A blog about business and economics.

Dec. 18 2014 6:03 PM

Every Single Stock in the Dow Jones Industrial Average Went Up Today

The Dow Jones Industrial Average just had its best day since November 2011. It gained 421.28 points or 2.4 percent, and all 30 of its components rose.

This was the second consecutive huge day for the stock market this week. On Wednesday, the Dow added nearly 300 points and it is up 497.32 points, or 2.9 percent, for the week. The S&P 500 index, a better benchmark of the overall market, also added 2.4 percent on Thursday and is up 2.9 percent for the week. The numbers are sort of hard to read, but you can see the nice upward curve in the Dow and the S&P in the charts from Yahoo! Finance below:

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Screenshots from Yahoo Finance

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As usual, it's a little hard to say what exactly is spurring such an energetic advance in the market. The Federal Reserve reassured investors on Wednesday after saying it would be "patient" in deciding when to raise interest rates. Tech shares also jumped on strong earnings from Oracle. The Dow's Cisco Systems, Goldman Sachs, IBM, Microsoft, and UnitedHealth Group all posted gains of 3 percent or more. When stocks fall across the board for reasons that can't quite be explained, people tend to point to profit taking. So...for now, we'll call this the opposite of that.

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Dec. 18 2014 5:02 PM

America’s Wealth Gap Is Becoming a Wealth Chasm

This week in the great wealth meltdown: Pew reports that the wealth gap between America's middle-income and upper-income families has never been greater in recorded history. In 2013, the median wealth of what Pew defines as a middle-income family was $96,500. The median wealth, or "nest egg," as Pew terms it, of an upper-income family was nearly seven times that: $639,400.

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The Federal Reserve began collecting the Survey of Consumer Finances data that Pew uses in its report in 1983, when the wealth gap between the median upper- and middle-income family was a factor of 3.4. Wealth, for a bit of context, is defined as the difference between a family's assets and debts. Those assets in this case include things like a house, a retirement account, stocks, bonds, and—unlike in other calculations—a car. (For a full discussion of why some researchers choose not to count cars, it's worth reading Jordan Weissmann's Slate post on the wealth gap between blacks and whites, but the basic point is that cars are depreciating assets.)

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Thinking about the kinds of assets included in wealth is key to understanding why the gap between middle- and upper-income families might have grown so substantially over the past several years. After hitting a low point in March 2009, the stock market had rallied well over 100 percent by when the Fed began collecting its 2013 data. For America's upper-income families, which tend to have more of their wealth invested in the stock market, that translated into gains. But for middle-income families, which disproportionately keep their assets in their homes, the market's momentum hasn't made much of an impact.

According to Pew's methodology, 46 percent of families in the U.S. were classified as middle income in 2013, and 21 percent counted as upper income. "The upper fifth of households by income, their typical wealth levels have indeed started to mend from the devastation of the Great Recession," says Richard Fry, a researcher at Pew and author on the report. "But for the bottom four-fifths of households, particularly the middle income households, they’ve made no gains."

Beyond stock market gains, the other factor to consider in the growing wealth gap is household income since the recession. "When we look at the incomes of the upper-income households and the incomes of the middle class, what we see in this Fed data is that the typical incomes of upper-income households have at least held steady from 2010 to 2013," Fry explains, "as opposed to the typical incomes of middle-income households and lower-income households, which have actually have fallen."

The one caveat to this data is that the 2013 numbers were collected between March and December of 2013. In the time after that survey began, as the Fed points out in a footnote on its findings, housing prices rose and the stock market continued to surge. That means both middle- and upper-class families have likely seen their wealth increase over the last year or so. But whether gains in the housing market have been enough to start narrowing the wealth gap? That's an open question.

Dec. 18 2014 2:21 PM

Nobody Cares About Income Inequality During the Summer

Apparently the beach has a way of curing economic angst. While doing some research for a longer piece today, I found myself plugging variations on the word "inequality" into Google Trends. A sort of odd pattern emerged: Nobody, it seems, cares much about income distribution in the summer.

On Twitter, economist Justin Wolfers offered up what strikes me as a reasonable interpretation.

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Ry Rivard also points out that many searches for "inequality" may be related to the math term, and those should definitely disappear when schools lets out. But interest in specifically economic uses, like "income inequality," seems to rise and fall in a similar pattern.  

So the lesson from this extremely cursory but entertaining bit of market research: If you have a big opus planned on inequality—or who knows, maybe a book—release it when a bunch of students are brooding on campus.

