Thursday, September 14, 2017

Which jobs don't Millenials like?

This weekend, one of my executive students told me that she is able to hire college graduates in Chicago for only $30K/year if they get to work in a downtown office. However, these same graduates turn down sales jobs that pay $50K. She ascribes it to the “cool” factor of working in a downtown office, i.e., to get a graduate to work in the relatively uncool job of sales, you have to pay them a $20K compensating differential. HT: Megan

Monday, September 11, 2017

Excavating entrenched management

In the words of Weisbach (1988): "Managerial entrenchment occurs when managers gain so much power that they are able to use the firm to further their own interests rather than the interests of shareholders."

Marc Fors told me this story of excavating entrenched management from American Business Products (ABP), a public company that was comprised of a variety of product groups; from food packaging to stationary and office products to book manufacture. BookCrafters was the book operation and was about $40M in sales and while historically profitable had now been losing money for several years. A new management group had been hired a few years before but the downward slide continued. All efforts to sell the company to other larger competitors had been fruitless. It had to be fixed or would have to be shuttered.

 I was hired as the turnaround CEO and moved to Ann Arbor with my wife and we rented a house in the community. This would be the smallest company I had attempted so far. It was the dominant company in the small town of Chelsea, and its largest employer. It had long been a family operation before being acquired by ABP and had been insulated from the changing realities of the print markets.

 Apart from the usual array of process control, a sales organization and equipment problems, there was a distinct morale issue. After a day or so at the plant HQ offices interviewing key players I began to understand the depth of the morale issue within the ranks. There was little respect or confidence in the new management team that had been hired by ABP. They had come across to the employees as aloof outsiders, more concerned with their own positions, and had not made any progress the 450 employees could see. Some key employees had been demoted or fired to make room for new managers aligned with the new management team, making matters worse as those hires brought a similar attitude and effected no positive change.

I had arrived a day earlier than planned and noticed that the entire management team was out at a “management meeting” at the local private golf club where the company maintained a membership. When they returned the next day I was struck by the lineup of leased company vehicles they all drove – all expensive luxury cars. These guys were out of touch and they had lost the respect of the hourly employees and were not likely to get it back. Morale was low and the rumor was out that I was here to reduce headcount and close the plant.

 After a series of one-on-one meetings with each department head where I was regaled with how much new capital they needed to improve operations I was scheduled to tour the plant with the three key manufacturing managers. A book printing operation is a complex operation of parts and assembly at that time. The skilled trades were on the printing presses, as large as a small house, and they were mostly men. The unskilled trades of assembling parts and operating the bindery were almost 70% women.

 Once out in the factory we walked through the Bindery with its loud clacking machines and all the handworkers gawking at the guys in suits, ostensibly to the center of the operation and to one of the newer printing presses that they wanted me to see and presumably be impressed by, they asked what I wanted to see first that day. I stopped the whole group in the aisle, by a small group packing boxes, and spoke loudly in order to be hard by all: “I want to see the women’s bathrooms.” Chuckles and odd smiles were the response all around and I said, “I’m serious. I want to see them all, one after the other – together as a group” Then I want to see any break room or employee changing area.” “After that, I will decide if we see anything else”

So that is what we did. I made them tour each bathroom and break area with me – making notes of cleanliness, broken faucets, paint problems, chipped and rusty porcelain and the like. It was intended to be obvious to the whole plant. I asked a female worker to take a break, leave her station and come with us – she entered before and made sure we were not disturbing anyone. I went in each bathroom over the course of a couple of hours (there were 12) and spent time in each and went I came out made a point of waving my arms, pointing and gesturing with the group around me.

After the tour, standing in the aisle we started in, I summed it up for the group: “So far, I am not impressed. You would not ask your own wife or daughter to spend time in those bathrooms and I am shocked you have let it go that far. I have to tell you I am not interested in touring anything else, or talking about any new capital for this plant until those bathrooms are fixed. That’s where we start. Productivity comes from people first and equipment second, not the other way around.”

The next day I fired one department head and hired back, as his replacement, a much beloved (and effective) manager that had been demoted. He began work on the refits. He had all the stalls dismantled and repainted by the local auto-body company in short order. Lighting was changed and upgraded. Paint and mirrors replaced and new seating and lockers installed in the break rooms. Fresh food options replaced broken vending machines.

