The True Unemployment Number

Edward Tj GeretyThe Labor Department said today that the unemployment rate stayed at 5.1 percent in September — but does that tell the real story?

Most economists look beyond the “main” unemployment rate to other figures that can give a more textured view of the employment situation. On jobs day, the Bureau of Labor Statistics puts out a slew of figures, each of which provide their own view of the economy.

One of those figures is the U-6 rate. Many economists look to the U-6 rather than the main unemployment rate (also know as the U-3). The BLS defines U-6 as “total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force,” plus all marginally attached workers.

In other words, the unemployed, the underemployed and the discouraged — a rate that remains stubbornly above prerecession levels.

The U-6 rate dipped in September to 10 percent, the one bright spot of the jobs report. The overall trend in the U-6 has been more volatile than the main unemployment rate and it’s down 170 basis points over the past year, versus an 80-basis-point drop in the U-3.

The jobs report this month has particular importance because of the Fed’s dependence on data for its decision on raising rates. The Fed declined to raise rates in September as many had predicted, but had hinted that a rate hike in 2015 was still likely.

Fed Chair Janet Yellen recently said policymakers were waiting to see an increase in the labor participation rate, as well as a decline in unemployment.

The nation added 142,000 jobs in September, just 2 percent higher than in September 2014.

One ongoing cause for concern in the jobs report has been the area of wages. Average hourly wages increased 2.2 percent on a year-over-year basis in September; weekly wages inched up 2.4 percent.

When the unemployment rate declines, average wages typically rise as employers have to compete for a smaller pool of job candidates.

“Silicon Valley”: Start Me Up

Edward Tj GeretyMike Judge has done it again. A few months ago, I wrote about one of my favorite workplace flicks, Office Space, and the dangers of pushing off uncomfortable employment issues (specifically Milt Waddams, a mumbly arsonist-to-be). Now I’m hooked on Mike Judge’s latest project, HBO’s Silicon Valley.

Silicon Valley chronicles the ups and downs of life in a tech startup. The feature characters are all residents of an eccentric business incubator that allows them free room and board in exchange for ten percent of their companies and some questionable business direction. One of the characters (Richard) suddenly scores the attention of several venture capitalists and potential acquirers for his company, Pied Piper, and its revolutionary compression algorithm. From that point, the show does a brilliant job of showing that initially successful tech startups are a bit like the dog who chased the car—and caught it.

After multiple suitors woo Richard with various offers, he chooses to turn down a $10 million cash offer for Pied Piper. Instead, he signs up with a quirky genius of a venture capitalist who seedshim with $200,000 in exchange for five percent of the company. He hires on the rest of the guys (all of them are male, reflecting a well-worn concern about the tech sector) in the incubator to grow the company and go to market. He soon realizes, however, that he’s in over his head and his efforts to play catch-up give each episode plenty of creative tension to move the series along.

For instance, Richard’s first meeting with his VC is a disaster—he has no business plan or the slightest clue how to get Pied Piper to market. In fact, there’s a big doubt whether it will go to market as Pied Piper (a California irrigation company already has the name, and Richard learns how to negotiate on the fly to convince aleathery farmer to sell him the name). Later, word spreads about his discovery, and established tech giants and thieving competitor startups try to trick him out of his IP. Ultimately, the second season concludes with Richard prevailing in a high-stakes arbitration against a tech giant that claimed ownership of his IP; even better for me, the arbitrator gave Richard the victory because the tech giant overreached and included an unlawful restrictive covenant in his prior employment contract with the company.

If you work for an early-stage enterprise or are looking for a fun way to see the pitfalls common to startups,Silicon Valley is a great way to spend some time. Each episode is going to cover issues ranging from  trade secrets, arbitration, to litigation, working some diversity into a close-knit company, and transitioning from a freewheeling group of man-children in a den to a disciplined operation.

Season 3 starts in February—I, for one, can’t wait to see what’s next.

Kids Still in Basements as U.S. Underemployment Limits Mobility

The kids in the basement are staying there.

One lasting scar from the deepest recession since the 1930s is the phenomenon of young adults, facing their own financial challenges, forced to squeeze in the homes of their parents. And new data show the trend is getting worse, not better .

In 2015, 15.1 percent of  25 to 34 year olds were living with their parents, a fourth straight annual increase, according to an analysis of new Census Bureau data by the Population Reference Bureau in Washington. The proportion is the highest since at least 1960, according to demographer Mark Mather, associate vice president with PRB.

