What’s the Matter with Small Biz?

The following is a guest post from Robin Bose.

There’s a truism that small businesses are the backbone of the American economy. I happen to think it’s true that small businesses make local economics more resilient to shocks and changes in the overall mix of market forces. If we accept that, then we should all be a little worried. A mildly alarming study The Brookings Institution published shows a 30 year decline in what the US census calls “new firm formation” (i.e., baby businesses getting formed) accompanied by no real change in “firm exits” (small business owners closing up shop). Some surprising highlights:

  • Troubling 30 year secular decline across multiple business cycles and political administrations
  • Trend is prevalent across all 50 states and all but a few of 360+ metros
  • No industry (not even high tech) has withstood the decline except financial services

I made a little slideshow pointing out some of the data the Brookings Institution used to make the case, as well as some of the reactions in the media trying to explain why this is happening. Will try to follow up with a post on my thoughts — feel free to leave thoughtful ramblings on why you think it’s happening.

Predictor of Stock Market Returns

I found this post from the ‘Philosophical Economics’ blog to be very thoughtful. It offers some interesting ways of thinking about equity price levels, and what drives them. The author makes a convincing argument that despite the fact that many believe price changes are largely a function of valuation multiples (e.g., P/E ratios), they are actually caused by relative changes in the aggregate investor allocation to equities.

Essentially, the post makes the case that aggregate demand for equities as a proportion of all financial securities — or average asset allocation to equity across all investor portfolios — does a much better job of explaining subsequent returns than traditional mean-reversion metrics. When demand for equities in aggregate increases (decreases), expected future returns decrease (increase). This is because equity allocations cannot fall below zero or rise above 100%, and in practice they generally fall between 25-50%.

For example, if the current equity allocation level is high, this implies that there’s much more room for the level to decrease rather than rise over a medium term time horizon. When it does decrease, the excess supply will drive down prices and thus returns. This chart shows the strength of the relationship:

avginv

The post is long, but the arguments are carefully constructed and compelling.

Outsourcing Gavel Production in the US Senate

The following is a guest post from Robin Bose. Robin went to MIT with me and likes beer almost as much as I do. He’s also a great singer. 

The United States Senate has a busy 2013 summer schedule: a new farm bill, interest rates on student loans, and comprehensive immigration reform. Immigration reform in particular has thrown off a lot of heat and light, with new entrants into lobbying — led by Facebook and the tech sector — facing an already crowded field of corporate interests, immigrant groups, unions, Tea Partiers, border militia, and lots of local, state, and national officials. For example, we know who the sheriff of Maricopa County AZ is (Joe Arpaio). He makes national immigration news. That’s crazy. I don’t even know who the sheriff of my town is (do we have a sheriff?).

There’s a big stink about immigrant visas from places like India, tied up with leftover emotions from the last presidential campaign about outsourcing. So, as the Senate considers immigration reform, its members might take a quick moment to look at their gavel.

By U.S. Senate (Senate gavel (direct image URL [1]).) [Public domain], via Wikimedia Commons

Apparently, in 1954 (a mere 7 years after modern India gained its independence from the British Empire), the US Senate asked the Indian government to fashion a replacement for the national gavel, which was made of so much ivory that there wasn’t enough available commercially to make one without asking India (honestly — how much ivory do you really need?! Won’t a single elephant tusk do?). So the vice president of India traveled to the US Senate and offered the presiding officer a new gavel (whose manufacture was outsourced to India!).  He also offered an appropriate homily about the senators debating “with freedom from passion and prejudice.” Maybe something for them to remember during the summertime immigration debate, when veiled warnings about the dangers posed by immigrants to the American economy/culture will probably get thrown about.

By the way — there’s a sidestory behind why America’s most august chamber needed a new gavel. Richard Nixon, then the VP and presiding officer, broke the old one, which had been around in the Senate for over 100 years. He kept whacking it against his desk during a heated argument about atomic energy. It broke. Party foul.

