April 28th, 2011


On the arbitration ruling

Okay, I'd started an econ post, but it got too big, so I'm breaking it into chunks.

The first thing I want to talk about is this ruling from the Supreme Court, which overturns California's law limiting the ability of corporations to send customer complaints against contract violation to court. DISCLOSURE: I haven't read the full ruling, only analysis, but everyone agrees that it basically says that a user agreement can wipe out the ability to go to court in a dispute, and can force you into arbitration on the company's terms.

Corporations have, over the last few decades, captured the regulatory agencies that are supposed to regulate them. This is why no banker, no investment house member, no real-estate interest is going to go to jail despite having deliberately and clearly engineered a system built on fraud from the ground up which led to the real estate bubble and collapse. And that's only one example, of course.

The only rules restraining behaviour at this point are: 1) Do I get away with it? And 2) Do I make a profit? That's all.

Another manifestation of this is the reality wherein violations of law and the tiny fines which result are simply a cost of doing business. They're well aware that no actual punishment will be handed out, and that the fines will be well less than the profits made by various illegal activities, so the fines are merely another cost of doing business. C.f. above: no penalties. (See also how this leads to $220m in bailouts to wives of banking executives, but that's another story.)

But corporations are always looking for ways to get still more money. One way to do this is to nickel-and-dime fraud millions of customers. Most won't notice, but a few will. Until yesterday, a restraining force on this sort of thing has been the class-action lawsuit, one of the few mechanisms wherein the revenue from some form of fraud or abuse might actually be completely lost. It might actually hurt, so it's been a restraining factor.

So they started turning to arbitration clauses to block such possibility of redress; they want to force you, as an individual, to take them to arbitration under their rules (with an arbiter they hire) to get back the $60 they stole from you in illegal or non-contracted fees. As a class, applied to everybody affected, that's real money; but as an individual, it's a lot of work for a single person and even the people who do notice often won't bother.

Various laws have been in place saying no, you can't do that, it's bullshit; it's a way to make violating contract on a mass scale legal. And until yesterday, the courts have generally* sided with that view.

Now the US Supreme Court has removed such protections. Arbitration clauses are upheld, and the California law banning them has been removed. As a result, the restraint against this kind of systemic abuse - one of the last ones remaining, as far as I can tell - has been removed.

The takeaway for you is that the list of bad behaviour which now passes the "Do I get away with it/Does it make a profit?" law just grew a lot bigger. Sure, you can complain, and you'll maybe even get your money back. If I were them, I'd make a show of that, for PR purposes. It's a lot cheaper than the bad publicity, and a lot cheaper than the old class-action payouts used to be.

And it's a tiny fraction of the money to be made this way. Look for this behaviour to become systemic in very, very little time.

*: eta: "generally," a word I meant to have here to begin with. It hasn't been as clear-cut as my original, errant, sentence implied. Also, and importantly, I have not done a survey. See comments.
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On the same-store sales report

This was the second item that got really big in today's economics roundup, so here's Separate Post Two! It's pretty much just excised from the bigger post I'm still writing.
GDP forecasts have been slowly being revised down - just in advance of a bunch of Surprisingly! Better! Corporate! Numbers! Nice pump-and-prime there, guys. Too bad the advance numbers just came out as "ass" (1.8% annualised).

Part of that corporate gain was same-store sales. I've lost the link, but a lot of noise was made about same-store sales being up year-to-year last week. But in the same news reports you were hearing about rashes of commercial vacancies as stores close. These were not linked in news stories, and that's bad, because the relationship is very important.

How does this combine? I'll tell you! Let's say it's March 2010, and you have three stores in an area selling something commonly used - let's say laptops. Each store A, B, and C, sells 10 laptops a month. That's a total of 30.

One of those stores goes out of business in December 2010. No more Store B. What happens?

What does not generally happen is that only only end up with a total of 20 laptops being sold. People buy laptops anyway. Given that stores are closing, you know the economy is bad, so people are buying less - but they're still buying. Some of those sales that would've happened in store B now happen in stores A and C.

Now it's March 2011. The economy is bad, so let's say that fewer of those 30 buyers make the same decision this time. Let's say it's real bad, and only 22 of those buyers - 27% fewer - buy laptops this time. (These numbers are examples, not real reports.)

