Say hello to the Standard and Poor’s backlash. The rating agency, which downgraded the U.S. sovereign debt from AAA to AA+ on August 5, is now reaping what it sowed. Dan Indiviglio’s thoughts, from the Atlantic:
Apparently, it isn't so fun to get downgraded. Earlier this month, Standard and Poor's downgraded the U.S., which caused a domino effect and pushed down the ratings of bonds issued by other entities implicitly guaranteed by the U.S like some municipalities. The retaliation appears to have begun.
This week, we're learning that some of those local governments are dropping the agency from the group it pays to rate its debt. Meanwhile, the U.S. Justice Department is reportedly investigating S&P for its mortgage bond rating mistakes. Yet S&P rejected a proposal that would have changed the ratings market framework in a way that might have prevented bond issuer retaliation. The agency may only have itself to blame for its situation.
Among those local governments is Los Angeles, which will no longer be paying S&P to rate its investment fund and it’s major exposure to U.S. Treasuries, now that S&P has rated the fund AAf rather than AAAf.
This is occurring in the context of “super downgrades” of municipal bond ratings by all the major agencies: S&P, Moody’s, and Fitch. So, have the ratings agencies proven themselves to be capricious, reactive, and...well, incompetent, given their track record to putting lipstick on subprime mortgage securities before the financial crisis? Or are the doing the good work of good men?
Some of these questions will remain unanswered. But LA was right to can S&P. Why?
- It’s all about yield. Take a look at the yield on the 10-year T-note: it’s currently at a 50-year low of 2.08 -- down 50 basis points since the August 5 S&P downgrade. The U.S.A. should get downgraded more often! What that yield says is that prospects for the future of the U.S. economy aren’t very good -- if they were, money would be chasing riskier returns in the stock market and elsewhere. But a flight to quality has shown that U.S. debt is still the safest haven there is. Local investment funds would be...how can I put this? Idiotic? to reduce their demand for that debt. As the very entertaining James Altucher argues at MarketWatch: “Debt ratings” of the most highly liquid bonds on the planet should be determined by one thing only: Yield (in the absence of other information about our ability to default). That makes U.S. bonds the safest AAAAA+ bonds in the world.
- S&P was providing window-dressing. The only reasons LA was paying S&P to rate its fund was because it wanted to be able to reassure anyone exposed to the fund that its investments were ironclad. If you were concerned on that point, you could simply look at how much of the $7 billion -- $5.6 billion -- was tied in Treasuries. Boom! Rock-bottom risk there. Or...you could have considered how much L.A. was paying S&P to perform this completely perfunctory rating: a very perfunctory $16,000.
- Investments aren’t debt. Los Angeles is retaining S&P -- as well as Moody’s and Fitch -- to rate its bonds. S&P should be thankful that municipalities even consider this worthwhile and just don’t mount a campaign to get bond investors to concentrate on a yield range as a true measure of whether city is a good bet (see above). But there’s still a distinction to be made. LA gets to decide how much risk it wants to take on with its own investments. But the market makes a call regarding the debt that the city issues. S&P and the other agencies, it could be argued, perform some kind of service to municipal-bond investors by giving them a mechanism by which to quantify risk that isn’t subject to daily fluctuations. That’s in LA’s interest.
Now that Texas Governor Rick Perry is running for President, his so-called “Texas Miracle” on job creation is being hotly interrogated in all quarters. Here’s a taste, from Harold Meryerson at the Washington Post:
Perry’s economic vision is the kind of race-to-the-bottom mercantilism we’ve come to expect from developing nations in the globalized economy, although, as China, Brazil and India illustrate, many such nations have begun to provide citizens with more schooling and better jobs as they grow wealthier. No comparable developments can be seen in Rick Perry’s Texas.
And here’s Joseph Lawler at the American Spectator:
Although there are good reasons to think that Texas's record doesn't validate conservative economics once and for all, I think that the evidence suggests that Texas would have been worse off in the recession -- more like California -- if not for its free-market laws. Conversely, it also indicates that states like New York and Illinois would be in better shape now if they were more like Texas.
You get the idea. The left considers Texas' job-creation record to consist of...crummy jobs and low wages with few benefits and -- unlike enlightened China and India -- no meaningful schooling to help workers drawn by those jobs to the state to escape their low-wage plight. The right says that business needs to be able to afford the jobs it creates in order the be successful, so quit complaining. Hey, look at California, where the unemployment rate just climbed above 12 percent again, making it the second-most-unemployed state in the U.S., behind the place where all work goes to die, Nevada.
