fueled by lemons
From the category archives:
Bad news if you’re a government looking for a scapegoat; good news if you’re a demonized “short” trader:
A Brussels investigation into possible problems with speculative trading of credit default swaps on Greek sovereign debt in the wake of the country’s crisis is understood to have found few serious flaws, triggering rumours that officials are reluctant to release the document.
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I know the NYPL will let me check out ebooks, but the result is wrapped in layers of DRM that tie it to my computer (or, with some work, a Sony Reader or B&N Nook). One thing I’m sure of: e-reading will succeed if and only if the text is truly portable across many devices. My most frequent reading location will be a tablet-sized e-reader, but I may want to access the material on a desktop, laptop, work computer, public location, phone, etc. Without that functionality, we’ve taken a step backwards from physical books (which, for the price of inconvenience, I can have wherever I want).
I don’t have a problem with DRM itself. In fact, I’d embrace it if only I could access the data anywhere. What’s so difficult about that? Every e-reader app for the iPad provides syncing capabilities with its respective hardware; surely the NYPL can figure something out!
But I may be asking too much for the NYPL’s books to be freely available, so how about this: I will gladly rent books rather than buy them. When I purchase a book from Amazon, B&N, etc., instead of just downloading the text straightaway, ask me how long I want the book for (1 day, 1 week, 1 month, forever) and charge me accordingly. Maybe the book costs $10 to own, but I can have it for a week for only $3. And after a week, I’m locked out. Need more time? Three more dollars, please!
Or how about this – instead of a la carte pricing or rentals, I’ll pay a flat rate for unlimited reading. Maybe it’s a few hundred dollars (I have no idea what the efficient level would be off the top of my head) to subscribe to Amazon’s library. Lock the ebooks to my devices so I can’t distribute them and you got yourself a deal.
This can’t be difficult to implement on the technology side, though I imagine it would meet some resistance on the publishing side. The evidence for success is strong, however – look at movies and music, which have both embraced successful rental or subscription plans.
One of the keys to this model could be how hard it is to access the filesystems of the devices in questions (iOS devices most notoriously). Putting a DRM’d file on a computer is, let’s face it, an invitation for someone to hack and redistribute the information freely. But because we can be confident that consumers will use controlled/closed devices to access their ebooks, part of the hacking threat is mitigated.
But again, there’s nothing revolutionary about this idea. Movies and music have been doing it for some time. We just need to expand our conception of “multimedia” to include text as well.
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It’s become poor form to take the jobs report at face value, and every financial blog out there is doing its best to reveal “the truth” about the misleading numbers. Most recently, the headline is that the 431,000 jobs which were added to non-farm payrolls included 411,000 temporary census-related jobs. Quick arithmetic reveals that this means only 20,000 jobs were actually added.
Should the market care?
The market doesn’t respond to the number of jobs. Instead, it responds to the difference between the reported number of jobs and the market’s expectation. A jobs report of 50,000 could result in either a massive rally or a crash, depending on the expectation. Here, 536,000 jobs were expected to be created, so the market should fall whether it was 431,000 or 20,000 – both miss the mark (albeit by different amounts).
But we all get that the government numbers mess with our employment perception, that’s established. What I really want to know is if the 536,000 jobs that were anticipated already included the 411,000 government jobs? I would expect that they did, because those forecasters aren’t doing their jobs otherwise, in which case it is wrong to compare the survey result to the 20,000 number. Both should include the government boost. However, if forecasters were slacking off – and who knows, they may have been – then it would indeed be correct to point out the emperor’s missing jobs.
And now back to your regularly scheduled market crashes.
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The NYT reports on soap.com, which aims to provide drugstore items over the internet. I’m having a hard time seeing how this is really interesting news.
“Nobody is really buying toilet paper online,” Mr. Bharara said. “We’re trying to shift in a big way consumer behavior over all, and take share from offline.”
Merely being online isn’t a magic bullet. Consumers are more likely to migrate their behavior if the item is better suited to online delivery than off. The nature of a drugstore’s goods (typically necessities) and drugstores themselves (situated on almost every corner) have already evolved into an optimal balance of proximity and immediacy. In NYC, we laugh when we see two Starbucks on opposite corners but we complain when we have to walk more than a block to the 24-hour Duane Reade (or CVS, or the bodega…). So there isn’t as clear a motivation to adopt delivery as there is for electronics, clothing, books or even food, as those industries are otherwise impeded by inconveniences like distance and time.
