Some encouraging news via Frank SanPietro and internet connectivity. The story in PC Magazine talks about how Sprint is going to provide 1 million students with the equipment and connectivity to connect to the internet at home.

Frank SanPietro and internet connectivity.
Frank SanPietro and internet connectivity.

The powerful thing about this project is that connectivity is not just about doing homework – though that’s a very important piece of it. Connectivity is the bridge to opportunity – it’s a way of accessing information about colleges, scholarships, jobs, careers, etc and putting into these students hands is very powerful.
The alliance will be providing the students the hardware to access the internet and equally important, Sprint will provide 3 GB of LTE data per month. The story notes that it’s often the cost of data that keep students from being able to access the internet consistently via smartphone.
Given all of the turmoil about government, politics,, etc – this story was a refreshing change.
Thanks for stopping by…..

Frank SanPietro on how California Aims Retirement Plan at Those Whose Jobs Offer None

California Uber Alles!
All due respect to late, great punk band the Dead Kennedys’, it appears that Gerry Brown and Co. are at it again.
The proposal is to implement mandatory retirement savings at all CA employers. In those instances where a company does not offer retirement benefits, the state will take 3% of the workers pay and put those funds into a retirement account for that individual. While on the surface, this seems completely benevolent (who could argue with the idea that Golden State workers will have resources for their Golden years?), the implementation of the plan raises some not-so-shiny concerns.
First; Statistically speaking, companies that do not offer retirement benefits tend to be smaller operations. These smaller companies tend to have fewer and lower paid employees. While 3% doesn’t seem like a lot (and to be fair, there are tax breaks for contributors’), lower paid workers tend to “feel” any difference in their take home pay, no matter how slight.
Second; Regulations, Regulations, Regulations. Since the financial crisis, there have been a plethora of new financial regulations implemented. The regulations dealing with employee retirement plans have emphasized the fiduciary responsibility borne by the company when they choose the investments and are otherwise in control of employee plans. With the state making the collection of these contributions compulsory , employers may be subject to litigation from disgruntled employees.
Third; Who is going to manage the money? The article points out that the federal MyRA program has had anemic response, due in large part to the very low yields currently being offered on treasuries. If the CA plan wants to produce returns in excess of the risk free rate, they will need to invest in equities. Who manages these investments and their level of compensation is no small consideration and (not surprisingly) is also a potential cause for litigation.
Fourth; the federal law which governs the creation and management of retirement plans is known as ERISA, the Employee Retirement Income Security Act. Adopted in 1974, this federal law provides protections for employees retirement funds. These protections are designed (largely) to prevent unscrulous employers from misuse or mismanagement of employee retirement savings. The proposed CA plan is exempt from ERISA. So, the oversight on which millions of American workers have come to rely regarding their retirement plan assets is inapplicable to the proposed CA plan.
There are good reasons both financial and humanitarian to promote responsible retirement savings and investment. Everyone should be able to live out their final years in dignity. Further, individuals who have resources are less likely to rely on the state (taxpayers) to support them in their final years. However, it appears that the implementation of a plan that would be exempt from the normal regulatory requirements and is focused largely on small businesses and their staff isn’t the best course of action to get there.
Thanks for stopping by–Frank SanPietro, out…………….

Read more about it from the NY Times here (photo credit to NYT):


Frank SanPietro and NY Times retirement
Frank SanPietro and NY Times retirement

G-7: Stop Helping….Please!?!?!?!?

Saw this G-7 article and had to offer some thoughts for collective consideration.
THOUGHT 1 – “Use All Policy Levers” vs. “Demand Still Weak” — These are two sides of the same coin. Demand is weak, in large part, because of the overuse of “policy levers” to manipulate the economy. Worse yet, demand is not growing as rapidly because many individuals, investors and business owners are reluctant to make commitments , as they fear new regulation, tax or bothTHOUGHT 2 – “Japan Considering Raising National Sales Tax from 8% to 10%.. “offsets” may be required to prevent economic damage” –
If there is already concern that implementing a tax hike will require corrective action, it’s probably a bad idea. Interestingly, these sort of “offsets” are referred to as “loopholes” and generally criticized by some of our leadership

PARTING THOUGHT – “Stop throwing anchors instead of life preservers” – The “finance ministers” noted that they would need to action from the private sector to stimulate demand. Reasonable. However, if the objective is truly to stimulate private sector activity, perhaps the public sector could restrain itself from taking actions which lead to the exact opposite outcome.

Labor Market: When Giving Up is Considered Winning….

Recent BLS report mentions how the level of claims has been under 300,000 for over a year. Traditionally considered to be a sign of a healthy labor market, it could also be interpreted evidence of the vast number of US job seekers that have either exhausted benefits, exited workforce entirely, or haven’t had sufficient consistent employment to qualify for unemployment benefits over the last year.
More concerning is the quote at the end of the piece by Challenger, Gray and Christmas Chief, John Challenger – he talks about the slowing pace of job cutting because many employers are taking a “wait and see attitude” – does that mean that those cuts will “never” happen? Not likely. Does that mean that we may, depending on things like Brexit, the November Elections and Solar Flares, see a sudden move towards job cutting later this year? Stay tuned………

Precious Metal Prices pointing to a Gilded Future ?

