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Today's massive market plunge, in full perspective

After the AP's Twitter account was hacked today, we saw a lot of scary charts on how much the market moved. Here's the view of today's stock market volatility that you've probably seen:

Pay attention to the y-axis though -- it's absurdly cropped. As it is here and many other places, or here, here, and here if you're interested in the Dow.  Sure, the market recovered in a few minutes, but that's a scary looking chart.

Reuters Stephen Culp pulled together a different view. The y-axis goes all the way to zero, as it should:

Unlike the first example, on this chart the market drop has to be highlighted so it isn't obscured by a speck of dust on your monitor. Much more soothing, isn't it? – Ben Walsh

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"Rebuilding revenue streams [in Stockton] in the short-term is nearly impossible. The City exhauseted all reserves long ago. Without voter approval, state law forbids the General Fund from borrowing money from other funds or from private creditors unless the City can repay the advances from revenues raised in the same fiscal year. The City cannot do so. Raising taxes also is illegal without voter approval. And voter approval of new debt or new taxes is highly unlikely in a city with 20% unemployment, a high rate of foreclosures, a high level of poverty, and widespread distrust of the City's past fiscal practices. Because raising revenues has not been a realistic tool for solving its chronic budget deficits, the City has resorted to increasingly drastic cost-cutting measures. It balanced its fiscal year 2009-10 and 2010-11 budgets largely by reducing services and employee compensation and benefits. These actions were necessary, but came with a cost. Stockton has the highest crime rate for a large city in California, but has 22% fewer police officers on the streets than it did four years ago. Violent crime, murders, gang activity, and drug trafficking are on the rise. Fire protection, building, vehicle, road, and tree maintenance, and community programs have also been slashed.

Stockton's bankruptcy brief (PDF)

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In Stockton, California, public safety workers earn on average 126 percent of the maximum salary and at least 200 percent of the minimum wage for their respective wage categories.

Cate Long on how runaway pay for police officers and firefighters contributed to Stockton's insolvency

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U.S. Bankruptcy Court Judge Christopher Klein's ruling permits Stockton to proceed with its Chapter 9 bankruptcy protection filing from last June in a case with precedent-setting potential for other cash-strapped U.S. cities. In a lengthy preamble to his ruling, Klein said Stockton's bondholders had failed to negotiate in good faith with the city prior to its filing for protection. He added the city was "by any measure insolvent" prior to its filing.

Reuters: Stockton eligible for bankruptcy protection

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The idea that American manufacturing is on the cusp of a renaissance is everywhere these days—except in the hard numbers. It's true that industrial production has grown twice as fast as the economy as a whole in this recovery, and manufacturers are adding jobs again. But economists see those gains as too small relative to what was lost in previous years to suggest a full-blown revival... "There's simply no statistical evidence of a broader renaissance at this point," says Daniel Meckstroth, chief economist with the Manufacturers Alliance for Productivity and Innovation, an Arlington, Va., group that represents mostly large U.S. producers.

The WSJ's Timothy Aeppel examines whether or not the return of US manufacturing is a real phenomenon. He largely concludes not.

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Tim Taylor on the remarkable persistence of US economic growth, 1790-present. 

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The CFPB proves it takes agency to complain

The Consumer Financial Protection Bureau has released its database of complaints against credit card companies, and “well-to-do neighborhoods of Florida and New York that are supplying the most grievances”:

Of the top four zip codes contributing to the 18,539 complaints published as of March 18, two are on Manhattan’s Upper West Side and two in south Florida -- Boca Raton and Palm Beach Gardens. Almost 60 percent of complaints originated in zip codes where the median household income is higher than the national median of $52,762, according to the analysis.

This is amusing, but also instructive. To end up in the CFPB’s credit card complaint database, you must fit a fairly narrow set of criteria, from having a credit card, to knowing when you’ve been had, to caolling yur credit card company, all the way to knowing the CFPB exists and how to register your complaint. And of course, a certain sense of justified indignation.

Each one of these steps requires a specific level of financial understanding, bureaucratic knowledge, social literacy, and disposable time. And, of course, you have to belive that your grievances can be righted through bureaucratic channels, and that public institutions are responsive and responsible. All of which requires a very specific type of personal agency, and explains why complaining about your credit card company is actually rare behavior. -- Ben Walsh

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The cost of Warren Buffett's imprimatur

Stephen Gandel has a smart post on the Buffett-Goldman deal. Instead of looking at it from Buffett's perspective, as I did yesterday, he looks at it from Goldman's perspective. His conclusion is that in the fall of 2008, Goldman "may have been in more trouble than is understood". It needed Buffett's investment far more than he needed to make it, and he got very favorable terms:

Almost all of the gain Buffett got on his Goldman investment comes from the special structure of the investment -- the preferreds and the warrants. As a straight stock pick, Goldman hasn't been all that remarkable since Buffett put his money in...

So how much trouble was Goldman in at the height of the financial crisis: $2.4 billion worth. That's how much extra the bank paid Buffett above what he would have earned if he had just bought the shares on the open market... 

