TIME Economy

What’s Really to Blame for Weak Economic Growth

The George Washington statue stands covered in snow near the New York Stock Exchange (NYSE) in New York, U.S. Wind-driven snow whipped through New Yorks streets and piled up in Boston as a fast-moving storm brought near-blizzard conditions to parts of the Northeast, closing roads, grounding flights and shutting schools.
Jin Lee—Bloomberg via Getty Images The George Washington statue stands covered in snow near the New York Stock Exchange

Finance is a cause, not a symptom, of weaker economic growth

After years of hardship, America’s middle class has gotten some positive news in the last few months. The country’s economic recovery is gaining steam, consumer spending is starting to tick up (it grew at more than 4 % last quarter), and even wages have started to improve slightly. This has understandably led some economists and analysts to conclude that the shrinking middle phenomenon is over.

At the risk of being a Cassandra, I’d argue that the factors that are pushing the recovery and working in the favor of the middle class right now—lower oil prices, a stronger dollar, and the end of quantitative easing—are cyclical rather than structural. (QE, Ruchir Sharma rightly points out in The Wall Street Journal, actually increased inequality by boosting the share-owning class more than anyone else.) That means the slight positive trends can change—and eventually, they will.

The piece of economic data I’m most interested in right now is actually a new report from Wallace Turbeville, a former Goldman Sachs banker and a senior fellow at think tank Demos, which looks at the effect of financialization on economic growth and the fate of the working and middle class. Financialization, a topic which I’m admitted biased toward since I’m writing a book about it, is the way in which the markets have come to dominate the economy, rather than serving them.

This includes everything from the size of the financial sector (still at record highs, even after the financial crisis and bailouts), to the way in which the financial markets dictate the moves of non-financial businesses (think “activist” investors and the pressure around quarterly results). The rise of finance since the 1980s has coincided with both the shrinking paycheck of most workers and a lower number of business start-ups and growth-creating innovation.

This topic has been buzzing in academic circles for years, but Turberville, who is aces at distilling complex economic data in a way that the general public can understand, goes some way toward illustrating how the economic and political strength of the financial sector, and financially driven capitalism, has created a weaker than normal recovery. (Indeed, it’s the weakest of the post war era.) His work explains how financialization is the chief underlying force that is keeping growth and wages disproportionately low–offsetting much of the effects of monetary policy as well as any of the temporary boosts to the economy like lower oil or a stronger dollar.

I think this research and what it implies—that finance is a cause, not a symptom of weaker economic growth—is going to have a big impact on the 2016 election discussion. For starters, if you believe that the financial sector and non-productive financial activities on the part of regular businesses—like the $2 trillion overseas cash hoarding we’ve heard so much about—is a cause of economic stagnation, rather than a symptom, that has profound implications for policy.

For example, as Turberville points out, banks and policy makers dealt with the financial crisis by tightening standards on average borrowers (people like you and me, who may still find it tough to get mortgages or refinance). While there were certainly some folks who shouldn’t have been getting loans for houses, keeping the spigots tight on average borrowers, which most economists agree was and is a key reason that the middle class suffered disproportionately in the crisis and Great Recession, doesn’t address the larger issue of the financial sector using capital mainly to enrich itself, via trading and other financial maneuvers, rather than lending to the real economy.

Former British policy maker and banking regular Adair Turner famously said once that he believed only about 15 % of the money that followed through the financial sector went back into the real economy to enrich average people. The rest of it merely stayed at the top, making the rich richer, and slowing economic growth. This Demos paper provides some strong evidence that despite the cyclical improvements in the economy, we’ve still got some serious underlying dysfunction in our economy that is creating an hourglass shaped world in which the fruits of the recovery aren’t being shared equally, and that inequality itself stymies growth.

TIME Innovation

Five Best Ideas of the Day: February 10

The Aspen Institute is an educational and policy studies organization based in Washington, D.C.