“It takes young people longer these days to find jobs with decent wages,” Mather said. “Young adults need to spend more time getting the necessary education and skills before they can become self-sufficient. The recession likely exacerbated this trend.”

Some of the delays may reflect changing social norms, as young people are delaying both marriage and having their own children, he said.

The tough job market for young people since the recession ended in June 2009 is also contributing to a lower mobility rate. Adults under 30 are typically the most mobile part of an American workforce, constantly on the move since the 19th century. That mobility has been seen as a key advantage of the flexible U.S. labor market compared with places like Europe.

The latest Census data show just 3.1 percent of Americans from 25 to 29 relocated in the last year between states, just half the share of 2002. While moves between counties in the same state — less likely to be for jobs — have increased some, they too remain below pre-recession levels, according to PRB’s analysis.

Goldman Sachs economists, who examined the phenomenon of “kids living in the basement” in an August report, found a few reasons to explain it.

Millennials, the 82 million people born between 1981 and about 2000, have been plagued by chronic underemployment since the recession  — consider the college grad working as coffee barista — and rising student debt is proving to be a lasting burden.

“Above-average youth underemployment rates alone account for about one-third of the increase in the share of young people living with their parents, and lagged effects of the recession probably account for a bit more,” Goldman’s David Mericle and Karen Reichgott wrote.

There is a silver lining to the trend, they said. Presumably, all the adult children will one day leave their parents’ basements, and that household formation will prove to be a huge boost to a subpar housing recovery. There is already evidence this is occurring to some degree.

 The Goldman economists are in that camp. “As a result, we continue to see plenty of upside for residential investment,”  they wrote.

The Will-ists Versus the Should-ists

Message to politicians and economists: Learning to deal with the world as it is, not as we want it to be.

Edward Tj GeretyMonetarists and Keynesians, Democrats and Republicans, Roundheads and Cavaliers, Jets and Sharks — they’re all at the opposite ends of a particular spectrum. And they rarely agree on much, other than when and where the next fight is going to take place.

Look carefully, however, and there is another pair of opposites when it comes to seeing successfully into the future. I call them the “should-ists” and the “will-ists.”

“Should-ists” are people who tell you what “should” happen in the future. Whatever it is that they are studying or involved in, it “should” happen because it’s been studied, its properties are known — and the benefits supposedly outweigh the costs.

Politicians are natural “should-ists,” of course. However, it’s not their job to see into the future, but to get their way in the present.

Justification for Should-ism

Better-educated economists also tend toward “should-ism.” In my experience, the better educated they are, the more “should-ist” they become.

Their rationale is simple: Why shouldn’t they have a sharper eye on the future, given the time they invested and intellect they ploughed into whatever it was they were studying along the way?

As for myself, I am definitely a “will-ist.” Equipped merely with a Bachelors’ Degree in Economics with Statistics, I became an economist at Morgan Grenfell & Co., Ltd. Right after I started my job, I was introduced in the morning meeting as the “expert” on France.

In that capacity, I was asked what I thought the Banque de France was going to do in the coming months. I got about as far as “Well, what they should be doing is” before the Head of Trading interrupted: “Stuart, we don’t care what they should be doing, just what they will be doing.” Well, let’s just say that I quickly learned my lesson.

Here is an example of a “will-ist” and a “should-ist” in action, just to help you spot the difference between the two.

A few weeks ago, UK Chancellor of the Exchequer, George Osborne announced that he was contemplating the introduction of a balanced budget law with respect to the UK public finances.

“Aha,” I (a “will-ist”) thought to myself. “He’s doing that so he can sign the UK up to the European Fiscal Compact in 2017 and thereby help the UK goal of getting Treaty change.”

Excited about my insight, I shot off an e-mail to a couple of senior journalists I know. “So we agree to something insane and, in return, we get something unimportant,” one shot back. He was definitely a “should-ist,” in case you are wondering about his intellectual preferences.

Why should-ism doesn’t really help

Here is why the contrast between the two groups matters a lot: Most “should-ists” can’t predict the future, for all their love and dedication to the subject matter at hand (or all of your money).

In statistical terms, they over-fit all the equations, but lose predictive power every step along the way. It’s the well-known fit-forecast trade-off in action, actually.

Of course, most of the world’s top policymakers tend to be very well-educated, with PhDs, even professorships to boot. In these fields, the ability to explain the past with clarity is a key criterion for employment.