Stimulus Plan Brings Foodie’s to Southie

lfoodies ogo headerThere’s been a lot of debate about whether or not the stimulus plan worked. At the time it was passed, many argued that it wouldn’t be fast enough, that the projects would take so long to get underway that it wouldn’t be able to accomplish its purpose. And now, according to many economists, it definitely helped create jobs. But here we are, three years later. Our financial system didn’t self destruct, but economy is still growing at a pretty pathetic pace (although there have been some encouraging signs over the past two months). So, knowing we can’t change the past anyways, maybe its not so bad that some of the effects of the stimulus plan have yet to hit the economy.

I’ve lived in South Boston for four and a half years. I live on the west side, the part that is “up and coming.” While there have been a ton of condo developments since I’ve been here, and a bunch of new retail establishments, there’s still a lot of under utilized real estate. A perfect example is the old Chocolate and Nuts factory on West Broadway. It’s been abandoned since the day I moved to the neighborhood. It’s disgusting. And it occupies a huge street corner, right in the center of hundreds of recently built/renovated condos. Not only is the neighborhood not fully utilizing its space, but the aesthetic of having a dilapidated abandoned building must be a deterrent in some way, keeping some people away from the neighborhood.

So yesterday I was both surprised and excited to see a sign on the old Chocolate and Nuts factory indicating that Foodie’s, a high end fresh food grocery store, is renovating the building and will be opening in the spring. I was surprised because right on the building they had one of those “This Project was Funded by the American Recovery and Reinvestment Act” signs. This seemed a bit odd. Why would a three year old stimulus law fund a grocery store project in my neighborhood?

I went to their website and found out they obtained a low interest small business loan from the stimulus budget, which helped justify their investment in my neighborhood. The loan was approved in 2010, and two years later they’re just starting the renovations. So, at least using this anecdote, the critics were right about the timing issues.

But, at least to me, this seems like a great use of stimulus money. First off, it’s only a loan, not a grant. So the government will in all likelihood get the money back, and will only pay the spread between the rate they offered and a treasury rate of the same duration. And treasury rates are low right now. At historic lows. So it probably won’t cost all that much.

And having been in Southie for such a long time, I know people that have chosen not to move here because it’s tough to buy groceries here. We have lots of convenience stores, but the closest grocery store is a mile away. It’s not that far, but some people like to be able to pick something up on the way home from work. And that’s tough in this neighborhood.

Not only does this loan help a small business expand, but it will also make the west side a more desirable place to live. Having a family-owned gourmet grocery store around the corner will definitely encourage more people to live here, speeding up the rate of condo developments, helping property prices, and thus encouraging more retail establishments to open.

So I’m fairly confident that this will help the Southie economy. I’m also fairly confident that I’m going to start spending a bit more money on fresher groceries. All in all, not so bad.

The Great Norwegian Butter Shortage of 2011

This article threw me for a number of reasons. I’ll comment on it paragraph by paragraph:

“An acute butter shortage in Norway, one of the world’s richest countries, has left people worrying how to bake their Christmas goodies with store shelves emptied and prices through the roof.”

Why not ship some from Sweden? Or Denmark? Or the UK? Sounds like a good short term operation for someone with a truck. Or a boat.

“The shortfall, expected to last into January, amounts to between 500 and 1,000 tonnes, said Tine, Norway’s main dairy company, while online sellers have offered 500-gramme packs for up to 350 euros ($465).”

Whoa! Seriously? This is nearly $1,000/kilo, or $907,000 per ton. A truck can hold 5 tons or so. There’s obviously no way those extreme prices would hold if the shortage were filled, but this still seems like a great opportunity. Seriously, why isn’t someone with a truck making a quick buck here? If any Norwegian readers want to send me an address, I’ll ship you butter for just $150/kilo plus any import fees.