1. Is the technology that is supposed to increase resilience actually making us vulnerable?

By Colin Dickey in Aeon

2. Stock buybacks — usually to prop up a corporation’s perceived value on Wall Street — are draining trillions from the U.S. economy.

By Nick Hanauer in the Atlantic

3. The Navy of the future wants to use lasers and superfast electromagnetic railguns instead of shells and gunpowder.

By Michael Cooney in Network World

4. An after-school culinary skills program gets teens ready for work — and thinking about food in our society.

By Emily Liedel in Civil Eats

5. The next wave of bike lanes in London could be underground.

By Ben Schiller in Fast Co.Exist

The Aspen Institute is an educational and policy studies organization based in Washington, D.C.

TIME Ideas hosts the world's leading voices, providing commentary and expertise on the most compelling events in news, society, and culture. We welcome outside contributions. To submit a piece, email ideas@time.com.

TIME

Investors Sink Their Teeth Into Shake Shack’s IPO

Shares of Shake Shack more than doubled on the first day of trading

Shares of Shake Shack more than doubled on the first day of trading Friday, as investors feasted on a chance to get a piece of the New York burger chain before it opens hundreds of additional restaurants in the U.S.

Shake Shack’s stock was trading at around $49 per share early in Friday’s session, a roughly 133% gain above the $21 initial offering price that was set on Thursday evening. The company had initially anticipated a share price in the range of $14 to $16, but investor enthusiasm prompted the company to raise that range by $3 on Wednesday. Shares are trading on the New York Stock Exchange under the symbol “SHAK.”

A bet on Shake Shack, a fast-casual restaurant operator with just 63 global locations, is an investment in a company that could one day become the next Chipotle. Those two chains are the model that all other fast-casual chains could one day aspire to achieve. Fast-casual restaurants have menus that are filled with food that consumers perceive as healthier fare than what fast-food competitors sell, but without the table service found at casual dining chains.

Though Shake Shack is growing — generating nearly $79 million in “Shack sales” for the first nine months of 2014 — there are some worries that growth at stores that have been open for at least two years has slowed.

MORE The 17 Most Influential Burgers of All Time

Shake Shack can be seen as more thrilling investment than McDonald’s , which this week saw the resignation of its CEO after a string of poor sales. But the newer chain is also facing stiff competition from other fast-casual burger chains such as Smashburger and Five Guys. And McDonald’s, while it faces major challenges, still booked $4.8 billion in profit last year.

Burger chains are in prime position, at least when it comes to prevailing trends in the restaurant world. Nine billion servings of burgers were ordered at U.S. restaurants and foodservice outlets last year, an increase of 3% from 2013, despite weakness in traffic at other restaurants, according to research firm NPD Group. That indicates the burger chains can court rising consumer interest in their core menus.

History was on Shake Shack’s side when it debuted on Friday. The fast-casual chains that have debuted on the market the past decade have reported an average gain of 95% on their first day of trading, according to IPO ETF manager Renaissance Capital. If Shake Shack’s early pop holds until the end of the day, it will have reported the best first-day performance among the seven restaurant chains that have gone public over the last 10 years.

Of the now seven fast-casual chains Renaissance Capital tracked, only Chipotle has been on the stock market for greater than two years. It listed in 2006 and has gained over 3,100% from its IPO price, suggesting investors are willing to place a bet on what could be the next huge concept in the category.

This article originally appeared on Fortune.com

MONEY wall street

Wall Street Walloped Tuesday After Snowstorm

A blizzard kept the New York Stock Exchange trading floor mostly empty Tuesday, but there was enough activity to send shares downward.

MONEY stocks

Why Main Street’s Gain Is Wall Street’s Pain

150106_HO_Lede
Carlo Allegri—Reuters via Corbis Trader Joseph Mastrolia works on the floor of the New York Stock Exchange while wearing 2015 novelty glasses on New Year's Eve, the last trading day of the year, in New York December 31, 2014.

