A blog about business and economics.

Nov. 14 2014 9:03 AM

Social Media Is Hard, New England Patriots Edition

The New England Patriots Twitter feed recently reached 1 million followers, so to celebrate the team's crack social media crew decided to give something back to fans last night. They sent out an image of a Pats jersey, and told people to retweet it to get a custom copy with their handle written on the back.

Because the Internet tends toward entropy, this of course ended up with the team tweeting out a jersey with the N-bomb written on it.

pats_tweet

Obviously, the image started going viral. The team realized its mistake and deleted the tweet, and added an apology. Apparently, their automatic filter had failed them.

And that brings to a close this week's episode of Murphy's Law.

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Nov. 13 2014 6:53 PM

Once Again, Banks Get Nailed for Dumb Things Traders Said in Chat Rooms

On Wednesday, six banks agreed to pay $4.3 billion to regulators for attempting to manipulate the foreign-currency markets. Citigroup and JPMorgan Chase got hit the worst, with fines of more than $1 billion apiece. The nuts and bolts of the scandal are complicated, but basically the banks involved colluded to rig an important currencies benchmark in a $5.3 trillion market to boost their own profits.

One of the remarkable aspects about this particular scandal is that yet again banks are being nailed by regulators for dumb things their traders said in chat rooms. In October of 2013, it came out that chat rooms were a focus of the probe into currency manipulation. A U.K. regulator's examination of email and chat transcripts revealed a small group of traders that went by names including "The Cartel," "The Club," "The Bandits' Club," and "The Dream Team."

A lengthy report filed by the U.S. Commodity Futures Trading Commission this week shines more light on what was going on in those chat rooms:

FX traders at Citibank and the other banks used private electronic chat rooms to communicate and plan their attempts to manipulate the FX benchmark rates for certain currency pairs.2 Certain FX traders at Citibank regularly participated in numerous private chat rooms. At times, in certain chat rooms, FX traders at Citibank and other banks disclosed confidential customer order information and trading positions, altered trading positions to accommodate the interests of the collective group, and agreed on trading strategies as part of an effort by the group to attempt to manipulate certain FX benchmark rates, in some cases downward and in some cases upward.

And here's an example of what regulators cite as misconduct:

Chat rooms have caused many headaches for Wall Street in the past. They most famously helped regulators document the LIBOR scandal and also earned fines for Barclays after it discarded instant messages. So great have been the finance industry's chat-inflicted pains that several big banks banned certain chat rooms and others looked to overhaul the system entirely. Early last month, Goldman Sachs led a $66 million investment in Symphony Communication Service Holdings, a platform designed to centralize digital communications from texts to tweets for finance professionals.

The irony in this latest scandal, as Matt Levine points out at Bloomberg View, is that no one seems to know or care how much money the banks made manipulating the foreign currency market. What people care about is that the traders in these chat rooms weren't playing by the rules. "After Libor, terrible chat room conversations are enough in themselves to justify billion-dollar fines," Levine writes. If that's really the case, Wall Street and all its chat-loving employees might want to take note.

Nov. 13 2014 3:57 PM

Everybody’s Favorite New Myth About Millennials: They’re Bad at Saving

The millennials aren’t saving any money. I mean, a few twentysomethings might be stuffing some crinkly dollar bills under their futons or something, but in aggregate, we’re burning more cash than we're putting away. Earlier this week the Wall Street Journal reported that following “a flirtation with thrift after the recession,” the personal savings rate of Americans under the age of 35 has dipped to -1.8 percent. The median net worth of young households has also plummeted since the recession.

wsj_millennials

This news has, of course, led to both shrieking and thumb-sucking. “Millennials Face a Savings Time Bomb,” CBS declared in a follow-up story. (Our empty checking accounts are apparently incendiary devices now.) The Atlantic, taking a turn into econo-cultural analysis, suggested that “the fact that Millennials are more skeptical than ever of banks” might have something to do with our spendthrift ways.