CNBC had an interesting story about precious metals and the relationship between the price of gold and silver. The “gold-silver ratio”, as one would expect compare the metals by calculating the amount of silver that can be purchased for the cost of a single ounce of gold.
Given that gold has been well over $1,300 per ounce, while silver has been rising rapidly, recently trading over $20 per ounce, the ratio has been about 66 or so.
The story notes this indicator having been as high as the low 80’s in the beginning of the year. Historically, the ratio has been about 61.
Now comes the interesting part…
As with all good financial “signals” – the gold-silver ratio can be interpreted optimistically by some, while others can take the diametrically opposite position viewing the same information. The article quotes one analyst as interpreting the change in the ratio (and the rise in silver driving it) as a sign of “real speculation” and being a “warning sign”.
A different analyst notes that this same set of facts can be used to support an argument that “investors are embracing risk again”.

To my mind, the interesting thing about these conflicting analyses is that they are fundamentally (philosophically?) the same. Both talk about the rise in silver as being indicative of market participants taking on more risk. In the bearish case, this is seen as unwarranted speculation and a sign that there is a bubble of sorts and it’s nearing the tipping (popping?) point.
The same set of facts – i.e., silver currently rising rapidly and shrinking the gold silver ratio – is used to justify the bullish case. In that situation, the willingness of investors to keep buying as prices continue to rise is evidence that market participants are taking on more risk (hmm, where have we heard that before?), but that they are doing so because they believe the markets will be headed to new highs for the remainder of 2016.
One way to interpret this is to consider the following – Silver, while considered a “precious” metal, is also an important industrial metal. As such, the price of silver responds much more dramatically to economic events. Gold, on the other hand, is almost entirely mined and traded as an investment (and of course, for jewelry).
Viewing it through this lens, one could interpret the narrowing of the gold-silver ratio as evidence of continued growth in manufacturing, and by extension, the economy as a whole.
This will be an interesting one to watch as the second half of the year progresses, especially considering that it’s an election year.
Thanks for stopping by.
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What COULD be keeping mortgage rates from going even lower?

Great piece on mortgage rates in WSJ.com. Discusses why the spread between the long mortgage rate (30 year fixed) and the underlying bond (10 Year Treasuries) is at it’s highest.
One of the big misconceptions about interest rate determination is that the “Prime Rate” has something to do with mortgages. It doesn’t. Well technically it has an effect on some adjustable and home equity rates since they can be “tied to Prime”, though LIBOR (London Interbank Offer Rate) has become more popular over recent years as the benchmark for rate determinations. However, the real instrument that determines the rates for mortgages is the 10 year treasury. Why? Because the “average” person moves about once every 7 years or so. Therefore, in a textbook example of liability matching, the lenders use the rate on the 10 year since it’s the nearest liquid fixed income instrument which is longer than the average holding period.

So, if that’s the case – then why aren’t banks going ahead and “following the 10 year down”? Because at a certain point, rates can only be so low before banks have profit issues and also have insufficient cash flows to guard against future contingencies.
One of the biggest — compliance with Dodd-Frank. Fannie Mae and Freddie Mac both have changed their regulations and are now requiring that banks purchase loans back from them. This practice was introduced after the 2008 mortgage meltdown and is a way of avoiding Fannie and Freddie having responsibility for “catastrophic liability levels”.
So, banks are keeping rates higher than what the normal calculations would say is current fair value to account for the increased costs of compliance and cooperation with regulators.
Still in all, rates are very low and many homeowners are continuing to take advantage of this environment to lower their mortgage payments. In the long run, that’s good news.

Recent Observations on Events

Hello Friends and Fellow Observers of the World!!!

Posting has certainly slowed down during June with vacation and other family commitments.   Here are links to a couple of news stories on which I recently commented.

Locally Grown..Globally Shipped….

Reuters did a piece on the soon to be re-opened Panama Canal. Interestingly, that has implications for farmers (and others) right here in West Tennessee.

Stability Never Felt So Shaky…..

Recent BLS news on the economy and labor conditions claims that things are stabilizing.  I raise some different points.

Hope everyone is enjoying their summer!

“Money Monsters”..and Other Mythical Creatures

Believe it or Not..When Grimm’s FairyTales were first published, they were criticized as being “unsuitable for chidren”…..

And for good reason; you see our pair of author brothers, Jacob and Wilhelm were trying to provide cautionary tales to Der Kinder.   However, it’s hard to offer dire warnings absent graphic descriptions of the perils awaiting those who fail to heed Mama and Papa.  Hence, we hear about evil witches cooking children,  and blood thirsty wolves pursuing young maidens.  And all to illustrate (among other points) the importance of not straying from home.   These type of “object lessons embedded in a story” have been a literary staple throughout human history and across virtually every culture.

So, it’s no surprise that we are getting  a modern version in the new George Clooney and Julia Roberts movie “Money Monster”.   And much like the Brothers Grimm, the tellers of this modern monster tale rely on a highly emotional, though implausible wicked villain as the personification and source of all evil.