In my view, there is just one little problem: It generally wrecks one’s ability to predict the future and particularly when tomorrow is different from today. No wonder most Central Bank and Finance Ministry predictions aren’t worth the paper they are written on.

Don’t get me wrong. The world would be a lot worse place without its fair share of “should-ists.” Just don’t rely on them for their predictions of what will actually happen. It’s not their fault. It’s just not their calling.

Come to think of it, though, it’s probably one of the reasons why economists have such a bad rap when it comes to the all the big things they have missed over the years. They are (mostly) a bunch of “should-ists!”

NASDAQ is engaging Bitcoin — about time!

Edward Tj GeretyNasdaq OMX Group Inc. expects to become the first major exchange operator to use the technology behind bitcoin when a project in its private-companies business goes live in the fourth quarter.

The stock market operator is partnering with infrastructure provider Chain to use blockchain to issue and transfer the shares of privately held companies. Blockchain is the ledger that drives the bitcoin digital currency.

The technology will be “of fundamental importance to Wall Street,” Nasdaq Chief Executive Officer Bob Greifeld said during a phone interview. “The benefits to the industry are immense and cannot be ignored.”

Advocates for the software say it will dramatically speed up and simplify how trading of everything from stocks to loans and derivatives is processed. Wall Street professionals endorsed blockchain in a recent Greenwich Associates survey, with 94 percent saying it could be used in finance.

Earlier this year, Nasdaq joined a clutch of companies seeking to adapt blockchain for mainstream finance, saying it would “leverage blockchain technology as part of an enterprise-wide initiative.”

“We also plan to announce further blockchain initiatives in the future,” Greifeld said during a conference call with analysts. “The application of blockchain technology within Nasdaq’s private market aims to modernize, streamline and really secure cumbersome administrative functions,”

Last month, Symbiont, which plans to use blockchain to make it quicker and cheaper to transfer assets between buyers and sellers, raised $1.25 million from financial industry heavyweights including former New York Stock Exchange chief Duncan Niederauer, former Citadel LLC executive Matt Andresen, and two co-founders of high-frequency trading firm Getco LLC, Dan Tierney and Stephen Schuler.

Other firms investigating finance-related uses of blockchain include Digital Asset Holdings LLC, headed by former JPMorgan Chase & Co. banker Blythe Masters, and Blockstack, run by former Google Inc. and Nasdaq employees.

The Ragging Bitcoin ‘Civil War’ Could End It

Edward Tj GeretyBitcoin, the digital currency technology with an ecosystem attracting hundreds of millions of dollars in investment, is struggling through an existential crisis.

And what may to outsiders seem like petty squabbling about a single number actually has major financial implications and could even threaten the very survival of the cryptocurrency.

The argument—which is pitting Chinese constituencies against largely Western developers, the business community against the often ideological early adopters, and programmer against programmer—centers on a simple number in the global bitcoin system. But if the various parties can’t come to an agreement, the whole network could splinter, wrecking its major selling points of security and decentralization.

“There is literally a war going on right now in the bitcoin world,” Marco Streng, CEO of Genesis Mining, stated last month.

What’s the issue?

There are two major questions facing the technology: Who is bitcoin for? And who gets to decide?

Most of the early adopters saw appeal in bitcoin as a decentralized digital currency—(to over-simplify the promise) a sort of virtual gold that could not be touched by governments, banks or corporations. But in seeking to create the perfect system for such a currency, bitcoin’s early creators also created a technology that has wide-ranging applications.

That technology is called the “blockchain” and this is basically what it does: It can record any information in a secure way, and make that information both public and unchangeable—doing this without relying on any central authority. Banks, stock exchanges, payment companies and others have already begun exploring how this can be used in their own businesses.

The issue at hand is about the structure of bitcoin’s blockchain (which is composed of “blocks” of data with each block referring back to the preceding chunk of information—thereby creating a chain). The community is arguing about how big the maximum block size should be: The current max is one megabyte, which only allows for about seven transactions per second—far too few for most businesses currently investing in the technology.

This speed is a “roadblock to bitcoin growth,” Jeff Garzik, one of five bitcoin core developers who have taken over maintenance of the technology, wrote in a recent paper. (Visa, for comparison, says its network can handle more than 24,000 transactions per second.)

“Any responsible business projecting capacity usage into the future sees the system reaching an absolute maximum capacity, with this speed limit in place,” he wrote. “Increasing or removing this limit will encourage businesses to view bitcoin as scalable and capable of supporting millions of new users.”