It is true that millennials are probably in worse financial shape than Gen X or the Boomers were at their age. We have far more student debt than any generation before, which has cut into our wealth, and we graduated into a blasted moonscape of a job market (although, to be fair, the early 1980s weren’t exactly a fun time to enter the workforce, either). But I think something should be made clear here: Young adults have never been good at saving, and they are no worse at it today than 15 or 20 years ago. For the past quarter-century, in fact, a negative savings rate seems to have been the norm for the under-35 set, as shown on the graph below, based on the same Moody’s Analytics data the WSJ used for its story. (It's a bit hard to read—sorry—but the chart stretches back to 1989.)

moodys

Moody's Analytics

This shouldn't be surprising. Young people don't make a great deal of money. But they are busy buying their first cars and first homes, and having their first children. At least, they typically are during good economic times. It's worth noting that the last time the young adult savings rate turned positive, according to Moody's, was during the rough patch of the early 1990s. I don't think the reason for that was that the savings and loan crisis made Gen Xers distrust the financial industry. Rather, when the labor market gets choppy, young people put away their credit cards and are less likely to make big life purchases.

So the problem for millennials doesn't appear to be that we're frightened of JPMorgan or comfortable putting away an unusually small share of our income. It's that we've gotten a start in life at an inopportune moment in history, and probably have lower salaries and higher education debt to show for it. We're not bad savers by American standards. But American standards might not be good enough, at least if any of us ever want to retire.

Nov. 13 2014 2:27 PM

Amazon’s Standoff With Hachette Over E-Books Is Finally Over

The publishing war of the year is officially over, with Amazon and Hachette announcing that they've finally reached an agreement on e-book pricing. The bitter dispute had dragged on for months, with Amazon halting preorders and delaying shipping on many Hachette titles, and at one point even pulling George Orwell into the mess. As of Thursday morning, preorder buttons appeared to have been restored and Hachette titles were once again shipping in a timely manner.

At the moment, it's unclear who came out ahead in this resolution. Both sides are keeping the details of the deal tightly under wraps, though according to the New York Times' David Streitfeld "both pronounced themselves happy with the terms." The agreement lets Hachette set prices for its e-books—a sticking point in the negotiations—but "includes specific financial incentives" for Hachette to keep those prices low, an Amazon executive told the Times. Amazon maintained throughout the dispute that e-books should be sold cheaply because they are highly price elastic. That's econ-speak for saying that if their costs fell, customers would buy many more, making lower prices theoretically better for everyone.

The new e-book arrangement is supposed to take effect in early 2015. While the Amazon-Hachette feud is over for now, the war between the publishing industry and Jeff Bezos is not going away so easily. Authors United and the Authors Guild—two advocacy groups for authors—are urging the Justice Department to investigate Amazon for antitrust violations. "If anyone thinks this is over, they are deluding themselves," Douglas Preston, one of Hachette's top-selling authors and a outspoken critic of Amazon, told the Times. "Amazon covets market share the way Napoleon coveted territory."

In related news: "Amazon buries the Hachette" is the most overused Twitter joke of the day.

Nov. 13 2014 11:44 AM

Walmart Steps Up Competition With Amazon as Holiday Season Approaches

With the holiday shopping craze just weeks away, Walmart had some good news to report on Thursday. For the first time in seven quarters, Walmart said sales at stores open at least a year ticked up in the U.S. The retailer also beat expectations on profit and revenue in the latest quarter and said e-commerce sales—a main strategic focus—increased by 21 percent during that period.

The online sales metric is particularly important because Walmart, for so long America's brick-and-mortar everything store, is now waging a war against Amazon, its counterpart on the Web. Walmart has already made major investments in e-commerce and, just last month, said it would speed up the pace of those initiatives. On a call with investors this morning, Walmart U.S. CEO Greg Foran also authorized store managers to match the prices of Amazon and other online retailers. While Foran said about half of Walmart's 4,344 stores in the U.S. were already matching prices, formalizing the practice might help the company sway holiday shoppers from ordering a gift later on Amazon.*

While e-commerce was a bright spot, Walmart still hasn't ironed out its chronic Walmart problems: understaffed stores and understocked shelves. Sales in Walmart's grocery segment were "relatively flat," in part because of lasting effects from cuts to the food stamps program. Two days earlier, the New York Times reported on an "urgent agenda" memo that Walmart had sent to managers calling for improvement in the dairy, meat, and produce departments. The "highly sensitive" memo urged managers to mark down old meat and baked goods and replace expired eggs and dairy products. Employees of Walmart, meanwhile, told the Times that their hours are already so thin they can no longer keep up with their workloads.