(And yes, I’m assuming that the target consumer is urban or suburban. Rural consumers are 1) predisposed to purchasing home items in large quantity – witness the success of Wal-Mart – and at regular intervals and 2) are rarely the focus of online businesses due to more idiosyncratic needs.)
The physical layout of locations like convenience stores and dry cleaners demonstrate that the industry is focused on a hyperlocal experience. One establishment serves only the houses or apartments immediately surrounding it; if two businesses are sufficient distance apart, a third will open to capture the middle share. As such, the online model represents a radical departure from the business norm – as long as we consider every franchise independent. As soon as we look at every DR as an extension of the same overarching business, we’re more in line.
But that speaks directly to another issue: just because people aren’t buying toiletries online doesn’t mean they can’t. Indeed, the drugstore.com market is well saturated by big players like DR, CVS, Wal-Mart and Amazon. They may only account for $8B of a $125B market, but I don’t think it’s for a lack of brand awareness. Rather, it’s that the marginal benefit of shopping online is simply not as great for these types of products.
The one big advantage an online store has, of course, is serving the long tail: e-retailers can stock products which brick-and-mortar can’t afford to give up shelf space for. Again, however, I’m not convinced that such a long tail exists in drugstore items (since their size is infrequently prohibitive) or that it is sufficient motivation to drive consumers online (since this is hardly a new e-market).
So far I’ve only discussed hurdles for a consumer migration to line, and most have centered on the status-quo effect: the industry has stabilized around a hyperlocal but physical layout, and there isn’t a major benefit to moving online. In fact, there might be a cost to moving online: how many people buy toiletries in advance? I would imagine that people buy toilet paper, toothpaste, floss, shampoo etc. as they need it, which means waiting a day or two for shipping is out of the question.
The real hurdle for online drugstores is not enticing consumers to use the internet for commerce (that path was pioneered long ago), but getting them to anticipate their drugstore needs so that the delivery period is not an impediment. One way to do that is to offer bulk discounts, a la Costco. I’m not going to buy two bottles of shampoo right now, because I’ll just buy the second one on my corner the night I need it. But if that second bottle were cheaper… now you’re talking.
If I may break the statistician’s code and use a personal anecdote, I’ve been buying toiletries from Amazon ever since they introduced Prime two-day shipping. The equation’s fairly straightforward: free shipping + volume discounts > my perceived cost of walking to the store + hassle of ordering in advance.
So I’m not quite as excited as the NYT about soap.com’s prospects. It’s not because I think it’s a bad idea, it’s because I think the fundamental shift in consumer behavior that they need isn’t the one they seem to have targeted. You don’t need to convince people to buy online, you need them to buy in advance! It’s psychological, not economical. And perhaps most importantly, I don’t think this is a new idea by any means. But perhaps soap.com can push it to the forefront and help people migrate across the digital divide.
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In a piece called “Laughing as you Sink,” Clarke and Dawe explain the European Debt Crisis — this is required watching:
(And yes, my title stems from LOST withdrawal.)
(Via The Big Picture)
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Via the AP:
“As we know, the global financial crisis originated neither in Russia, nor in Greece or Europe — it came from across the ocean,” Putin said.
“In the United States, we see the same problems — massive foreign debt and budget deficit,” he said.
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The Special Inspector General’s report on TARP has been released from embargo. It concludes that TARP was unsuccessful, and even its (debatable) short-term corrections are overshadowed by the extent to which it has returned the economy to its previous bubble state — “we are still driving on the same winding mountain road, but this time in a faster car.”
From the executive summary:
The substantial costs of TARP — in money, moral hazard effects on the market, and Government credibility — will have been for naught if we do nothing to correct the fundamental problems in our financial sys- tem and end up in a similar or even greater crisis in two, or five, or ten years’ time. It is hard to see how any of the fundamental problems in the system have been addressed to date.