The block size limit may also negatively impact bitcoin’s original currency use-case: As the number of transaction requests exceed the limit, the user experience degrades: The pools of “miners” who help inscribe data onto the global network will begin charging ever-higher fees for processing, eliminating some of the appeal over other payment methods.

But there are reasons for limiting the size of a block. For one, it provides security for the system by constraining available space, and therefore making it costly to maliciously flood the network with spam.

Miners are generally against increasing the size too much: They would have to do more work on each block, but they’d still reap the same benefit per block (while transaction fees remain negligibly low), said Pete Rizzo, the U.S. editor for cryptocurrency site CoinDesk.

Also, some early adopters who plan to hold bitcoin for extended periods of time as an investment may prefer to keep the block size limit low—unbothered by transaction fees or business prospects, Garzik has explained.

But even if more interests seem to point to increasing the block size, there’s no agreement what size is ideal—balancing present-day security and future promise—or how a change should be made.

Gavin Andresen, one of the most important developers of the technology, proposed increasing the max size to 20 megabytes. (He did not respond to request for comment.)

A powerful constituency of Chinese miners—who also object to increasing the size of the block, saying their nation’s Internet connection to the rest of the world would not allow it—made a counter proposal suggesting an eight-megabyte maximum. Andresen has since backed a version of this plan.

For his part, Garzik proposed a sliding cap with a change to the bitcoin code allowing for periodic block increases (or even decreases) based on global miners’ votes.

The most important parts of the community were variously leaning toward Garzik’s proposal, an 8-megabyte increase, or just a small “can-kicking” measure to wait for technologies that might allow them to bypass the question.

But as a totally decentralized system, bitcoin has no clear way to weigh these disparate opinions and interests—in other words, no way to make a definitive decision.

Why does this matter?

Garzik called the block size debate the first major alteration to bitcoin policy since it began in January 2009. When other changes have been made, the core software has been changed, and the players on the network have quickly updated (anyone who doesn’t follow the current protocol gets booted from the network until they comply).

But with a contentious issue like this, the developers risk splitting the network into those who want to follow one set of rules, and those who want another. If someone were to push out a global update without ensuring near-total consensus, a split could occur.

“That would be the worst of all possible options,” Garzik said.

Bitcoin runs on a blockchain that is more secure and decentralized than any of its competitors because of its large user base and its comparatively lengthy history. If those users were to splinter, then the entire enterprise could be compromised.

So what’s at stake? Hundreds of millions of dollars have been invested in bitcoin and blockchain-related companies, and the current value of all the bitcoin in existence is currently about $4 billion.

The risks of a network split are low but not negligible, experts have repeatedly stated.

“You’re dealing with consensus among a community of people who aren’t communicating very well—and haven’t for some time,” Rizzo said, explaining that making any change to the code risks breaking a technology that already works pretty well.

“At what point does that risk become untenable? At this point it’s still within the realm of ‘danger Will Robinson’-level risk,” he added.

Bitcoin defined as VAT-Exempt Currency

Bitcoin-in-EuroBitcoin will be used more often for trade and investment if the Court of Justice of the European Union confirms an advocate general opinion categorizing bitcoin as a currency because transactions will be exempt from value-added tax.

In a July 16 reasoned opinion, AG Juliane Kokott said digital currencies, such as bitcoin, should be considered a currency rather than property or other financial instruments, and therefore shouldn’t be subject to VAT in line with the exemption provided for currency transactions under the EU’s VAT Directive (2006/112/EC).

For VAT purposes, bitcoin is more akin to other recognized currencies, Kokott said.

Hedqvist welcomed the AG’s opinion in a July 17 statement as it lends support to the case he is currently arguing before the Swedish Supreme Administrative Court.

The case, Skatteverket v. David Hedqvist (C-264/14), was brought by the Swedish tax authority to determine whether Hedqvist should be charged VAT on transactions involving bitcoins.

The authority had appealed a lower court ruling to the Swedish Supreme Administrative Court, which requested a preliminary ruling from the CJEU.

Presuming the CJEU takes the same position as the AG, the ruling will only apply to bitcoin currency trades. Other forms of taxation levied on virtual currencies, such as capital gains or income tax on gains in the currency’s value, won’t be affected by the ruling.