Monday's 331-point drop in the Dow shows that the tables have turned on Wall Street.

Up until now, the bull market seemed to defy the everyday experience of many Americans: As Main Street households struggled through a recovery that repeatedly fell short of expectations, investors on Wall Street rejoiced.

That’s because the economy was growing fast enough to justify higher share prices, but not so fast that inflation was viewed as a real threat.

This year, though, the script seems to be flipped.

As Main Street Americans finally begin to see the economy improving, it’s the stock market that’s falling short, as evidenced by Monday’s 331-point drop in the Dow.

Monday’s dive was driven by two major economic trends that on the surface should be a boon for U.S. consumers. First, oil prices continued their sudden and surprising slide, driving prices at the pump down with them.

Brent Crude Oil Spot Price Chart

Brent Crude Oil Spot Price data by YCharts

At the same time, the U.S. dollar is now at a nine-year high against the struggling euro. That bolsters the purchasing power of Americans traveling abroad and U.S. consumers purchasing imported goods.

^DXY Chart

^DXY data by YCharts

Thanks to both trends, auto sales last year reached their highest level since before the global financial crisis.

Yet none of this is moving the dial on stock prices so far in 2015.

Some analysts think this could be a recurring trend throughout this year. “Expect a good year on Main Street but a more challenging environment for Wall Street,” says James Paulsen, chief investment strategist for Wells Capital Management.

Why?

Before, lukewarm news on the economic front bolstered the hope that the Federal Reserve would keep interest rates near zero for the foreseeable future. Now, some investors worry that the forces causing oil prices to fall and the dollar to rise — the weak global economy abroad — may be too much for the Fed to tackle even if rates stay low throughout this year.

Moreover, falling oil prices and the strengthening dollar may be giving the market false hope about low inflation.

“Some have argued that lower oil prices give the Fed more room to maneuver. This is a mistake,” says David Kelley, chief global strategist for J.P. Morgan Funds.

While it is true that lower energy prices are reducing inflation in the near term, “falling oil prices are also a big boost for consumers,” Kelly said. “Even if gasoline prices were gradually to move up to $2.75 a gallon by the end of this year from $2.39 at the end of last year, consumers would spend roughly $90 billion less on gasoline in 2015 than they did in the 12 months ended in June 2014.”

Not only is this a financial boost, “it is also a psychological positive with sharp increases seen in consumer confidence readings in the last few weeks,” Kelly said. “This should power an increase in consumer demand which should, in turn, boost prices in other areas.”

TIME Markets

IPOs Raise $249 Billion in 2014 Amid Funding Frenzy

Dow Rises Over 400 Points Day After Fed Signals No Rise In Interest Rates
Andrew Burton—Getty Images A trader works on the floor of the New York Stock Exchange in New York City during the afternoon of Dec. 18, 2014.

Last year was a busy one for public offerings, even without Alibaba’s record-breaking listing

A company looking to raise money in 2014 didn’t have to look too far. Last year was the busiest for initial public offerings since 2010.

From Alibaba Group’s $25 billion IPO to much-hyped smaller listings, such as GoPro and Ally Financial, companies listing on the stock markets raised $249 billion worldwide, according to data collected by Thompson Reuters. Even without Alibaba’s record-breaking offering, last year was a standout period for IPOs.

IPOs picked up pace from 2013: about 40% more companies listed on public markets in 2014 compared to the year prior. They also raised more money. Leaving out Alibaba’s offering, which many agree is a once-in-a-generation kind of IPO, companies raised almost 36% more money year-over-year, according to the New York Times.

The booming market has led some analysts to speculate that it is inflated past realistic valuations, pumped up by overly optimistic investors. For instance, Lending Club’s December IPO valued the online lender at 35 times estimated revenue for 2017, which would put it on par with tech companies such as Facebook.