Despite these issues, Walmart has joined its peers in expressing cautious optimism about the upcoming holiday season. Walmart is kicking off its sales online at 12:01 a.m. on Thanksgiving this year and stretching them through Dec. 1.** Family Dollar, another low-cost retailer, said in mid-October that its stores were "well-positioned" for the holidays. At the same time, no one denies that this year's Thanksgiving-through-New Year's crush will be cutthroat. "We expect this holiday season to be highly competitive," Foran warned investors. After the polar vortex and a weak economy handed retailers their worst holiday season since 2009 last year, everyone is eager to prove they can turn things around.

*Correction, Nov. 13, 2014: This post originally misstated that Walmart has 5,000-odd stores in the U.S. As of Oct. 31, it had 4,344.

**Update, Nov. 13, 2014: This post has been updated to clarify that the Walmart sales beginning at 12:01 a.m. on Thanksgiving exist only online. In-store sales start at 6 p.m.

Nov. 13 2014 11:24 AM

Thanks to Massive Republican Tax Cuts, Kansas Is Facing a Budget Crisis

What's the matter with Kansas now? Oh, you know, just a small budget crisis brought on by its Republican governor's radical tax cuts. This week, the state discovered it would have to cut $279 million by June in order to balance its books, then slash another $436 million during the following fiscal year. For Kansas, this is a hefty amount of money. The entire state budget legislators approved in May was just $6.3 billion.

Back in 2012, the state's recently re-elected Republican governor, Sam Brownback, turned Kansas into a petri dish for conservative fiscal policy after he signed into law a massive tax cut that dropped rates for top earners and eliminated taxes entirely for some businesses. Brownback and conservative tax guru Arthur Laffer promised that the cuts would bring "enormous prosperity" to the state by making it more competitive. But jobs growth has lagged in Kansas, and this summer, the state government found itself nearly $300 million short on revenue. To cope, it began burning through its reserve funds, and Moody's in turn downgraded the state's credit rating.

Brownback's administration tried to blame the shortfall on tax-shifting due to the 2012 fiscal cliff, but that excuse—which was never really credible—has been pretty much rendered moot by the new numbers. The fiscal cliff can't explain budget problems all the way out in 2016. If there was any doubt at all, the state's nonpartisan Legislative Research Department confirms that the deficit "is primarily being driven by the state's income tax cuts," according to the Wichita Eagle.  

And about the "enormous prosperity" just waiting around the corner? Via Econbrowser's Menzie Chinn, here's a chart of Kansas' economic outlook, based on an index of various indicators. Notice it's not just running below the national average. It's running below high-tax California, too.

econbrowser_graph

Nov. 12 2014 5:18 PM

YouTube Will Offer a Subscription Streaming Service, and Spotify Should Be Terrified

After months of leadup (and some nasty tussling with artists), Google-owned YouTube announced today that it will offer a paid music subscription service. The name: Youtube Music Key. The promotional price: $7.99 a month, marked down from $9.99. Right now, the service is in invite-only beta mode. But this marks the start of what seems like Google's first serious bid to plant itself firmly in the center of the music industry.

Two points to make here, one narrow, one broad:

The narrow point: This sounds like a good deal, and Spotify should be worried

YouTube is already the world's largest streaming site. But it's never been particularly useful for searching for whole albums or listening on the go. The company wants to change that. Starting soon, visitors will be able to easily pull up artists' whole discographies and browse curated playlists. Those who sign up for the paid version of the app will get their music ad-free, be able to play it in the background while using other apps on their phone (which YouTube currently doesn't allow), and watch videos offline.