Categorizing Bitcoin

Ahead of the CJEU’s ruling on the case, Kokott examined whether bitcoin could be deemed to be “securities” according to the VAT directive. Article 135.1.f of the directive provides an exemption on transactions in shares, debentures and similar instruments. She found that bitcoin couldn’t be categorized as such.

Kokott also examined whether bitcoin could be defined as “negotiable instruments” according to article 135.1.d of the directive, which refers to instruments deriving their value from other currencies and not instruments with their own value. Kokott found that the exemption under this provision shouldn’t apply to bitcoin either.

In addition, she examined whether bitcoin could be characterized as “currency” under article 135.1.e of the directive, which refers to transactions concerning currency, bank notes and coins used as legal tender. Gold, silver or other metal coins aren’t included in this definition.

Kokott noted that the definition of legal tender appeared to vary in different translations of the VAT Directive. While the German version appeared to limit the definition to official national currencies, other translations—such as the Finnish and Italian versions—appeared to imply a broader scope.

Using this broader definition, Kokott said that the purpose of bitcoin appeared to be the same as that of a traditional currency and the VAT exemption was applicable under this provision.

EU-Wide Impact

In a July 16 statement, Anders Hultqvist, associate professor of law at Stockholm University, said the AG’s opinion and the CJEU’s expected preliminary ruling will have a significant impact across the EU.

“The AG’s conclusion is that the exchange of bitcoins to Swedish kronor is a service within the scope of the VAT Directive, but also that it is an exempt service according to article 135.1.e,” he said.

“This has been one of the hard questions, since there is no national bank or other institution that issues this as legal tender,” he noted.

However, the AG found it to be unclear as to what can be defined as legal tender. As such, she compared different language versions of the VAT Directive and concluded from a more purposeful view that bitcoin are used as tender and exchange, and therefore should be considered to be exempt on these grounds, Hultqvist said.

“Some member states, with good reason, don’t define legal tender this way, but the AG has a good point,” Hultqvist said. “Bitcoins are used and work mainly in the same manner,” he said.

“The result is that the exchange service is exempt from VAT,” he explained. No VAT needs to be charged for the exchange of bitcoins to Swedish kronor, nor to any other currency when performed within the EU. “Provided the EU court reaches the same conclusion, those countries who have charged VAT on these services must now change their practice,” Hultqvist said.

“The judgment will of course have a great impact in all EU countries, since all of them will have to follow the CJEU judgment,” Hultqvist pointed out. “The Supreme Administrative Court in Sweden will certainly deliver a judgment with reference to the CJEU ruling,” he added.

General Use

While the AG’s opinion only refers to currency trades involving bitcoin, David Hedqvist stated that it would likely prove beneficial to the general use of bitcoin as an investment and a means of payment. “This means that when it is traded it will be treated much the same as any other currency,” he said. “It will not be more expensive for consumers to exchange between bitcoins and other currencies.”

“If you look at how it is used as a payment in stores, online and such, it has been gaining traction now over a number of years, I don’t think this [opinion] changes a lot there,” he said. “But if you look at the bigger picture, now that the rules are clearer, people will be less hesitant to get involved in bitcoin.”

The CJEU concurs with the AG’s opinion in the vast majority of cases.

Hedqvist added that his legal team had also argued for a VAT-exempt status to be granted on the grounds under article 135.1.d of the VAT Directive, which was rejected by the AG. “It was interesting,” he said that the AG went with 135.1.e, which “puts it together with other currencies.”

The AG noted that 135.1.e is different in different translations of the VAT Directive, Hedqvist said. “Because of that it was important to look at the purpose of bitcoins,” he added, welcoming the AG’s decision to look at the purpose of the exemptions as a whole.

“To us at least, it was obvious that bitcoins should be exempt because if you look at how bitcoin is used and what it is, then it fits very well into that [135.1.e] category.”

Global Issues

However, Hedqvist noted that differing tax treatment in jurisdictions where bitcoin is used and traded could still cause problems in the future because the CJEU’s ruling would only affect trading within the EU. “If you look at the global situation, I think this is something that will be still being discussed for many years,” he said. “But it’s good that the situation has become clearer here,” he added, referring to the EU.

Hedqvist said he now expects the Swedish tax authority to “leave bitcoin alone” and accept the CJEU’s decision. “A few months ago, the tax authority published something about bitcoin mining,” he noted.

In that context, “they came to the conclusion that it was exempt from VAT. The authority here seems pretty reasonable, so I think that they will leave it alone now after this, but of course there will be more discussion.”