But they buy them from the nearby stores - stores A and C. That's 11 laptops per store. And that's a 10% same-store sales increase year-to-year, despite being part of a 27% overall decline.

And that's what you're seeing - or, I guess, not seeing - in those same-store-sales numbers. Stores that close do not count in same-store year-to-year sales, because they're just not there the second time. Ghost stores aren't included. It's not "okay, 22/three stores = 7.3 laptops per store, a 37% decline," it's "22/two stores = 11 laptops per store, a 10% increase."

This also works the opposite way in growing economies; if a new store opens, it'll cannibalise sales from nearby stores too, reducing same-store-sales increase numbers.

But yes, there is other news

And finally, in other news:

Tories are starting to plan for an NDP government, and at least this one says, "Well, after the last few years, we have it coming." (As do the Grits.)

Meanwhile, in BC, the Lower Mainland real estate market just bit the turf. That's gonna hurt.

Meanwhile, how 'bout that US$? DIX of 73.270 and that's not awesome - it's below the lows of a couple of years ago, and that's part of that stock market rally - a lot of new cash (mostly in the form of, let's call it, printed money) is making its way into various markets. Adjusted for the dollar's devaluation, stocks are up less than a percent for the year. The DIX was actually below 73 for a while this morning.

Mish argues that no one wants to be the reserve currency, because the costs are too high. It's an interesting read, if nothing else.

Have you seen silver lately? Silver is where people who can't afford to play with gold. As gold gets higher, you get more people forced out by pricing, and into silver. You can make a lot of money in a silver spike. You can also lose even more; it's one of those make-a-small-fortune-by-starting-with-a-big-one markets. But until then, industries which use silver are going to suffer. When you have shit like this going down, you have a run on silver - it'll rocket up and then right back down, so be careful.

That M1 multiplier I keep talking about isn't getting any healthier, by the way. The GDP boost being provided by "borrowed" - really printed, functionally, at this point - money isn't keeping up with the cost of that money. I've talked about that before, of course; debt is good, but debt is only good if the economic gain is greater than the cost of borrowing. So if you borrow $1 and pay 20¢ in interest, and get back $2 in economic growth, you're golden! That's good debt. But you'd better get at least $1.20 back in economic growth - no return, but no loss - or you're borrowing yourself downward, not upwards. Currently, the US is borrowing itself down.

Talking of, Robert Rubin has plans for working around the debt ceiling - at least for a little while.

Housing has continued to be a complete disaster. Most of this loss hasn't been realised yet, either in securities based on insane valuations or in actual attempt to recoup investment when moving, but it's still huge, as this breakdown shows. There's actually been a resumption in CDO action; since nobody got punished and none of the money stolen via fraud got returned, and all the criminals were rewarded with bailouts, you're seeing some double-dipping going on. Because why? Because they got away with it and they made a profit. That profit came out of your tax dollars, but who cares about that? See previous posts about corporate regulatory capture.

Talking of, Zero Hedge says it's not merely the top 1% - it's the top 0.1%, and has charts to show it.

I've been talking occasionally (hopefully at least some online) about the ramp up in the producer cost index. That's about to hit retail. Wal-Mart is telling anyone who will listen to prepare for serious inflation at the retail level. Some of that is the collapsing US$, but some of it is also in food due to poor crops and other unfortunate combinations of effects.

Japan's retail sales collapse, due to the tsunami. This is of course unavoidable, but still isn't going to help anything economically.

All that said, remember I talked about the collapse in the Baltic Dry Index? That is not yet being seen in railcar loadings. I must emphasise that this down signal has not had the critical confirmation it needs to have before it becomes meaningful.

And now we have initial unemployment (first version) gains coming in at 429,000 again - and last weeks' was revised upwards (again) to 404,000, and two weeks ago's revised figure is at 416,000. That's a steady 4-handle, which is, as they say, not helping. (And yes, the birth/death model is still adding over 100,000 "estimated jobs" per month. Participation rate is still hovering at a very low 64%.) MarketWatch now reports that food stamps now make up 18.3% of personal income, and wages are down to 50.5%, both reported as the highest and lowest figures (respectively) on record.

Oil hit US$114/barrel this morning before heading back down to $112 and change; Exxon is doing just great. Gold, US$1539/oz.

That's all for now. Good luck out there.