said William Collins. a retired N.C. State University extension specialist. Pharmacies, only responsible for 3.6 percent of tobacco sales, will make little dent in this enormous industry.

Yet CVS's decision may be marginalized for other reasons as well. CVS may be one of the first national pharmacies to stop selling tobacco products, yet I've personally seen this trend in consumers prior to the announcement. Consumers now associate pharmacies with health and well-being, not a source of vice products. CVS is the place to get a prescription filled or buy an ace bandage, not a pack of Camels. 

CVS's decision may seem like a milestone, but its more of a publicity stunt. Americans are going to continue buying cigarettes every day, gas stations may just dominate 51.6 percent of the market instead of 48 percent now. Tobacco fields like the one below will continue to color the North Carolina landscape for years to come.

-Det Beal

Sources: http://www.charlotteobserver.com/2014/02/05/4666465/nc-tobacco-industry-shrugs-at.html#.UvP1cnllNU1

Read more here: http://www.charlotteobserver.com/2014/02/05/4666465/nc-tobacco-industry-shrugs-at.html#.UvPrW3llNU0#storylink=cpy

Meditating on Sunk Costs

Many of us who have studied economics are familiar with the sunk-cost fallacy. If not, it can most simply be explained as the fallacy of putting value on time and/or money which you have already spent.

Ex: Continuing to stay at a job you hate because you feel that you have already invested too much time in it, when decisions should really be made at the margin because that time has already been wasted.

However, did you know that people are much more able to overcome the temptation of the sunk-cost fallacy through meditation?

Recent research (abstract) conducted by researchers Andrew C. Hafenbrack, Zoe Kinias, and Sigal Barasade shows that just 15 minutes of such mindful meditation can reduce one's urge to fall victim to the sunk-cost fallacy. In two experiments involving a few hundred undergrads, breathing-based mindfulness meditation significantly increased vulnerability to making decisions off the margin. In the first study, 78% of participants who underwent the meditation resisted the sunk-cost bias, whereas only 44% of those who did not undergo the meditation did. In the second study, 53% of those who meditated resisted the sunk-cost fallacy, whereas only 29% who did not meditate could resist it.

In both studies then, the risk of falling victim to the sunk-cost fallacy dropped by the large amount of 43%. So, when you're getting ready to make important life decisions, just remember that a mere 15 minutes of prior meditation could help you make a more efficient decision.

Link to article: http://freakonomics.com/2014/01/21/meditating-on-those-sunk-costs/

-Matt Rutley