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Archive for January, 2009
The End of DRM – Winners and Losers |
 Image Courtesy of flickr/Karen Rustad Apple and the recording industry made the right move in announcing recently that they will suspend digital rights management (DRM) and change pricing for iTunes downloads, say Fuqua Marketing Professors Preyas Desai and Debu Purohit, who recently completed an analysis of DRM and the digital music marketplace with Fuqua PhD student Dinah Vernik. While the music industry previously stood by DRM in order to protect profits, Desai, Purohit and Vernik predict that online music retailers and consumers will both benefit from the elimination of DRM. Their rationale is straightforward: the music industry had ignored consumer resentment of restrictions imposed by DRM protection, as well as consumer preference for purchasing DRM-free music. The disappearance of DRM provides consumers with a product they prefer, as they can now download higher quality music than was available under DRM, and can use that music in a variety of formats.The researchers predict that these improvements will cause consumers to purchase more music online and reduce illegal downloading and copying. The losers in this environment will be traditional CD retailers, whose customers will be attracted to the increased quality and ease of use of DRM-free music. The Duke team predicts that traditional retailers will be forced to lower prices in order to be competitive as more consumers shift to digital DRM-free downloads. |
Fed Running Out of Bullets |
“Fed To Hold Rates Near Zero” is the news headline today. It is not really news. What were they supposed to do? They can’t increase the rates. Zero is as low as you can go. There were about six notable items in the announcement. 1. The description of credit conditions changed. December 16, 2008 read: “markets remain quite strained and credit conditions tight.” January 28, 2009 reads: “credit conditions for households and firms remain extremely tight.” The key word is “extremely”. I am glad the Fed is on the same page as the rest of us now. 2. They are very worried about deflation. This is a big one. December 16, 2008 read that the Committee expected inflation “to moderate further in coming quarters.” That’s hugely different from January 28, 2009: “inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.” This also gives extra emphasis to keeping interest rates low for a long period of time as well as expanding the balance sheet for a longer period of time. In short, they want to stamp out deflation. 3. Looks like they will buy long-term Treasuries. In December, they were “evaluating the benefits”. Now on January 28, 2009 they say “The Committee also is prepared to purchase longer-term Treasury securities…” Buying Treasuries will reduce interest rates. But hey, the 10-year bond is trading at 2.6%. It is already rock bottom. What we need is a reduction of risk premia. That can only happen if they buy risky assets. 4. Other notables are the fact that they ” are likely to keep the size of the Federal Reserve’s balance sheet at a high level”. Again, that spells inflation. Expect to see longer-term inflation expectations (as reflected in inflation-indexed bond) to increase. 5. There is no change in the all available tools language. Both December 16, 2008 and January 28, 2008 use the identical language: “The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.” No news here. 6. It was a split vote. In December, it was unanimous. However, I don’t think the split is that notable. Lacker simply preferred to target Treasuries rather than the credit programs. Overall, the announcement today did not offer any new ideas. That is disappointing.  Image courtesy of MicksGuns.com |
Congress Correct Not to Delay Digital TV Transition |
Congress took the correct action on Wednesday not to push back the date for the nation’s transition to digital-only TV (DTV) broadcasting because a delay would have been neither politically shrewd nor in the interest of the public good, says a former Federal Communications Commission economist and Fuqua Professor. “When the DTV transition happens, there are going to be some people — the uninformed, misinformed and procrastinators — who are not ready. They will complain,” said Leslie M. Marx, a professor at Duke’s Fuqua School of Business who served as the FCC’s chief economist in 2005 and 2006. “But that was going to happen regardless of whether the transition happens next month or in five months. “By letting the DTV transition go ahead as planned, Congress and the Obama administration can blame any problems on the FCC and the previous Republican administration,” Marx said. “If they had postponed the transition, then they ‘owned’ it. Any problems were then theirs.” Marx points out that a year ago communications companies bid $19 billion for the right to use the spectrum currently being used for analog TV signals. “If I were working for one of the companies that bought the spectrum and a four-month delay had occurred, I would be asking the government for some kind of compensation,” she said. “Delaying the transition could also have cost the government a lot of goodwill.” |
This Winter of Our Hardship |
The ‘Winter of Our Hardship’ are the words of President Obama in the inaugural address. He refers to the common dangers that we face in his somber message. The common danger is that this recession turns into a depression. In this video blog shot on January 22, 2009, I explore the economic death spiral. It goes something like this. Corporations cut back more than they need because they want to be sure they are safe. But in doing so, there is additional unemployment and the demand for the corporation’s goods decreases leading to even more cutbacks in employment. This is the death spiral. or Streaming Video from Duke University  Image courtesy of flickr/Wayne MacPhail |