The public markets weren’t the only place to raise big bucks. The private market also saw big number sums, including Uber’s $1.8 billion fundraising round that valued it at $40 billion. Chinese smart phone maker Xiaomi and online home rental service Airbnb also raised huge sums that valued the startups at $10 billion or more.

Fundraising in both the public and private markets have been driven by a confluence of factors, including low interest rates that have pushed investors toward higher-growth opportunities and a skyrocketing stock market.

While no mega-IPO like Alibaba is set for the year ahead, there are some big-name companies that are scheduled to go public, including file-sharing startup Box and “fine casual” dining chain Shake Shack.

Other potential IPOs remain the subject of much speculation. Investors are watching startups such as Uber, Pinterest and Fitbit carefully, though none have yet indicated when or if they will list on public markets.

This article originally appeared on Fortune.com

MONEY Economy

Economy Delivers a Last-Minute Gift to Wall Street

141223_INV_Party_1
Getty Images/Purestock

The U.S. economy isn't exactly partying like 1999, but it came pretty close in the third quarter, growing faster than it has since 2003.

It’s time to stop describing this economic recovery as being “tepid.”

A new report from the Commerce Department Tuesday morning revealed that the U.S. economy had grown at an annual rate of 5% in the third quarter. Not only does that represents a major jump from earlier estimates of 3.9% growth, it marks the economy’s best performance in 11 years. And it’s the second straight quarter in which U.S. gross domestic product grew at or near the historically high mark of 5%.

Wall Street reacted as you’d expect, pushing the Dow Jones industrial average up another 60 points in early morning trading Tuesday to above the 18,000 mark. In just the past week, the so-called Santa Claus rally has now lifted the benchmark Dow up nearly 1000 points.

Most of that rally, however, centered on the bad news surrounding the global economy, as the slowdown overseas is putting a lid on inflation and allowing the Federal Reserve to keep interest rates near zero for some time.

Today’s bump, though, was all about the surprising health of the U.S. economy in general and American consumers in particular.

Earlier reports showed that consumer spending, which represents more than two thirds of total economic activity in the country, had grown a decent 2.2%. But today’s new report updated that figure to 3.2%. “The boost to personal consumption was much stronger than we had expected,” noted Michael Gapen, chief U.S. economist for Barclays Research.

This would imply that the improved job market and rising net worth due to improvements in the stock and housing markets are finally being felt by American households—just in time for the holidays.

MONEY Federal Reserve

Fed Leaves Rates Unchanged, Signals Cautious Stance

Janet Yellen
Chip Somodevilla—Getty Images Federal Reserve Bank Board Chairman Janet Yellen

The Federal Reserve kept interest rates near zero -- and surprised many by not hinting at higher rates.

The Federal Reserve’s Open Markets Committee left interest rates unchanged Wednesday. But in a minor surprise, the central bank declined the opportunity to drop a widely expected hint that it was inching closer to raising rates.

Many on Wall Street and in the financial media had expected the central bank, which wrapped up a two-day meeting in Washington on Wednesday, to prepare markets for higher rates by changing the language of its closely watched economic statement.

The Fed had previously and repeatedly reassured investors that rates would remain low for “a considerable time.” With the U.S. economy steadily improving, many economists expected the phrase to be dropped. But it reappeared in Wednesday’s release.

The Fed’s language did change ever so slightly. The committee, it said, “judges that it can be patient in beginning to normalize the stance of monetary policy.” But it went on to add that it viewed this new assessment as “consistent” with its previous reassurances that the hike would come after a “considerable time.”

The tweaks to the Federal Reserve’s assessment come at a time when the U.S. economy is finally showing signs of sustained strength, with robust third-quarter GDP growth of 3.9% and a November jobs report that was widely regarded as one of the best in months.