 Over the next two years more progress was made and the sales organization was rebuilt. The plant never experienced the feared reduction in hourly manning – in fact the reverse. Sales grew, new product lines added, and morale and productivity recovered. I then led the sale of BookCrafters to a larger company that had two similar book plants that we merged with and integrated, led by the BookCrafters management team, bringing our management style and priorities with us. BookCrafters grew to become the Book Division of the Sheridan Group, a $500M print company, and is still in operation today in Chelsea Michigan.

Tesla "Crimping?"

Alex Tabarrok over at Marginal Revolution thinks Tesla may have unwittingly committed a marketing faux pas. As Hurricane Irma bears down, they expedited an over-the-update to the cars to extended battery life.
Tesla owners in Florida may be grateful for this mileage boost as they escape the ravages of Irma but I suspect that some of them will be upset when they have more time to reflect. How could Tesla increase the mileage at the flick of a switch? The answer is that owners of the Tesla 60kWh version of its Model S and Model X actually have the same battery as the 75kWh vehicles but the battery has been purposely limited or “damaged” to provide only 60KWh of mileage. But why would Tesla damage its own vehicles?

The idea of offering both premium and discount versions is common, as is purposely 'damaging' the product one so as to make the discount version perform more poorly than the premium version (i.e. "Crimping").

In this case though, there may have been no deception. There is a report that owners may have opted not to pay for the better battery life.

Saturday, September 9, 2017

REPOST: Risk-on, risk-off trading

Thursday, October 31, 2013

Risk-on, Risk-off trading

In our chapter 9 video, we illustrate how Vanderbilt Treasurer made money by selling risky assets and buying less risky ones when risk premia (the extra return investors receive for investing in risky assets) moved to historic lows.  He correctly reasoned that investors were ignoring risk in search of higher return, so when risk premia widened, in 2008, the price of risky assets fell relative to their less risky counterparts.  In the jargon of finance, this is known as a "risk off" trade.

We can illustrate risk-off trading, uusing Don Marron's "history of the European Union in one simple chart" below. It shows the premia that the Southern European PIIGS (Greece is in orange) had to pay to borrow money.

In 1995, for example, Greece (in orange) had to pay 18% to borrow money, representing an 11% premium over Germany's (in red) 7% rate.  The risk premium disappeared in 2002 when Greece joined the EU.  In 2008, the risk premia re-appeared, as the interest rate on Greek debt rose to 16%, a 12% premium over Germany's 4%. 

From investopedia:

...During periods when risk is perceived as low, risk-on risk-off theory states that investors tend to engage in higher-risk investments. When risk is perceived as high, investors have the tendency to gravitate toward lower-risk investments.  ... The 2008 financial crisis was considered a "risk off" year, in which investors attempted to reduce risk by selling existing risky positions and moving money to either cash positions or low/no-risk positions, such as U.S. Treasury bonds.

If you can anticipate changes in risk premia, you can make money:

  • A prescient "risk-off" trade would have been to short Greek debt and buy German debt in 2007, and sell in 2011.  
  • Conversely, a prescient "risk-on" trade would have been to buy Greek debt and short German debt in 1995, and sell in 2001.

Friday, September 8, 2017

REPOST: Trump was right: China ate America's manufacturing jobs.

Monday, February 27, 2017

Trump was right: China ate America's manufacturing jobs.

Freakonomics podcast featuring labor economist David Autor:
  • Between 1991 and 2013, Chinese exports grew from roughly 2 percent of the world’s total to nearly 20 percent.