In 2009, the Economist magazine, never one to pull punches, did take a good hard look at the California v. Texas debate. Here’s what it thought about the Golden State:
Back in its golden age in the 1950s and 1960s, it offered middle-class people, not just techy high-fliers, a shot at the American dream—complete with superb schools and universities, and an enviable physical infrastructure. These days California’s unemployment rate is running at 11.5%, two points ahead of the national average. In such Californian cities as Fresno, Merced and El Centro, jobless rates are higher than in Detroit. Its roads and schools are crumbling. Every year, over 100,000 more Americans leave the state than enter it.
And here’s the rundown on the Lone Star State:
Texas also clearly offers a different model, based on small government. It has no state capital-gains or income tax, and a business-friendly and immigrant-tolerant attitude. It is home to more Fortune 500 companies than any other state—64 compared with California’s 51 and New York’s 56. And as happens to fashionable places, some erstwhile weaknesses now seem strengths (flat, ugly countryside makes it easier for Dallas-Fort Worth to expand than mountain-and-sea-locked LA)...Texas also gets on better with Mexico than California does.
Oh man. Ouch.
The Battle of the Biggest States in the West really boils down to three main distinctions. First, Texas doesn’t do politics like California. In fact, it doesn’t do politics at all. The American Prospect argues that Texas doesn't have a government so much as an "anti-government." This makes it tough for politicians or, um...voters to interfere with the business process.
Second, California is a laboratory for democracy, with its controversial reliance on direct democracy through the ballot process. Texas is a pioneer of the state-as-mercantilist approach that the WaPo’s Meyerson outlines above. This might make California seem far more noble, but in practice it’s made California far more reliant on business innovation (e.g., Silicon Valley) to move the needle than on simply creating a favorable climate for business operations.
Finally, while California is stereotypically laid-back, Texas is stubbornly indifferent. It can get away with this because it’s the center of the U.S. energy economy. California has Green dreams, while Texas loves Big Oil.
It’s unlikely if not inconceivable that Texas and California will combine economic DNA. And this is a problem for the Golden State. Because while Texas can catch up with what California currently has going for it, especially in terms of education, California will have to give up plenty of things it can no longer afford to stay competitive with its rival in the West.
Last week, unemployment claims edged above 400,000 again, after falling slightly below that number. Why is this a (potentially) big deal? Because 400,000 is a bit of a magic unemployment number: Fall below it, and you could be on the road to recovery; rise above it, and you could be looking at an economy headed for a stall. Or a double-dip recession. In any case, misery.
What does this mean in Southern California? Nothing good, given that our unemployment rate is running far above the national average of 9.1 percent. In Los Angeles County, it was at 12.4 percent in June, according to the latest batch of statistics released by the BLS.
Angelenos might want to consider themselves lucky, however. As the chart below shows, Riverside and San Bernadino counties have it much worse (the graphic comes from Google’s very useful interactive Public Data Explorer).
Southern California has two Very Large Economic Problems right now: higher unemployment than the national average (around 12 percent versus 9.2 percent); and a thoroughly cratered housing market, down a knee-buckling 44 percent since its peak in 2005.
Now there’s something else. According to the California Association of Realtors, Wells Fargo will “[no longer] accept applications for loans using...temporary loan limits ($625,501-$729,750),” limits that were raised by Congress in 2008, but are scheduled to expire September 30. So $625,500 is now the new ceiling for a loan that can be backstopped by Fannie and Freddie.
Obviously, this is a challenge for the Southern Californian housing market. Let’s look at prices in L.A. County, which fell last month, but where the median is still $320,000. It’s not as expensive to buy here as it was during the boom. But it’s far from cheap, particularly in desirable areas. In fact, the whole reason for Congress to up the limit was to keep prices from completely tanking in high-cost regions, like SoCal.
Upper-middle-class buyers will now no longer be able to get conforming loans from Wells Fargo above the $625,000 limit. Look at a neighborhood like Silver Lake in L.A., where the median home price is now $540,000. Because we’re dealing with the median here, whatever very expensive homes sold in Silver Lake are excepted. But there’s still not a whole lot of room to maneuver between $540,000 and $625,000.