Gandel is spot-on in identifying the perpetual preferreds as the key to the profitability of the investment, and Buffett's ability to charge a hefty premium for his imprimatur. -- Ben Walsh

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Regulatory filing of the week: A123 becomes B456

A123 Systems, a struggling lithium ion battery manufacturer, has filed an 8-K with the SEC to legally change its name to B456.

Here's the full document. 

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Warren Buffett still has an index problem

As of yesterday, the warrants (rights to buy) that Buffett acquired from Goldman Sachs as part of his fall 2008 $5 billion investment are woth $1.34 billion.

Matt Phillips writes that this means that, to-date, Buffett’s investment in Goldman has generated $3.1 billion in returns -- a healthy 62%. Over the same period, the S&P 500 with dividends reinvested -- the benchmark Buffett sets for himself -- returned 44%.

Buffett may have “out-Goldmaned Goldman”, as Market Watch put it, or got ahold of “10 million Goldman Sachs shares without handing over a penny”, in the WSJ’s accurate but misleading words, but he still has an index underperformance problem. Berkshire has underperformed the S&P over the last four years, and is on track for its first ever five-year period of underperformance. Part of that is cyclical -- the equity market has boomed since late 2008, and Buffett knows this isn’t good for Berkshire.

Berkshire ended 2012 with a book value of $187 billion. If the S&P repeats its average yearly return over the last four years of 14%, Buffett will need the equivalent return of nine Goldmans to beat the S&P in 2013. -- Ben Walsh

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Europe enters the "post-solidarity era"

As Cyprus rolls out draconian capital controls, the Institute for International Finance calls the outlook for the island's economy "very grim":

While it is hard at the current time to be confident about the degree of likely declines in GDP, it seems plausible that the cumulative decline could amount to as much as 20% of GDP in 2013-15...

The near-term dislocation caused by the extended bank holiday will cause a sharp drop in activity (and a rise in the unemployment rate). This dislocation will be compounded by the huge loss in national wealth resulting from the decline in the perceived value of bank deposits, as well as other asset holdings (equity and property prices). Moreover, the forced  downsizing of the financial system will push many highly skilled financial services sector workers out of a job

The details of the capital controls include a ban on cashing checks, restricting cash exports in any currency to no more than €3000 per person, and limiting credit card purchases abroad to €5000 per month.

Cyprus remains a nominal euro member, but as David Keohane had said, capital controls are anathema to the idea of a currency union. -- Ben Walsh

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Output on [Cyprus] could easily decline by 25% or more, and I don’t think that will involve much subsequent mean-reversion. There will be a deflationary shock, an uncertainty shock, an “austerity shock,” a credit contraction shock, and a few other negative shocks as well. The Cypriot government will not be fiscally well situated to support the safety net or automatic stabilizers

Tyler Cowen on the shocks on shocks on shocks facing Cyprus

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If #Cyprus=Lehman, #Luxembourg=AIG cont'd: ECB says Lux “monetary financial institutions” have assets = 22 times GDP. ft.com/intl/cms/s/3/7…

— Anatole Kaletsky (@Kaletsky) March 25, 2013

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While last week saw dozens of well-heeled Russians and their representatives fly down to Cyprus to check on bank accounts and confer furiously with Cypriot officials, they are being closely followed by another wave of visitors: the European bankers who hope Cyprus’s loss will be their gain. [...] Mr Mikhin complains that the Cypriots do not appreciate the extent to which Russia has propped up the local economy. “When the Russians leave who is going to stay at the Four Seasons for $500 a night? Angela Merkel?”

From the FT: "Russians prepare to quit Cyprus"

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In a case like Cyprus, there's just no way to beat the instant access to data, insight, and on-the-ground observations that can be obtained through a well-curated twitter stream. In a fast-moving story that combines lots of moving parts (economics, markets, politics) no research shop could compete.

Joe Weisenthal on how Twitter is displacing traditional research reports from Wall Street analysts

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It’s hard to imagine now, but for more than three decades after World War II financial crises of the kind we’ve lately become so familiar with hardly ever happened. Since 1980, however, the roster has been impressive: Mexico, Brazil, Argentina and Chile in 1982. Sweden and Finland in 1991. Mexico again in 1995. Thailand, Malaysia, Indonesia and Korea in 1998. Argentina again in 2002. And, of course, the more recent run of disasters: Iceland, Ireland, Greece, Portugal, Spain, Italy, Cyprus. What’s the common theme in these episodes? Conventional wisdom blames fiscal profligacy — but in this whole list, that story fits only one country, Greece. Runaway bankers are a better story; they played a role in a number of these crises, from Chile to Sweden to Cyprus. But the best predictor of crisis is large inflows of foreign money: in all but a couple of the cases I just mentioned, the foundation for crisis was laid by a rush of foreign investors into a country, followed by a sudden rush out

Krugman makes the case for capital controls (again).