  • ...There are two big differences of the last two decades relative to earlier periods. One is that a lot of our trade prior to China’s rise, a lot of it was North-North trade. You know, trading between wealthy nations. So you know, we sell aircraft engines to France and we buy cheese and wine and Renaults or maybe we buy Mercedes from Germany. And so it’s a lot of high-skill people trading high-skill goods and we’re trading on the basis of taste. Like, “I like your vehicles. You like my aircraft.” It’s not trying to see who can make the cheapest version of X, Y, or Z. We’re often focusing on a set of expensive goods in which we all are differently good at different subsets.
  • So when the United States trades with the developing world, we’re going to typically export skill-intensive products: aircraft engines, electronics, movies, and TV programs and things that use a lot of highly educated labor. And we’re going to tend to import low-skilled or what we call labor-intensive products like you know footwear and textiles, leather goods, things that require a lot of hand assembly. 
  • TRADE BENEFITS US SKILLED WORKERS AND CONSUMERS:  And so what does that do? Well, when we export those high skill-intensive goods we’re basically raising demand for skilled or educated workers in the United States. When we import those labor-intensive goods, we’re going to reduce demand for blue-collar workers, who are not doing skill-intensive production. Now we benefit because we get lower prices on the goods we consume and we sell the things that we’re good at making at a higher price to the world. So that raises GDP but simultaneously it tends to make high-skilled and highly educated labor better off, raise their wages, and it tends to make low-skilled manually intensive laborers worse off because there is less demand for their services – so there’s going to be fewer of them employed or they’re going to be employed at lower wages. So the net effect you can show analytically is going to be positive. 
  • BUT HARMS U.S. UNSKILLED LABOR: But the redistributional consequences are, many of us would view that as adverse because we would rather redistribute from rich to poor than poor to rich. And trade is kind of working in the redistributing from poor to rich direction in the United States. The scale of benefits and harms are rather incommensurate. So for individuals, you know, I have less expensive consumer items because of imports from China. But it hasn’t affected my employment or my wages. For many others – on the order of at least a million U.S. manufacturing workers – it meant the end of their jobs and in many cases the end of their industries.
BOTTOM LINE:  Trade helped U.S. skilled workers (by increasing demand for their services) and consumers (by giving consumers cheaper goods), but hurt U.S. unskilled workers (by reducing demand for their services).  In a frictionless world, they would move to their next best alternative (e.g., Texas or Tennessee), but instead they are moved out of the labor force and into the safety net (e.g., medicare, medicaid, early retirement, disability insurance, food stamps, and TANF).

Interesting closing thoughts by David Autor, which seems to echo President Trump's campaign:
I think the other thing that we have to recognize, and that economists have tended not to emphasize is that jobs aren’t purely income. They are part of identity. They structure people’s lives. They give them a purpose and a social community and a sense of relevance in the world. And I think that is a lot of the frustration that we see in manufacturing-intensive areas. We saw a lot of that actually in the recent election. People feel like their place in the universe, or at least in the economy, has really been kind of reduced, made less valuable. And I think that that’s costly even beyond the direct financial costs.

Tuesday, September 5, 2017

Equilibrium in the Tinder Market?

When demand shifts up we expect price to rise, ..., or quality to fall. Worst-online-dater over at has done some analysis of activity on Tinder. The nice thing about heterosexual matching markets is that there is are almost equal numbers of males as females. With a few exceptions, matches tend to be one-to-one. But, before settling down (and perhaps after), there appears to be much more interest by men in dating women than women in dating men. Normally this would lead to side payments but that has traditionally been frowned upon. So what other mechanism allocates scarce women to the surplus of men?

Quality, or at least attractiveness, sorts these scarce women to all these men. The curve between the pink and the blue represents equal numbers of Tinder "likes" by attractiveness percentile of men and women.

Men must be quite attractive to be "liked" on Tinder while women need not be.
In reality, the bottom 80% of men are fighting over the bottom 22% of women and the top 78% of women are fighting over the top 20% of men.

An Honest Pension Manager

Zero Hedge Fund has a nice story demonstrating the power of compounding. One way to make your pension look solvent is to assume exceptionally high expected rates of return. Minnesota made more realistic assumptions and found that their unfunded obligations ballooned from $16 billion to $50 billion. But Minnesota is only noteworthy because their revised assumptions are now more honest. Most other states are in pretty bad shape too.

Friday, September 1, 2017

Reduce Prices When you Acquire a Complementary Good: Amazon/Whole Foods

The WSJ is reporting that Amazon will begin steep price cuts at its newly acquired Whole Foods affiliate. One way to think of the merger is that it couples Whole Foods's retailing niche with Amazon's logistics expertise. These are complementary assets. Lowering the margin on one increases the demand for the other. This is likely to be profitable for Amazon. Some evidence that this will benefit consumers can be gleaned from the effect of the announcement on traditional retailers.
The announcement Thursday, which sent stocks of traditional grocers into a fresh tailspin, said price changes for both staples and more high-end foods would go into effect as soon as Amazon closes the Whole Foods deal on Monday.