Dec. 18 2014 1:00 PM

The Last Time So Few People Were Starting Law School, It Was 1973

The last time this few students were starting law school, Nixon was president, Tony Orlando and Dawn were killing it on the charts with "Tie a Yellow Ribbon Round the Ole Oak Tree," and ... oh, who cares? The point is, first-year law school enrollment is down to its lowest levels since 1973, according to the American Bar Association's new annual report. Just 37,924 new J.D. candidates enrolled this fall, 28 percent fewer than when the number of new students peaked in 2010. Since then, the ABA has also approved four new law schools, bringing the grand total to 204 (in 1973, there were just 151 schools). So there are more seats to fill, and fewer bodies to fill them.

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Chart by Jordan Weissmann

Which brings us to our next delightful stat. There are 186 first-year students per law school this year, down from 262 in 2010. You have to go all the way back to 1968 to find a number that low. Groovy times.

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One thing to keep in mind: The enrollment crash hasn't hit every school evenly. The ABA notes that 33 schools saw 1L enrollment increase at least 10 percent. Another 64 schools saw drops greater than 10 percent. So some institutions may be faring fine in this storm. Others are probably drowning.

And in the end, these numbers aren't especially surprising. But they do reinforce two points I've made before. First: This year's new crop of aspiring J.D.'s will likely have a far easier time on the job market than past classes. Second, I really don't see how the legal academy makes it out of this crisis without at least one school closing.

Dec. 18 2014 8:00 AM

The Ban on Cuban Cigars Is Over. Will Their Mystique Disappear, Too?

The biggest week for U.S.-Cuban relations of the past 50 years is also shaping up to be a big one for the cigar industry. As part of sweeping measures announced by the White House on Wednesday, American citizens licensed to travel to Cuba will now be allowed to import $400 worth of goods, with up to $100 of that coming from alcohol and tobacco products. In short: Cuban cigars are no longer illegal.

Since the U.S. trade embargo against Cuba took effect, Cuban cigars have become something of the stuff of legend. Before instating the ban in 1962, President John F. Kennedy famously secured 1,200 of the cigars for himself. They are widely thought to be superior to all other varieties and command hefty prices. In 1996, the New York Times reported that a box of 50 Cuban cigars would fetch up to $850 on the black market in the U.S. Today, genuine handmade Cuban cigars tend to start at $250 for a box of 25, says Jeff Borysiewicz, president of Corona Cigar Co., an online retailer. The finest kinds can retail for hundreds of dollars more.

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"It's a forbidden fruit," explains Eric Newman, president of Tampa, Florida–based J.C. Newman Cigar Co., a cigar manufacturer. "The biggest market in the world prohibits them from entering the marketplace." Rather than deterring U.S. consumers, that ban may have in fact proved the biggest selling point for Cuban cigars over the past 50 years. People in the industry compare their allure to that of Coors beer before it became easily available beyond the American West. So great was the East Coast's unrequited love for Coors in the 1970s that the quest to bring the beer from West to East was depicted in the popular 1977 film Smokey and the Bandit.

With both Coors and Cuban cigars, the question has been whether the product is ultimately worth the hype surrounding it. "Coors isn't a bad beer, but is it the best beer in the world?" Borysiewicz asks. "Cuban cigars are kind of the same way." Newman offers a different comparison: "You know how in Forrest Gump he says, 'Life is like a box of chocolates—you never know what you're going to get?' You get a box of Cuban cigars and one will be a wonderful, flavorful cigar, and the next will be plugged so that you can't even draw through it." On top of that, the market for Cuban cigars is also plagued by counterfeits.

Despite their inconsistency, the built-up mystique of Cuban cigars has been enough to cultivate a robust black market for them in the U.S. Newman estimates that 5 to 6 million are smuggled into the country each year. (In 2013, a Brooklyn artist trained dozens of pigeons to smuggle Cuban cigars across the border as part of an exhibition.) In part because of this, cigar experts don't think they'll see much of an impact on the market from the import changes. Add to that the fact that $100 worth of cigars really isn't much at all—maybe five to 10, if they're real—and the new allowance for American travelers isn't looking too disruptive.

That said, prices for Cuban cigars themselves will probably spike on the news. "People will pay the expensive prices because there's a lot of curiosity," says Newman. "If we haven't been able to partake in a product for over half a century, there's all this pent up demand. People will try it."

Dec. 17 2014 1:31 PM

The Ruble Stopped Crashing Today. Russia Is Still Screwed.