Old Laws, New Technology

“There are other laws, too, that need to be made clearer with regards to where bitcoins fit in” Hedqvist said. “I guess the problem is that when the laws were written there were no such things as bitcoins. It’s like a clash between old laws and new technology.”

Although he hasn’t seen any figures for bitcoin use in the EU, “if you look at the investments in bitcoin companies internationally, it is steadily increasing,” Hedqvist said. “I think that in 2015 the numbers will be higher than last year.”

Many people “just look at the exchange rate and see that bitcoins are booming one year and crashing the next year and so on,” he said, “but if you look at the interest from investors, there has been a steady increase. I haven’t seen that so much in Sweden, but internationally this is certainly the case.”

Hedqvist agreed that other obstacles existed to the virtual currency’s acceptance, such as concerns about the potential anonymity of transactions.

“I think that some people will fight it,” he said. “To me, it’s kind of similar to when the Internet first came into existence, and anyone could get online. People were pointing out that there were all kinds of terrible stuff out there, kids could find out how to build a bomb, that kind of thing.”

As time went on, people realized that, on the whole, the Internet was a positive thing, he said. “I think it’s kind of the same with bitcoins. There will be a lot of discussion about the potential for criminality but I don’t think that it will be enough to stop it,” Hedqvist said.

“I certainly don’t think Sweden is the type of country that would actually pass new laws prohibiting bitcoins,” Hedqvist added.

Chinese investors rushed to stocks, fearing bubble in real estate, only to see the market crash

Edward Tj GeretyIn a crowded back alley, behind a popular noodle soup lunch joint in Beijing’s Central Business District, stock broker Wang Dao lights his fourth cigarette of the morning. It has been a particularly stressful week for the 28-year-old who works in one of the city’s many brokerages.

“I lost about 20,000 renminbi in the past 10 days,” he says, “but that is nothing compared to the millions some of my firm’s clients have lost.”

Chinese stocks nosedived in the past month, wiping out a third of the market. The Shanghai Composite, an index of all A and B shares traded on the Shanghai Stock Exchange, was on a bull run for the past 12 months, gaining 3,000 points and touching a high of 5,166 points on June 12.

By then, the Chinese government had stepped in to stanch the bloodletting. A 120 billion renminbi ($19.5 billion) fund was set up so that the country’s large brokerage firms could buy stocks. Trading was progressively halted through the week, and by Thursday, July 9, stocks of only about half of the listed companies were in play.

The market has since rebounded (on half the listed stocks, the other half remains suspended) and on Friday, recorded its largest two-day gain since the 2008 financial crisis to close at 3,877 points.

The damage, however, was done.

Stock’s the Way

Coinciding with the start of last year’s stock market escalation, many in the country’s tier I and II cities chose to ignore overheated real estate prices and decided to put their money in stocks. Successive rate cuts by the country’s central bank, the People’s Bank of China, which worked against regulators’ efforts to subdue the stock boom, also fuelled excessive liquidity flows into stocks.

Tony Nash, chief economist and managing partner at Complete Intelligence in Singapore, who watches the Indian and Chinese markets closely, says, “Chinese investors have few options to mobilise capital. One is real estate. The other is the stock market. This is partly the reason why we see China go from a bubble in equities to a bubble in real estate, then back to equities.

Bank deposits are gradually being liberalised, but it’s not as legitimate an option as in other places with liberalised deposit environments. In that respect, Indian investors have many more options.”

Angie Liu, who goes by her anglicised name, did something similar. At 30, living at her parents’ home in west Beijing, she thought an apartment was a good investment to make as she was saving on rent. She needed more than she was earning though to cobble together the 3,00,000 renminbi down-payment on a flat in Beijing.

“What better place to multiply my money other than the stock markets, I thought,” said Angie. “I borrowed cash and invested 1,00,000 renminbi last fall. By spring this year it had nearly doubled, but this week I am down 25%. Looks like the apartment will have to wait. I have to repay my creditors first,” she said, looking disconsolate.

China Daily, a government controlled newspaper, quoted a Shanghai stock broker who said a couple of his clients were “urgently selling their homes after losing money, trading in stocks”.

Wang, the Beijing stock broker, said, “Every single person I know who has invested in the stock market has lost money; the only question is how much. The long-term investors would not have lost much, but those who invested in the past year, especially those who used their stocks as collateral and borrowed more are not so lucky.”

