Weekend Must-Reads: Unions, Unemployment, Real Estate, Asset Allocation and Auditors

Some of the following links have been open for over a week, but have gotten buried under the onslaught of reading material I've accumulated since. Regardless, the following articles are all very interesting and well-worth reading, unless you think ignorance is, in-fact, bliss.

The Economist, Enemies of progress: The biggest barrier to public-sector reform are the unions

“John Donahue at Harvard's Kennedy School points out that the egalitarian culture in Western civil services suits those who want to stay put but is bad for high achievers. Heads of departments often get only two or three times the average pay. As Mr Donahue observes, the only American public-sector workers who earn well above $250,000 a year are university sports coaches and the president of the United States. Hank Paulson took a 99.5% pay cut when he left Goldman Sachs to become America's treasury secretary. Bankers' fat pay packets have attracted much criticism, but a public-sector system that does not reward high achievers may be a much bigger problem for America.”

Federal Reserve Bank of Atlanta: President Lockhart Describes “Multifaceted” Employment Challenges

Guess what? Between just structural issues and productivity increases, “normal” unemployment could be anywhere from ~5.5%-8%, far higher than the ~5% pre-crisis. Here's a thought: productivity has increased for the past ~10-20 years, but it took a shock like the crisis for firms to realize it them. Anyone who's worked in a large corporation and isn't blind to what's going on around them can attest, there is (was?) LOTS of fat to cut in the employment rolls. The question is whether firms have cut-down to appropriately lean size, and if so, whether such realization of productivity gains are sustainable.

United States: New Accredited Investor Net Worth Test To Impact Private Investment

Remember back in July I asked “How should an Accredited/Sophisticated Investor be defined?” That open thread elicited dozens of comments, many of which seemed to agree that the current definition(s) are garbage. Well, finally, we may be seeing progress in re-defining the term(s) in more realistic ways. Step 1: remove the net value of an investor's primary residence. That alone should make a significant difference in narrowing-down the # of people eligible to invest in securities available only to accredited investors, and to a lesser effect, slightly discourage people from buying more home than they can afford for other indirect reasons. I expect the major brokerage firms to fight these changes tooth-and-nail, as they get a disgusting amount of revenue (not necessarily as % of total) from selling crap neither they nor their “sophisticated” clients understand under the existing rules. Hopefully, though, we'll see some meaningful change, eventually…

Directorship: Main Street's View of Directors Improves

This chart is deeply disturbing:

Those identified as “Financial Analysts” rank directors as “poor” less than any other group, despite the fact that given that title (assuming it carries with it the credibility and knowledge we'd typically assign someone with such title) they should know better. They also rank directors as “adequate” more than any other group, again, despite the fact that they should know better. Perhaps the group of Financial Analysts was comprised of institutional investors who simply go with proxy-advisory consensus instead of exercising proper fiduciary duty?

This chart is even MORE disturbing:

“Financial Analysts” observed that shareholders exert the LEAST control over a company besides “undecided,” yet when asked who SHOULD exert the most control over a company, indicated that shareholders should be the primary controlling force. Besides the disturbing responses from “financial analysts” I suggest reading the article to see some similarly curious ones from both Board Directors and those in the C-Suite. (H/t @jenmanfre)

NY Times: How Secrecy Undermines Audit Reform

If you've been reading Francine McKenna this comes as no surprise to you. If you haven't, you should start. NOW. Of every group of organizations who had a hand in the crisis, Auditors have weaseled themselves out of accepting blame, punishment, and reform better than any other. This needs to be addressed, ASAP, lest we have more instances of Big Four auditors enabling if not being downright complicit-in bank failures, Chinese reverse merger frauds, etc. Accounting may not be sexy or sell alot of papers, but if Media doesn't start taking a good, hard look at the Auditors, they're going to get away (relatively) scott-free.

Morningstar: Doubleline's Jeff Gundlach ‘Stocks Will Have Trouble Topping Bonds'

Video and transcript. Watch/read it. Seriously, you'd be stupid not to. (h/t @stockjockey)

The Big Picture: Updated Case-Schiller 100-year Chart

If you don't read this you are not allowed to talk about anything even remotely connected to recovery.

Journal of Accountancy: Commercial Real Estate Fraud Poses Risks to Economy

“The Financial Crimes Enforcement Network (FinCEN) said reported incidences of suspicious activity in commercial real estate (CRE) financing almost tripled between 2007 and 2010. The analysis of suspicious activity reports (SARs) from depository institutions said a key concern in this area is the fact that an estimated $1.4 trillion in CRE loans will reach the end of their terms between 2010 and 2014…

…FinCEN's reports said that as the loans become due, analysts anticipate a delinquency rate of 10% because some borrowers will be unable to refinance due either to stricter underwriting standards or because the loan amounts outstanding exceed property values. The report said the valuation of the overall CRE market has fallen approximately 42% since it peaked in October 2007, with future fluctuation in CRE prices expected.”

In other words: all is not merry in the Land of Oz. Tread cautiously.