The Impact of the U.S. Economic Crisis on the Rest of the World |
For those of you who are familiar with some of my research, you know how I have railed against people overselling the concept of “Global Diversification”. While there is an obvious benefit to diversifying your investments, it is not fair to mislead investors about the degree of benefit. It goes something like this. Investors are sold a package of international investments with the promise of global diversification. Correlation is the measure usually touted and the international investments, we are told, have a low average correlation, say 0.30. But this is how it works. When the U.S. market is down, the correlation increases, say to 0.6, which is bad news because it means other markets go down with the U.S. That is, you are disappointed that the correlation was higher than the 0.3. When the U.S. market is up, correlations decrease, say to zero. This means that while the U.S. is going up, you are being punished by low returns in other markets. That is, you are disappointed that the correlation was lower than the 0.3. Yes, the average is 0.3 (0.6 + 0.0)/2 — but you are worse off than you thought. In this video blog shot on January 22, 2009, I argue that the current episode is an extreme example of why there are limited benefits to global diversification. All major equity markets dropped like stone in 2008. There was no diversification. or Streaming Video from Duke University
 Image courtesy of flickr/Kennington Fox |
The Essential Need for Transparency |
We recently learned that the U.K. financial institution, RBS, lost $41 billion. We also learned that Citigroup lost $8 billion. How are we to interpret these numbers? Would you be surprised if it was the reverse, with Citi losing $41b and RBS $8b? Probably not. You see we have no way of assessing the current state of banks. There is very little transparency. For example, we do know that Citigroup as $300b in assets sitting “off balance sheet”. Who knows what those assets are worth. We also know that some of these assets are not being marked to market (fair market value) because there is supposedly no bid or extreme lack of liquidity. As a result, we are relying upon the model prices that the bank (rather than independent third party) provide. In this video blog shot on January 22, 2009, I make two points. First, in order to rebuild confidence in our banking system we need an extraordinary degree of tranparency. Second, the government has no business blowing taxpayers’ money on bailouts of institutions where the government has no idea what the value of the firm is. or Streaming Video from Duke University
 Image courtesy of flickr/Jurek Durczak |
Unemployment Fast Forward |
The unemployment rate in December 2008 was 7.2%. We heard that initial claims for unemployment were greater than expected last week. What does this mean? As usual, it is difficult to navigate the data. We were told there were 589,000 initial claims in the week ending January 17. This was 82% higher than the comparable week last year. What’s worse is that these are not real numbers — they are seasonally adjusted. The unadjusted number is 769,000 which is down from the disasterous 957,000 in the previous week. Yes, that’s correct. In the past two weeks, 1.7 million people made an initial claim for unemployment insurance. This bad news was not reported in the press. In this video blog shot on January 22, 2009, I analyze the outlook for unemployment. or Streaming Video from Duke University  Image courtesy of flickr/Daquella Manera |
What Do We Do About Banks? |
The government has dumped $45 billion of cash and back stopped over $100 billion in troubled assets for each of Citibank and Bank of America. Current market capitalization of Citi is about $17 billion and Bank of America about $27 billion. Put simply, without the $45 billion each, they would be bust. But what do we have to show for it? Not much. They have hoarded the money rather than aggressively used it to create credit. It is the classic mistake of throwing good money at bad. The American taxpayer has put into these firms far more than would be need to outright buy 100%. The government has been satisfied with a passive role. That must change. In this video blog shot on January 22, 2009, I explore the state of banks and what potentially can be done to make them work better. or Streaming Video from Duke University  Image courtesy of flickr/Sonya |
Here’s an Idea: Let’s Throw Some Good Money at Good |
Once upon a time, there were three good banks: Bank of America, JP Morgan, and Citigroup. When the financial crisis started, these banks stepped up and seemingly did some favors for the government. JP Morgan acquired Bear Stearns (with some government help). Bank of America gobbled up Countrywide (the infamous sub-prime lender) and then devoured Merrill Lynch. Citigroup made a deal to grab the troubled Wachovia (with government help). But the financial crisis kept on going and questions started to arise. Now the government is barfing money to save both Citi and Bank of America. And there is no end in sight. Read on…..  Image courtesy of flickr/assbach |
Unemployment and Recessions |
“The worst job numbers since 1945”, we heard from CNN this morning. Well, that is not true. Today is different from 1945 for two reasons. First, our population is much larger. Second, there was an important technical factor — WWII (in September 1945 non-farm payrolls plunged by almost 5%). Nevertheless, the news of 524,000 losses was bad enough. The real loss was close to 700,000 if you include the negative revisions to October and November. How many more jobs will we lose? |