Dan Steinbock, director of International Business at the India, China and America Institute, says China’s market fluctuation is an inherent issue with the way the economy is structured. “In China, some 80% of investors are retail investors, not yet institutions.

The net effect is greater volatility, by default. These investors are not necessarily the mom-and-pop investors as Western media likes to portray them. Many represent the new middle class, the upwardly mobile but also risk-taking market segments.

Beijing has a great level of influence and control over its equity markets. Last week, it ordered a six-month ban on stock sales by those owning more than 5% of a company’s shares. Such a step in India would have been seen more as an intrusion, rather than a move to calm turbulent bourses.

Limited Options

The concern that the summer washout may have a long-term effect on the economy remains but not everyone is pessimistic.

Tony Nash says, “Today, we’re starting to see capital flow back into mainland markets from overseas and mainland selling of Hong Kong equities has subsided.

Hopefully, we’ll see a bit of stabilisation. In any case, Indian investors can generally place money overseas as they please, which doesn’t place undue ‘captive market’ pressure on domestic valuations.”

There are more than 90 million investors in China and that number is only bound to increase. However, unless more vehicles of investments are opened up, many see the stock markets as the only place they can put their money to work.



Is there a Tech Bubble? Some say, “No”

Edward GeretyAndreessen Horowitz, the most innovative and outspoken of Silicon Valley’s big venture capital firms, recently came out with a presentation intended to kill the idea that there’s a new tech bubble under way. The 53-slide presentation, by Morgan Bender, Benedict Evans and Scott Kupor, takes on the idea that too much money is flowing into private technology companies, especially in the highly valued startups called “unicorns.”

First, a little background. Bubbles, by definition, pop, and if tech crashed it would hurt a lot of investors. People making the case for a bubble often focus on unicorn startups (those with a valuation of greater than $1 billion) such as Uber, which is now valued at $40 billion without having gone public. They claim that large private financing by late-stage venture capital, backed up by large asset managers like Fidelity or Tiger Global Management, have replaced initial public offerings as the driver of overvaluation. This is known as the “private IPO.” The pro-bubble case is that these private financing rounds have inflated the value of the unicorns without spilling over into the public markets.

Andreessen Horowitz’s team attacks this idea from a number of directions. First, they show that overall funding for tech startups — both private financing and IPOs — is still nowhere near the dizzying heights it reached in 1999 and 2000, especially when measured as a share of the economy. The same is true of venture capital fundraising. They also present various arguments that long-term earning potential for tech startups is much stronger this time around. (Bloomberg LP, the parent company of Bloomberg News, is an investor in Andreessen Horowitz.)

The Andreessen Horowitz presentation makes a very convincing case. We should not be drawing a parallel between the boom in private late-stage funding of unicorn startups and the late-’90s IPO boom. They just don’t look like the same phenomenon.

So there’s probably not a unicorn bubble. How about a tech bubble more generally? The Andreessen Horowitz team points out that the tech sector isn’t taking over the Standard & Poor’s 500 stock index the way it did in the late-’90s tech bubble: The share of tech in the index has been flat for about 12 years now. And, as Sam Altman pointed out on Twitter, stock valuations for technology companies don’t look any higher than other stock valuations; the price-to-earnings ratio of the tech component of the S&P is in fact lower than for the index as a whole. So we’re probably not in a tech bubble of any kind.

That said, there was one Andreessen Horowitz slide that’s ominous. It shows that all the unicorns together are valued at slightly less than Facebook. That reminded me of an e-mail debate between financial economists Eugene Fama and Ivo Welch, on the question of whether the ’90s tech bubble was really an episode of market irrationality. In that debate, Fama said the following:

In other words, Fama is saying that the tech bubble of 1999-2000 was caused by rational investor expectations, not by irrational exuberance. (Obviously, that view isn’t universally held.)

Fama’s quote highlights two very important things about bubbles. First, even in the most dramatic cases, it’s not easy to know you’re in one. Second, true bubbles often involve overvaluation throughout the entire market, not just in one segment. Fama is absolutely right about all those IPOs being worth only two Microsofts.

But Microsoft’s price in 1999-2000 was about 70 times its earnings. After the 2000 crash, that plummeted to about 30, briefly recovered, then drifted down again. Even if Fama is right that tech investors in 1999-2000 expected the tech IPO market to produce two new Microsofts, he glosses over the fact that in hindsight, investors were drastically overvaluing Microsoft.