After two days of financial chaos, Russia is enjoying a tiny bit of respite. The country’s currency has stopped crashing for the moment—in fact, the ruble is up roughly 11 percent against the dollar today. Apple may have shut down its online store in the country until it can figure out how to properly price iPhones and iPads. Shoppers may be rushing to buy furniture and cars before prices go up. The country’s business press might be worrying about a possible “full-blown run on the banks.” But at least the markets are (relatively) calm.

Don’t expect it to last. Russia’s currency seems to have stabilized today for a handful of mostly fleeting reasons. Early Wednesday, the country's finance ministry announced that it would sell dollars and buy rubles to push up their value, which perked up investors. Unfortunately, it only has about $7 billion to spend—not enough to make a long-term difference. Meanwhile, Reuters reports that the country’s major exporters swept in and purchased rubles today “in preparation for monthly tax payments due this week.” And, perhaps most importantly, Russia’s central bank said it would inject money into the country’s banks to keep them financially sound.

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In the end, Russia is still facing the same bleak scenario that set off this week’s panic. Its economy is stuck in a vise between low oil prices and Western sanctions over its invasion of Ukraine. Cheap crude is killing the economy, while the sanctions have cut off banks and energy companies from the credit markets.

That combination is crushing for Russia, because, as Carl Weinberg of High Frequency Economics points out in a client note this morning, the country’s public and private sectors owe roughly $680 billion worth of foreign debt, which has gotten harder to pay off as the ruble has fallen. There’s certainly not enough oil money flowing to safely cover those loans. And without full access to the world’s financial system, Russian companies can’t count on borrowing to roll them over either. As Weinberg writes, some businesses “may fail. Others may default.” All of Russia is starting to look like one giant subprime borrower, which may well drive even more investors away from the country, and drive its currency lower. The central bank’s promise to support Russian financial institutions helps. But unless it turns on the printing press (which would hurt its oh-so-fragile currency), it doesn't have unlimited resources to spend.

Propping up the ruble would help. But how to do it? The Central Bank has tried the shock and awe approach of a massive interest rate hike this week, meant to tempt people to keep their money in Russian deposits. The move did nothing. And the higher rates go, the deeper the country is bound to sink into a recession, which will exacerbate its debt problems.

Some are hoping that the central bank will come to the rescue more directly, by using some of its $416 billion worth of cash reserves to simply buy rubles, much like the finance ministry said it would. Traders are already gearing up for it to start unloading some of its sizable gold reserves for that purpose. But that, too, doesn’t seem like a solution so much as a stopgap. The Central Bank has already spent $80 billion buying rubles in a vain attempt to stop its slide. Maybe even more money will help (the Financial Times quotes one estimate that $20 billion to $30 billion per day could add 15 percent to the ruble’s value). But as long as oil prices stay low—which could be a while—and sanctions stay in place, spending down the country’s reserves looks a little like burning furniture to keep the house warm. It can’t go on forever.

Many, like the Washington Post’s Matt O’Brien, are arguing that this all leads to one inevitable conclusion: Russia needs to put capital controls in place, which would essentially ban Russians from selling off their rubles. But that seems, at best, like a partial cure. Assuming they were successfully enforced—and in Russia especially, it’s an open question—it would stop money from leaving the country and keep the ruble stable. It wouldn’t fix the basic problem that, without expensive oil to rely on, Russia has lost its growth engine.

As long as Russia is stuck with cheap oil and painful sanctions, its economy will only get sicker, and its ability to repay its debts will remain in question. There’s no exit here. Except, maybe, getting out of Ukraine, and getting somewhere close to the West’s good graces.

Dec. 16 2014 4:25 PM

Court Rules Walmart Must Pay Up for Inadequately Compensating Workers

A week after a National Labor Relations Board judge ruled that a Walmart manager in California could not legally threaten to "shoot the union," a Pennsylvania court handed down another decision against the mega-retailer. The Pennsylvania Supreme Court ruled on Monday that Walmart must pony up $188 million to employees whom it failed to compensate properly during breaks and total hours worked.

The Pennsylvania Supreme Court upheld a 2007 judgment in favor of the workers. It affects roughly 187,000 people who were employed at Walmart between 1998 and 2006, and is expected to take a chunk out of Walmart's earnings for the current quarter, according to Reuters:

Monday's ruling on the class-action lawsuit will reduce Wal-Mart's earnings for the quarter ending on Jan. 31 by 6 cents a share, the company said in a securities filing. That amounts to roughly 4 percent of its profit forecast of $1.46 to $1.56 for the period.
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On Tuesday, Walmart said it might appeal the court's decision. "We disagree with the decision, and continue to believe that these claims should not be bundled together into a class-action lawsuit," the company said in a statement on Monday. Walmart also said last week that it disagreed with parts of the NLRB judge's decision, and planned to appeal them.