Look OUT for those evil I-Bankers, kids…..

However, where the brothers pointed to evil dwarfs and wicked stepmothers, our modern tale has as it’s central embodiment of evil..wait for it…those Wall Street Guys.   In a stunningly broad generalization, the anti-hero of the movie, featured prominently in the tv ads, tells us that he’s here to get back the “800 million dollars that you wall street clowns lost”. Of course, he’s fully entitled to undertake this act of terrorism, because he’s going after the “real bad guys”.    Never mind that the reasons for the last market downturn were varied, complicated and had more than a little to do with government policies (both fiscal and monetary).  Further ignore the fact that there’s no such thing as “those Wall Street Guys”.  The financial services industry is one of the largest in our country and the world .  Here in the USA, there are approximately 6 million people (of both genders and every race/ethnicity) working in the industry.

The point (which I will discuss in greater depth in future posts) is this … complicated problems have complex causes and very few plain answers.  While it may make for interesting viewing, I wonder if this modern tale of  “the Big Bad Wolf of Wall Street” will mislead and misinform current and future generations about some really important topics…like saving and investing for one’s retirement.

And that wouldn’t be anyone’s idea of happily ever after…….

Thanks for reading and let me know what you think..

Full Disclosure – I haven’t seen the movie yet, and am basing this post on the trailer.  Future posts will include my thoughts following my having viewed the movie

About the Author: Frank SanPietro is a Doctoral Candidate in Business Administration /Finance at the Fogelman College of Business and Economics, University of Memphis.

More on Ancient Philosophy and Goldman Sachs Mortgage Settlement

This Post is the second of two which examine the interplay of asymmetric information and perceived/actual ethical obligations – You can link back to Part 1 here  –   Ancient Philosophers and Mortgage Settlements

In the previous post, the situation posed by Cicero was under consideration.  Specifically, whether or not the merchant should voluntarily disclose to his buyers that there are several ships en route with similar goods, or, if he should simply bargain with them on the basis of his being present with goods for sale.

The argument in support of the merchant making that disclosure is rooted in a morally based position – i.e., the merchant should disclose the information because it would be the right thing to do.  Under this framework, the merchant is seen as having an unfair advantage over his buyers.  He knows that other ships are bound for Rhodes and that on their arrival, the current inflated price for grain will return back to “fair value”.   The economics vs. ethics conflict was analyzed in a 1986 paper, by Kahneman, Knetsch and Thaler , in the American Economic Review.

In the paper entitled ” Fairness as a Constraint on Profit Seeking: Entitlements in the Market”, the authors consider circumstances under which, as they put it, fairness demands that an economic actor behave in a manner contrary to classic economic theory.  Consider the supply-demand relationship.  Kahneman, et al (1986) note that “excess demand for a good creates an opportunity for suppliers to raise prices and that such increases will occur”.  However, they go on to note that while the “market” may view these “profit seeking adjustments” as “ethically neutral, the lay public does not share that indifference”.   In the view of the public (in the paper, the authors elicited responses to survey questions), there were situations where a businessperson had a “right” to raise prices and, situations which were economically identical, but presented differently in which the public viewed the action taken as grossly unfair.   Specifically, in the case of increasing market power (moving towards monopoly) raising prices, especially on a good seen as being essential, was considered to be unfair.

So, what does this have to do with both our ancient grain merchant and our modern money merchants?   We can see in both situations examples of the assumed “buyers entitlement” to the profits of the seller.  In the case of our grain merchant, it is expected that despite having assumed all of the risk of sailing to a foreign port to procure grain, then transporting that grain to Rhodes. (NB – there is an implicit choice here, in that the merchant likely bypassed other ports where the grain could have been sold for less profit, but with less risk) and then providing that to the buyers in Rhodes, at a time where they are in great need… that the seller should somehow work against his own self interest and share information that will only motivate his buyers to demand a lower price.

What if the other ships fail to make it to Rhodes?  What if there are at least some of the buyers who do not want to wait for the other ships, but take a “bird in the hand” approach and decide to fill their own storehouses with grain from this merchant?  The critical point? The most efficient process for allocating goods in this case and in others is through the use of price to allow for the natural forces of supply and demand to clear the market.

Bringing the matter full circle – it appears that the penalties levied against Goldman and the other large banks are largely in this vein; namely, the Bankers knew  that the mortgages they were securitizing were overpriced (or more precisely under priced given their level of risk) and took advantage of their market power to make “unfair profits”.  Finally, there is also the sense that “the Banks can afford it” when it comes to paying fines and penalties.  This misses the point, of course, that the Banks pay nothing.  The shareholders of these banks (many of whom are working class people with stock in a retirement plan) are making these payments, in the form of lowered earnings and value for their stock.

Looks like it may take another 2000 or so years for us to figure this one out.  Thanks for stopping by.

About the Author: Frank SanPietro is a Doctoral Candidate in Business Administration /Finance at the Fogelman College of Business and Economics, University of Memphis.