So what’s Facebook’s price-to-earnings ratio right now? Over 80.

The danger isn’t that we’re in a unicorn bubble. The danger isn’t even that we’re in a tech bubble. The danger is that we’re in an Everything Bubble — that valuations across the board are simply too high. The Shiller CAPE ratio, generally regarded as a good measure of the market’s over- or undervaluation, is indeed unusually high — though not nearly as high as in January 2000.

So what happens when China’s housing and stock bubbles finally crash, as both are probably in the process of doing? What happens when the Federal Reserve raises interest rates? It’s possible that not much will happen. Or it’s possible that there will be a big crash that it will take markets a few years to recover from. If it’s the latter, then unicorn startups will see their funding dry up along with everyone else.

In other words, the tech sector doesn’t seem to be creating a bubble like in the late ’90s, but valuations are looking slightly worrying at the overall market level.

Greece on the Edge

Edward Tj Gerety
By heeding their government’s advice and voting “No” in the referendum on Sunday, Greek citizens sent an unambiguous message. Much like the fictional Americans portrayed in the movie “Network” who threw open their windows and shouted out, “I’m as mad as hell and I’m not going to take this anymore,” the Greeks are demanding that the rest of Europe acknowledge their distress.

Greece’s Fiscal Odyssey

At this stage, however, only a handful of European leaders seem willing to listen; and even fewer appear willing to deliver the sort of relief that Greece desperately needs. The implications will be felt primarily in Greece, but also in Europe and beyond.

Here are 10 consequences of the vote that could unfold in the next few days:

1. The victory of the “No” camp – with more than 60 percent of the vote, according to preliminary returns – will initially lead to a general selloff in global equities, along with price pressures on the bonds issued by Greece, other peripheral euro zone economies and emerging markets. German and U.S. government bonds will benefit from a flight to quality.

2. Having been caught off guard, European politicians will urgently seek to regain the initiative: Chancellor Angela Merkel of Germany and President Francois Hollande of France will meet in Paris on Monday to work on a response. In a perfect world, these leaders would move quickly and effectively with the Greek government to get past the conflict and acrimony that preceded the referendum. This is likely to be difficult, given the mistrust, bad blood and damaging accusations that have poisoned the relationship.

3. Even with those challenges, Greek and European politicians don’t have much time to get their act together. The horrid conditions in Greece will get a lot worse before they improve. Without huge emergency assistance from the European Central Bank – a decision that faces long odds – the government will find it hard to get money to the country’s automated teller machines, let alone re-open the banks.

4. As hoarding increases, shortages of goods, including fuel and food, will intensify. Capital and payments controls will be tightened. The economy will take another worrisome step down, worsening unemployment and poverty. And the government will struggle to pay pensioners and the salaries of civil servants.

5. As a result, the government will be under mounting pressure to issue some type of IOUs to maintain a sense of a functioning economy. If it does, the IOUs will take on the role of a parallel currency, quoted domestically at a discount to the single currency.

6. Outside Greece, a lot of thought will be given to limiting adverse spillovers. The ECB will most likely have to roll out new measures to contain regional contagion, including expanding the current program of large-scale purchases of securities. This will weaken the euro’s exchange rate. In addition, together with the International Monetary Fund – to which Greece is already in arrears – officials will be preparing for serial Greek defaults.

7. All parties involved will find themselves slipping into their Plan B mode. This transition will probably be much more traumatic for Greece than for the rest of Europe.

8. With the ultimate goal of countering as quickly as possible the likelihood of further human suffering, pain and uncertainty, Europe has the instruments and institutions to limit contagion and maintain the integrity of the euro zone. But this will require ECB action to be coupled with measures by the European Stability Mechanism and the European Investment Bank aimed at completing a banking union and making progress on fiscal integration.

9. It is quite doubtful, however, that Greece will be able to restore its status as a full member of the euro zone. Indeed, without very skillful crisis management, it is at high risk of becoming a failed state. Rather than just stand by, Europe needs to ensure that Greece’s exit from the 19-member euro zone doesn’t also result in its dissociation from the larger European Union. This could involve special membership in an association agreement, for example,

10. Finally, expect an explosion of blame. This unproductive activity may end up delaying Europe’s urgent need to internalize the lessons from this sad outcome: A series of broken reform promises by several Greek governments was made worse by political stubbornness, poor analysis and inconsistent follow-through by Europe, which is contributing to the loss of Greece as a functioning member of the family.