Dec. 16 2014 1:49 PM

Sweet, Sweet Justice: Russia’s Currency Is Now Faring Worse Than Ukraine’s

Yesterday, I noted that if Russia's ruble continued to fall, it might take the title of poorest performing national currency of 2014, beating out Ukraine's hryvnia.

With today's sell-off, it's official: According to this chart by head Bloomberg economist Michael McDonough, Russia is now ahead in the race for Worst Currency in the World. Consider it a small spiritual victory for the country Putin invaded.

Dec. 16 2014 11:45 AM

2014’s Most Horrendous Startup Fumbles​

This article originally appeared in Inc.

These are boom days for tech startups. But as software continues to eat big, stagnant industries, sometimes the rest of the world bites back.

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We've compiled the best of the worst behavior by startup executives, and the strangest user-behavior that ended up reflecting badly on the companies involved. (Note: In order to keep this relatively brief, we are leaving out personal misdeeds by company founders, however egregious, if said misdeeds happened outside of their professional duties.)

We are also not going so far as to catalog actual company failures. These are just the fumbles. Some are massive. Some are small-but-remarkable. Some are absurd. Here's to learning something from 2014, and making 2015 a little less slimy.

Pointing the Spotlight at the Boys Club

Back in mid-March, an engineer at Github, Julie Ann Horvath, accused the software-code startup's leadership of harassing her and creating an unbearably uncomfortable environment for women in their workplace. The online barrage of allegations gained traction online, due in part to an already intense debate about the treatment of women in the boys club of Silicon Valley. A month later, co-founder Tom Preston-Werner, the company's most prominent executive, stepped down from the company after an investigation found "evidence of mistakes and errors of judgment" by Preston-Werner and his wife, Theresa.

Rats, Mold, and a Clone

First there was born a startup to help startup employees go without lunch. Then that startup was named after a 1973 Charlton Heston film that made plenty of people queasy. Then that startup raked in more than $2 million in outside funding. The media tried it. We tried it. Vice tried it. Vice visited the Soylent warehouse and found rats, mold, and questionable practices. Somehow, this news didn't stop the demand, and due to a backlog in orders, a Soylent clone has popped up in San Francisco. It's called Schmoylent. And if that doesn't hurt, we don't know what would. 

Even the Government Says This Startup Violated Your Privacy

Although lots of the criticism over the privacy of Snapchat heated up in 2013, it continued this year. As the New York Times reports, in May, Snapchat settled with the FTC and agreed to further improve its privacy features over time. Then, in October, an experiment by three anonymous men to prove that Snapchat's messages didn't actually disappear, called Snapsaved.com, had its servers breached. Details are hazy, but the privacy saga continues nonetheless. 

"Orgy." Enough said.

Maybe there's nothing you can't do in New York, but Airbnb hasn't been having an easy time getting established in the Big Apple. Earlier this year, the state called most New York City rentals listed on the site illegal. That's after a report by the attorney general said listings for rentals appeared to violate building codes, safety codes, and tax regulations. More recently, a spectacular single incident seemed to show the other side of the spectrum of what terrible things can happen when one lists their apartment: A renter attempted to stage what was dubbed an "XXX Freak Fest." Airbnb, for its part, acted well and promptly responded to the matter, cutting the tenant a hefty check for damages. But that was too late to erase an image seared into the brains of Airbnb users. At least the man who was attempting to Airbnb his apartment got some traction from surviving the fumble.

Try to Be Inflammatory Enough Times, Eventually It Will Work

Genius—formerly known as RapGenius—the crowdsourced annotations site, has never been a company known for its decorous ways. Its trio of co-founders curse, brag about drug use, and, worst of all, wear sunglasses indoors. You know, like three responsible Yale graduates with nearly $60 million in venture-capital investment on their hands. In 2013, co-founder Mahbod Moghadam made headlines for outbursts, including telling Facebook founder Mark Zuckerberg and investor Warren Buffett to "suck my dick." (He subsequently blamed a benign brain tumor, which he had removed, for the outbursts.) This year, Moghadam annotated on Genius the 141-page manifesto of Elliot Rodger, the 22-year-old man who went on a rampage near the University of California–Santa Barbara in May, with comments critics deemed "creepy" and "disgusting." He promptly departed the company.