All of that is nice enough, though perhaps not enough to convince most music fans to shell out a monthly subscription fee. But here's the part that should scare established streaming services: Those who subscribe to YouTube's new service will also get a complimentary subscription to Google Play Music, the company's Spotify analogue, which up until now has gone by the ungainly name "Google Music Play All Access." (YouTube Music Key isn't exactly a masterstroke either, but at least it's succinct). So far, Google's streaming service has failed to get much traction, just like its iTunes Store equivalent, Google Play. But with YouTube offering a service that basically amounts to "Spotify-plus" for $2 less per month, at least initially, it's possible to imagine the company finally siphoning off music fans into its network of services.

The broad point: Whether or not Taylor Swift likes it, streaming is the future

It's a nice coincidence that this news comes so soon after Taylor Swift pulled her catalog from Spotify (though, notably, not YouTube) and derided streaming as a "grand experiment" that doesn't pay artists fairly.* She might even be right. But it's very clear that the most important players in the industry right now—the big record companies—don't care. 

The first thing to realize about streaming services like Spotify, or Youtube Music Key, or the soon-to-be-renamed Beats Music (owned by Apple), is that they live and die according to the mercy of the three major music labels—Sony, Warner, and Universal—that control about 90 percent of the industry's sales. If any one of those companies decided not to sign over the rights to its catalog, no service could realistically expect to survive. But the big three have clearly made the calculation that they are best off with a thriving streaming market to combat piracy, which for a long while seemed like an existential threat to their businesses. The biggest testament to their love of streaming may be the fact that they've signed deals with services like Beats and YouTube, even though they own a large chunk of the equity in Spotify (which they received early on in return for writing off royalties the service would have owed). They don't just want their own service to grow. They want a whole network of sites competing to win over fans.

*Correction, Nov. 12, 2014: This post originally misstated when Taylor Swift pulled her catalog from Spotify. It was last week, not this week.  

Nov. 12 2014 3:23 PM

Marissa Mayer’s Yahoo Has Been Great for Startups

This article originally appeared in Inc.

Marissa Mayer's two-year tenure as CEO of Yahoo hasn't been especially fruitful in terms of revenue growth or the value of the company's core business. But, boy, has it been a boon to the startup economy. 

With the $640 million purchase of BrightRoll, an advertising technology firm that specializes in online video, the Sunnyvale, California-based Web giant has now spent more than $2.1 billion on acquisitions since Mayer's arrival in July 2012. In fact, it has spent considerably more: That figure, calculated by S&P Capital IQ, reflects only eight of the 49 companies snapped up over the period. Prices for the other 41 weren't disclosed publicly.

BrightRoll is one of the few additions that ought to justify its price tag in relatively short order. Most of the others—including Tumblr, the largest deal at nearly $1 billion—have yet to do so. Many were quickly shut down and explained—or written off—as "acqui-hires," perpetrated as a way to bring engineering talent into the fold. 

In the ordinary course of things, a CEO who's not showing much in the way of top-line growth would have a hard time selling an unending series of pricy acquisitions to her board of directors. But Mayer's had a free hand thanks to the appreciation of its stake in the Chinese e-commerce company Alibaba, now worth $44 billion. (For reference, Yahoo as a whole is worth $47 billion.) It has already pocketed $6 billion in cash, after taxes, from the sale of shares in Alibaba's IPO. 

That means Yahoo has plenty of cash lying around if Mayer wants to keep rolling up small and medium-sized startups, or even to make a play for a big one, like Pinterest. Some analysts believe the visual social network is the most logical acquisition target for Yahoo, or at least would have been before its valuation climbed to $5 billion in May

But some major Yahoo shareholders are keen to put the brakes on Mayer's shopping spree. The hedge fund Starboard Value LP is agitating for Yahoo to merge its core business with AOL, with which it's strategically aligned, rather than continue to bolt on new parts willy-nilly. And Reuters reports that two of Yahoo's biggest shareholders have grown so impatient, they've taken to lobbying AOL CEO Tim Armstrong to make the deal happen. 

The appearance in the third quarter of modest revenue growth might give Mayer the breathing room she needs to convince investors to give her strategy more time, if she's able to maintain the momentum. But if the pressure continues to mount, Mayer may find she has no choice but to start returning more of her funny money to shareholders. And that will mean a lot fewer comfortable exits for startups in need of a home.   