What this means in practice is that Wells Fargo is reacting to an imminent liquidity withdrawal from the market by saying that it’s going to raise the cost of writing loans on higher risk. Now anything above $625,000 will be defined as a jumbo loan, requiring a higher down-payment and commanding a higher interest rate. The problem here is that doing a 30-year fixed-rate jumbo with Wells Fargo is going to cost the borrower 37 basis points in interest.
Sure, rates are at historic lows, so that doesn’t sound like much. But you're going to need a 25 percent down payment, and if you finance, say, $650,000 at 4.625 percent over 30 years (that’s the rate the Wells Fargo is currently listing), you’ll pay about $553,000 in total interest. Do it at 4.25 percent and you’ll pay $33,000 less.
Photo: Coolcaesar/Wikimedia Commons
The Los Angeles Times just went through another round of layoffs, while its parent, Tribune Co., is nearing an exit from a bankruptcy proceeding that began in 2008 and shows few signs of being pleasantly resolved. The Times itself, however, is becoming a legitimate online powerhouse. But it’s beginning to look less and less like a newspaper.
The paper itself conveniently reports its own traffic numbers, focusing on its blogs. And the numbers are impressive. In July, the top 3 blogs racked up 36 million in page views. Let’s just jump back to that for a second. Blogs. Racked up. 36 million in page views.
Justin Ellis at the Nieman Journaism Lab is impressed:
[T]he Times’ traffic gains have also come off the work of its blogs, including Politics Now, Hero Complex (on “movies, comics, fanboy fare”), and a Technology blog. Orr attributes that to the high posting frequency from the blogs’ writers, as well as their writing style. It’s writing that has voice and knowledge, but is also reported out, Orr said. So when you read an item on Politics Now about the Iowa straw poll, say, or an item about Pixar on Hero Complex, those posts are actually more akin to article-length stories.
Hero Complex is indeed a fanboy's paradise. Gawer Media started a very similar effort in 2008, called io9, that roams the territory of capes, wands, and lightsabers. But Hero Complex aims for a more middle-ground, less geek-a-delic readership.
If you check out the Pixar post that Ellis highlights, it quickly becomes apparent that it isn’t very bloggy at all. But then again, this is something of a trend in the blogosphere. Old-school journalism and the fast-and-loose world of what we might now be able to call old-school blogging are beginning to converge. And both are changing in the face of the rapidly shifting economics of the media business.
Traffic is the coin of the realm in this space. And high-quality traffic -- the kind of thing that Google likes, and likes even more since it revised its Panda search algorithm -- is what the Times high-quality blogging is bringing in.
In fact, the Times’ blogs are beginning to look a lot like what Gawker Media -- the once-upstart New York-based enterprise that publishes the eponymous gossip site, as well as technology blog Gizmodo, sports blog Deadspin, and even porn blog Fleshbot (sorry, that link is NSFW) -- wanted to be in the aftermath of its controversial redesign earlier this year. (Reuters blogger and Gawkerologist Felix Salmon unpacks the whole thing here.)
Weirdly, it’s like the L.A. Times and Gawker are ships passing in the night: one a leviathan ocean liner trying to become a frigate; the other a fast-attack sub that’s turning into dreadnought. You could even say that the Times is ahead of the game here: its blogs feature exactly the kind of rich, reported content that Gawker head Nick Denton insists he wants -- as opposed to the snarky, quick-hit blogging that has made the Gawker sites successful and addictive in the early years of Web 2.0.
Viewed this way, the Times’ blog network, Southern California born and bred, looks like the most innovative media business in country -- better than the New York Times, which despite the popularity of satellites such as DealBook is still tied to the staid mothership; and better than the Huffington Post, which has become something of a hot mess since its merger with AOL.
Is this a model that newspapers everywhere should emulate? Well, maybe. The Times’ blogs have earned their traffic through original writing and reporting, less from the dreaded aggregation, whereby blogs summarize or deconstruct and re-assemble the content of others in a more search-friendly context.
But the Times’ blogs are also highly dependent on what Jeff Jarvis has called “Google juice.” The Times’ online managing editor, Jimmy Orr, reported that Google traffic for LATimes.com was up “65.4% year over year.” Sounds great. Until whatever search-engine optimization strategy that yielded it gets gamed by lesser operations and compels Google to again adjust its algorithm.
Of couse, one lesson that the Times’ can learn from Gawker is to avoid messing with a good thing. After Gawker Media unveiled its redesign, its traffic plummeted by 25 percent. That was the sound of a blogging network becoming less bloggy -- but also of money leaving the bank.
Photo: Minaert/Wikimedia Commons