“The dire shortage poses a serious challenge for Norwegians who are trying to finish their traditional Christmas baking — a task which usually requires them to make at least seven different kinds of biscuits.”

What?! Seven different kinds of biscuits? Required? I didn’t even know that many types of biscuits existed. Okay Norway, now you really have my attention.

“The shortfall has been blamed on a rainy summer that cut into feed production and therefore dairy output, but also the ballooning popularity of a low-carbohydrate, fat-rich diet that has sent demand for butter soaring. “Compared to 2010, demand has grown by as much as 30 percent,” Tine spokesman Lars Galtung told AFP.”

Are you sure it wasn’t the required 7 biscuits per family?

“Last Friday, customs officers stopped a Russian at the Norwegian-Swedish border and seized 90 kilos (198 pounds) of butter stashed in his car.”

Oh finally. Someone did try and make a buck. And his butter was seized?! What’s more important Norway, customs laws or preserving the Christmas biscuit baking tradition?

And the article just abruptly ends there.

AA+ What?

Kid Dynamite: “In case you’ve been living under a rock:  Standard and Poors downgraded the credit rating for the United States of America last night, from AAA to AA+.”

It seems that at this point S&P is generally viewed as incompetent, and the decision to downgrade the US may not be as consequential as many initially predicted. But who really knows? We’ll get a hint tomorrow morning. In the meantime, I found the following posts and articles to be thoughtful and/or interesting:

James Kwak:

Still, I think the whole thing is preposterous. S&P downgrading the United States is like Consumer Reports downgrading Coca-Cola. Consumer Reports is a great institution. For example, if you want to know how reliable a 2007 Ford Explorer is going to be, they have done more research than anyone to figure out the reliability history of every single vehicle. Those ratings are a real public service, since they add information to the world. But when it comes to Coke and Pepsi, everyone has an opinion already, and no one cares which one, according to Consumer Reports, “really” tastes better. When S&P rated some tranche of a CDO AAA back in 2006, it meant that some poor analyst had run some model fed to her by an investment bank and made sure that the rows and columns added up correctly, and the default probability percentage at the end was below some threshold. It might have been crappy information, but it was new information. When S&P rates long-term Treasuries AA+, it means . . . nothing. And if any serious buy-side investor were tempted to take S&P’s rating into account, she would be deterred by the fact that the analysis that produced the rating included a $2 trillion arithmetic error.

Ezra Klein, with two conflicting theories on the timing of it all:

S&P is downgrading their estimation of our political system, not our actual ability to pay our debts. Indeed, the past 36 hours offered a stunning demonstration of the market’s faith in our ability to pay our debts. The panic sent investors rushing to buy Treasuries, sending yields on 10-year Treasuries to 2.4 percent — that’s almost nothing — and demonstrating that American debt is still considered the safest bet in the world. That vote of confidence under real world conditions is far more important than anything S&P says.

This is very odd timing from S&P. The markets are very fragile right now. But you can take that both ways: It suggests that S&P either wanted to make a huge splash with their downgrade, or, because they’re doing it at a time when investors have precisely zero other options they like and are thus likely to continue to hold Treasuries … that they don’t want to make too much of a splash.

Paul Krugman:

So what was S&P even talking about? Presumably they had some theory that restraint now is an indicator of the future — but there’s no good reason to believe that theory, and for sure S&P has no authority to make that kind of vague political judgment.

In short, S&P is just making stuff up — and after the mortgage debacle, they really don’t have that right.

Felix Salmon:

…the US does not deserve a triple-A rating, and the reason has nothing whatsoever to do with its debt ratios. America’s ability to pay is neither here nor there: the problem is its willingness to pay. And there’s a serious constituency of powerful people in Congress who are perfectly willing and even eager to drive the US into default.

But putting aside the politics of it all, these charts from the Globe and Mail, via James Fallows, say quite a bit about where we’re at, where we probably need to go, and how we probably need to get there:

TaxChart1.jpg