Nov. 12 2014 1:40 PM

China and the U.S. Just Struck a Historic Climate Deal. So Why Are Coal Stocks Rising?

The United States and China have announced a groundbreaking new pact to combat climate change by cutting their emissions in the coming decades. This, you might assume, would be considered terrible news for the fossil fuel industry.

So why on earth are coal stocks up today?

coal_index

One possibility is that there's just other good news in the world keeping share prices afloat. (Hey guys, seaborne coal prices might rise 40 percent by 2020!) A more likely explanation, though, is that the new deal—while incredibly significant from a diplomatic standpoint—doesn't actually change much for coal merchants. Take China. The country has pledged that by 2030, it will stop its CO2 emissions from growing and obtain 20 percent of electricity from zero-carbon sources like nuclear, wind, and solar. It's crucial that the government is making a firm, public commitment on this front, because it could influence the behavior of other heavy coal-burning countries. But Chinese officials may just be putting down in writing what was bound to happen anyway. Researchers at the Lawrence Berkeley National Laboratory, for instance, have predicted that Chinese emissions would peak between 2025 and 2030.

And some believe that Chinese coal use, in particular, is bound to level off much, much sooner—both because the country is finally getting serious about dealing with the environmental catastrophes brought on by its industrialization, and because in the long run, its electricity use can only grow so much. Last year, Citigroup's Ed Morse, one of the most respected analysts in the fossil fuel world, argued that China would hit peak coal prior to 2020, far faster than the U.S. government had previously expected. In September, the Carbon Tracker Initiative released a report stating that China's use of thermal coal would top out sometime between this year and 2016. The Sierra Club believes that Chinese coal use has already dipped a bit, though it's by no means the clear start of a permanent decline.

There are, of course, dissenting voices. Analysts at Wood Mackenzie say they think Chinese coal consumption will double by 2030. But, by now, it seems likely that energy company investors would at least have priced in the possibility that China's appetite for coal wouldn't expand forever. Without a truly shocking announcement, there's no reason to start selling off shares.  

The same goes for the United States. Thanks largely to cheap natural gas, American coal consumption has already declined, and the Obama administration is moving aggressively to cut it further through new rules on power plant emissions. The new goal President Obama announced in Beijing—to slash new greenhouse gases 26 to 28 percent from 2005 levels by 2025—isn't a radical departure from the direction we were already going in. And, given that Republicans are about to have complete control over Congress (and might for a very long while), it's not clear how much the administration will be able to speed up its climate-fighting agenda.

Again, the fact that the world's two largest carbon emitters, which have traditionally sparred on global warming, were able to reach an accord on emissions is an enormous development. It may inspire other developing countries, like coal-loving India, to step up their own fight against climate change. But as of now, the deal hasn't given fossil fuel investors much reason to fume.  

Nov. 12 2014 11:26 AM

Why the Internet Didn’t Have Ads This Morning

If you were browsing around the Internet between 9:45 and 10:30 this morning, you might have noticed that your favorite websites seemed curiously ad free. For that you can thank Google. The company's DoubleClick ad servers went down, leaving sites including Slate, the Wall Street Journal, Forbes, the New Yorker, the BBC, and others stripped of their advertising. Some simply failed to load as they tried and failed to pull up their banner ads. As Napier Lopez succinctly put it on the blog of TNW during the outage, "It’s likely affecting millions of advertisements across the Web and could cause advertisers to lose a whole lot of money collectively."

Aside from the fact that publishers just suffered a collective coronary, this little incident is interesting because it's a very visual reminder of how Google underpins so much of the Internet's essential infrastructure. In the words of the Awl founder Choire Sicha:

The company controls slightly less than a third of all digital advertising dollars but is probably even more dominant when it comes to serving display ads for online publishers (I haven't been able to track down specific market-share data on that front). This isn't necessarily a bad thing. Having an absolutely giant marketplace where websites and advertisers can buy and sell ad space makes the business more efficient. But if something goes wrong with Google's hardware, the company apparently turns into the world's most powerful ad blocker.

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