But the Fed may have found reason for caution in the stock market’s recent skittishness. Prompted by plunging oil prices and a brewing crisis in Russia, shares have fallen about 5% since December 5. Investors appeared to react positively to the announcement. The Dow had already rallied about 150 points early Wednesday afternoon as news broke that the U.S. planned to normalize relations with Cuba. Immediately following the Fed’s announcement, the Dow was at 17,340, up about 272 points.

 

 

 

 

TIME Investing

This New App Makes It Way Cheaper to Trade Stocks

Robinhood
Robinhood Robinhood

Robinhood wants to convince Millennials to dip a toe into the stock market

Next up for disruption by the Silicon Valley set: Wall Street.

A new startup is aiming to convince Millennials to dip a toe into the stock market by making it cheaper and easier to buy securities. Robinhood, a new mobile-first brokerage that launched its iOS app today, lets users buy U.S.-listed stocks without paying a commission, a cost that typically runs individual investors $7 to $10 per trade.

The app’s slick interface lets users buy securities, track stock performance and keep tabs on their overall portfolio. Users don’t even have to maintain a minimum account balance, a common requirement of similar stock-swapping services.

“People in our age group were not being exposed to what we consider a pretty useful tool for building your wealth,” says Robinhood co-founder Vlad Tenev. He and co-founder Baiju Bhatt launched Robinhood in beta for a few thousand users earlier this year. Already half a million people have signed up to request the app, indicating a heavy appetite for cheaper trades. These users will begin being on-boarded to the app today, and newcomers can download the app to join the waitlist and view different stocks.

The company, which has netted $16 million in venture funding from backers like Andreessen Horowitz and Google Ventures, plans to make money by letting investors trade on margin (basically issuing loans to let customers buy additional stock).

Whether or not young investors really need a service that lets them buy stocks “as quickly as you can call an Uber,” as Bhatt puts it, is an open question. Most active stock pickers fail to outperform the overall stock market. During the first 9 months of 2014, only 9.3% of actively managed mutual funds outperformed the S&P 500, according to the Wall Street Journal — and those funds are managed by people whose job is to be good at picking stocks.

Tenev argues that stock-picking is a good way for young people to learn about investing. “It makes a lot of sense for a first-time investor who is an early adopter of technology and discovers companies through using their products and services,” he says.

That advice flies in the face of a lot of collective wisdom about investing, including from famed businessman Warren Buffet. But for those that are still confident they can beat the market and would like to attempt it more affordably, Robinhood will also be available on Android and on desktop soon.

TIME Money

Millennials Will Make These 15 Companies Tons of Money

Bags of tortilla chips sit in a row at a Chipotle Mexican Grill Inc. restaurant in Hollywood, California on July 16, 2013.
Patrick T. Fallon—Bloomberg / Getty Images Bags of tortilla chips sit in a row at a Chipotle Mexican Grill Inc. restaurant in Hollywood, California on July 16, 2013.

Where Millennials choose to spend their money could pay off serious dividends

The question on every Wall Street trader’s mind these days: “What do millennials like?”

Or at least it should be, according to a new report released Tuesday by Morgan Stanley’s equity strategy team. The report paints a pretty compelling picture of the millennial generation’s spending power five years out.

First, in terms of sheer size, millennials outnumber baby boomers as the largest demographic group. But more importantly, they are aging into some of the spend-happiest years of their lives. In the average lifecycle of the American shopper, spending tends to spike between the ages of 25 and 39:

Screen Shot 2014-11-18 at 3.54.45 PM

 

Where they choose to spend that money could pay serious dividends to a few savvy stock pickers. Which brings us back to the question, “What do millennials like?”

“Fast casual dining, hotels, buying online, gaming (social and online, less so casinos), eating organic and healthy, and working out more,” writes Morgan Stanley’s consumer stock researchers. They winnowed down a shortlist of 15 companies that hit those millennial sweet spots, and presented them as a “millennial basket” for investors’ consideration before the flood:

Screen Shot 2014-11-18 at 3.52.44 PM

 

 

 

 

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