Executive Gossips About Stalking Journalists

It was just last month when Uber senior vice president of business, Emil Michael, suggested Uber should dig up dirt on critical journalists in order to smear and discredit them. In terms of public-relations blunders, it might have seemed minor—it was no alleged passenger assault, kidnapping, or rape. But it was one that touched not just on user-safety issues, but also privacy—and generated tons of speculation on whether Uber as a company is mature enough to handle its own whopping valuation (and the responsibilities that go along with such massive scale). 

Revenge of the Freelancers

There's a common practice amongst fast-growth service startups: Use independent contractors instead of full-time employees. It's how Uber, Lyft, and TaskRabbit, to name a few, were able to scale fast. But sometimes, it can backfire. The on-demand house-cleaning and handyman startup Handy was sued in California for violating labor laws due to exerting significant controls over workers (including telling them "how to use the bathroom"), but then classifying them as contractors. How handy.

Disaster Strikes. Then Is Dragged Out

After Whitney Wolfe accused Tinder's internal management (and parent-company IAC) of sexual harassment, the company was slow to respond. Co-founder Justin Mateen was suspended, but it took until November for the company to settle with Wolfe for $1 million—and for co-founder Sean Rad to step down as CEO. 

Dec. 16 2014 11:37 AM

Russia Is So Screwed

Well, it looks like Russia is in for a long, cold, and economically devastating winter.

With its currency stuck in a disastrous freefall thanks to Western sanctions and plunging oil prices, the country’s central bank announced around 1 a.m. last night that it would jack up its key interest rate from 10.5 percent to 17 percent. This was a desperate decision. The country was already hurtling toward a recession, and the rate hike—the biggest since 1998, when a financial crisis eventually forced it into default on its debt—was sure to make the pain far worse. But the hope was that, with higher interest rates, investors would finally stop pulling their money out of the country—that, as the New York Times's Neil Irwin put it, keeping money at a Russian bank would simply be “too good an offer to refuse.”

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It wasn’t. Today, the currency plunge has continued, with the ruble at one point falling 35 percent, at 80 to a dollar. It has rallied a bit since then. A dollar is now worth about 70 rubles, which only looks good compared to the absolute crisis earlier in the day.

A crashing currency is a problem for a number of reasons. For one, it makes imports more expensive and stokes inflation. This is especially a problem for everyday Russians, since their country depends on imports for an outsized percentage of its food. At the same time, it's becoming harder for Russian businesses and financial institutions that borrowed in dollars to pay off their debts, which are getting ever more expensive, and dangerous, as the ruble slides.

But at this point, it’s not clear that Russia has any good options left at its disposal to stop the ruble from tumbling. It could start unloading its own foreign currency reserves to stanch the bleeding, but as Jennifer Rankin of the Guardian argues, those could drain away fast. And such a move wouldn't fix any of the underlying problems that have pushed Russia to the breaking point. The ruble is collapsing, in part, because oil prices are in the pits. Cheap crude is bad for Russia’s economy. It’s terrible for its government, which gets half its tax revenue from oil and gas. And it's terrible for the ruble, specifically, because as the value of a country’s exports plunge, so too does the value of its money. At the same time, Western sanctions have largely cut off Russia’s banks and oil companies from the credit markets by preventing financial institutions from lending to them for more than one month at a time. In other words, Russia’s economy is basically radioactive. Increasing interest rates further won’t cure it and bring the money back.

What will? Perhaps nothing. But some, like Bloomberg View’s Leonid Bershidsky, say that it may be time for capital controls, which are basically rules meant to at least keep money from fleeing the country. There’s some precedent for this; Malaysia used them to save its economy from a meltdown during the emerging markets currency crisis of the late 1990s. But currency controls are also tricky, because the second anybody starts seriously talking about them, there’s a risk that investors will start trying to get their money out the door before it slams shut. Plus, the sorts of billionaire oligarchs who dominate Russia don’t like being told where they can and can’t send their money.

Also, they just might not work. “The Russians are more skillful at escaping capital controls than anybody else in the world,” Anders Aslund, a senior fellow at the Peterson Institute for International Economics, told me. I asked Aslund what Russia could do at this point to save itself. “The only thing Russia can do is to have the sanctions ended,” which would restore some normalcy to the financial system, he said. “I don’t see any other options.”

Of course, that would require giving in to the West’s demands regarding Ukraine, which seems unlikely, to say the least.

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