- To the extent that huge, interconnected, “too big to fail” institutions contributed to the crisis, those institutions are now even larger, in part because of the sub- stantial subsidies provided by TARP and other bailout programs.
- To the extent that institutions were previously incentivized to take reckless risks through a “heads, I win; tails, the Government will bail me out” mentality, the market is more convinced than ever that the Government will step in as neces- sary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.
- To the extent that large institutions’ risky behavior resulted from the desire to justify ever-greater bonuses — and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions — the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been little fundamental change in the excessive compensation culture on Wall Street.
- To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices — as discussed more fully in Section 3 of this report — risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.
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Via The Big Picture comes news of a rather substantial revision of numbers from last November:
You may recall that consensus for November’s Durable Goods had been +0.5%. The reported data was lighter than expected at +0.2%. Looking at the revisions the Census Bureau has now incorporated into the data, we see that November actually printed at -0.7%.
The critical point is that this would represent two consecutive months of negative growth – a feat not accomplished since last January. For the record, the swing of more than 1% was officially attributed to a “processing error.”
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I’ve previously covered the danger of attributing meaning to a forecast which is obviously based on little or no information. In that case, it was the manufacturing survey, which one might dismiss as a more obscure measure. Recently, however, Ken Houghton has written a pair of posts on inflation forecasts that bring me back to that argument.
In his first, he presents a study that seems to show that, indeed, inflation expectations tend to assume that the future will look just like the present:
Again, this does not surprise me, as the futre expectation of a random walk is its present value. In the second post, the time series of inflation vs expectations is presented:
With the additional dimension of time, I can see a simple heuristic for inflation expectations: consumers think that inflation will stay at roughly the same level that it is on any given day, with some slight reversion to the Fed target, unless inflation is currently below the target, in which case they think it will rapidly bounce back to – or above – that level.
You can see the inflationary spikes in 2006 echoed in the 2007 forecast; the sharp 2008 increase and subsequent fall are mirrored in the 2009 forecast for the time they remain above the target, at which point they halt their slide.
These charts tell me two things. First, that consumers have very little insight into future inflation levels, to the point that they are unwilling to even choose a simple number like 3% and prefer instead to say that the future level will be similar to today’s. Second, that consumers have blind faith in the Fed’s ability to keep inflation at or above its target level – even in the face of evidence against that power.
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A long time ago, when I was first learning to manage my finances, my dad instructed me to prepay my credit card. This effectively transformed the credit card into a debit card by running a positive balance on the account. It was a great learning mechanism because it still required me to make monthly payments, but provided a cushion in case I missed one or made a mistake. In my father’s mind (and I agree), the few dollars I was losing in interest opportunity costs were more than made up for by a lengthy credit history with no late payments.
These days, I would never ordinarily prepay any of my cards. Just the opposite, in fact – I schedule payments for the last possible day. The economic rationale is simple: positive credit card balances don’t earn any interest, therefore I want to hold on to my cash for as long as I can. Occasionally, however, I send the credit card companies a little extra cash. The most common reason is also (believe it or not) economically rational: consumption smoothing. For example, I prepaid part of my October balance in September, anticipating an abnormally high balance that month (thank you, California trip). The net result after two months was the same, but there was no month in which I had to make a particularly large payment – and that’s easy on the mind.
So imagine my surprise today when I went off to make my first payment on my Discover card and the site informed me of the following (emphasis mine):
A credit has been applied to your Account since your last statement was posted. This credit has reduced your overall Discover Card balance.
Since you may not make an online payment for more than your current balance, we are showing you the Current Balance instead of your Last Statement Balance.
I found that very surprising (enough to write about, anyway!) – you would think, especially in this economic climate, that credit card companies would love to receive cash in advance on which they have no obligation to pay interest. I think that’s especially true because there’s a chance I might not use up my positive balance for some time, effectively giving the company an extended interest-free loan. So why would they ban this practice?
My theory is that their view is exactly the opposite of my father’s – by preventing customers from prepaying, they increase the probability of a customer paying late. That, in turn, allows the company to levy late fees which are far more lucrative than a few bps of short-term interest (at today’s levels).
Any other thoughts on why prepayments would be explicitly prohibited?
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