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The million jobs sitting in Apple’s cash hoard

Given the current political debate about offshort cash of Apple and others, estimated at $1.4 trillion overall, it is interesting to consider what keeping capital from returning to the United States means to job creation.

Let’s make some assumptions, which may be incorrect, but at least give us some visibility that can be tweaked. Let’s assume that a dollar of capital invested results in 50 cents of revenue, i.e. a price to sales ratio of 2, in line with the current price to sales ratio of the S&P 500. Given the higher valuation of publicly traded companies, this may be an understatement of revenue produced, but again, it provides some vision.  Let’s also assume that labor as a percentage of revenue is about 60%, in line with current average labor costs.  Let’s assume average wages are 52,000 annually, in line with current averages, and that average labor cost per employee are 45% higher, in line with current average benefits costs in the United States, at $75,400.

Now the math:

$75,400 In labor cost per employee of  / 60% labor cost as a percentage of revenue = $125,667 in revenue required to support one employee

$125,667 In revenue required to support one employee / 50% revenue per dollar of capital invested = $251,334 capital required to create one job

$240,000,000,000 in cash on hand at Apple / $251,334 capital required to create one job = 954,904 jobs that could be created with this capital

Curious as to what this means for the $1.4 trillion overall estimated to be overseas?

5.6 Million jobs

This is not the entire story, of course.  Companies that are taxed overseas get a credit for those taxes versus United States taxes, thus allowing repatriation is allowing earnings without corporate taxation.  The alternative, however, may not be that the money will eventually be taxed; it might be worse.  Management may instead find themselves as fiduciaries forced to move outside of the USA like others before them, including iconic names like Purina, Budweiser, and others.

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Venture Capital Financings per Capita by State

PriceWaterhouseCoopers recently released their Money Tree Report, which among other things provides the dollar amount of venture capital money raised by state.  Below is data from this report, but with each state considered on a per capita basis (2012 VC$ / 2010 population).  The last column is percentage of the highest per capita rate as a measure of relative activity.

State 2012 VC$ 2010 Pop  Per Cap VC$ % of Highest
MA     3,126,968,400     6,547,629              477.57 100.0%
CA   14,194,421,800   37,253,956              381.02 79.8%
WA        907,508,100     6,724,540              134.95 28.3%
CO        585,433,300     5,029,196              116.41 24.4%
UT        318,397,200     2,763,885              115.20 24.1%
DC          64,201,200        601,723              106.70 22.3%
NY     1,863,532,100   19,378,102                96.17 20.1%
RI          85,059,100     1,052,567                80.81 16.9%
NJ        444,135,500     8,791,894                50.52 10.6%
MD        284,252,600     5,773,552                49.23 10.3%
MN        253,183,800     5,303,925                47.74 10.0%
VA        372,380,200     8,001,024                46.54 9.7%
NH          60,672,000     1,316,470                46.09 9.7%
IL        570,432,100   12,830,632                44.46 9.3%
CT        157,577,300     3,574,097                44.09 9.2%
PA        520,744,100   12,702,379                41.00 8.6%
TX        934,421,200   25,145,561                37.16 7.8%
AZ        221,938,100     6,392,017                34.72 7.3%
OR        124,267,800     3,831,074                32.44 6.8%
GA        261,840,300     9,687,653                27.03 5.7%
OH        285,750,500   11,536,504                24.77 5.2%
MI        236,805,900     9,883,640                23.96 5.0%
NC        196,918,300     9,535,483                20.65 4.3%
NM          35,732,000     2,059,179                17.35 3.6%
WI          95,311,900     5,686,986                16.76 3.5%
KS          47,201,700     2,853,118                16.54 3.5%
TN          87,160,600     6,346,105                13.73 2.9%
IN          84,161,300     6,483,802                12.98 2.7%
FL        199,110,400   18,801,310                10.59 2.2%
DE            9,489,900        897,934                10.57 2.2%
ID          15,150,000     1,567,582                  9.66 2.0%
ME          12,787,200     1,328,361                  9.63 2.0%
OK          34,036,000     3,751,351                  9.07 1.9%
SC          39,499,900     4,625,364                  8.54 1.8%
WV          14,568,000     1,852,994                  7.86 1.6%
VT            4,415,000        625,741                  7.06 1.5%
NE          10,615,000     1,826,341                  5.81 1.2%
MT            5,575,100        989,415                  5.63 1.2%
KY          23,543,000     4,339,367                  5.43 1.1%
AL          23,106,000     4,779,736                  4.83 1.0%
ND            2,400,000        672,591                  3.57 0.7%
MO          21,316,000     5,988,927                  3.56 0.7%
MS            9,776,000     2,967,297                  3.29 0.7%
NV            7,095,100     2,700,551                  2.63 0.6%
LA          10,508,400     4,533,372                  2.32 0.5%
AR            5,000,000     2,915,918                  1.71 0.4%
IA            5,000,000     3,046,355                  1.64 0.3%
HI               645,000     1,360,301                  0.47 0.1%
PR               100,000     3,725,789                  0.03 0.0%
SD                           –        814,180                       – 0.0%
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On Black Swan Probability and Tail Obesity

For a long while now, having watched bubbles form and pop, I have found it frustrating how people pile into assets with straight line trajectories. I first noticed it in the time of the dot-com bubble of the late 1990s. During that time, as I recall, returns in the market were frighteningly close to straight line, not only highly positive, but with a low volatility of returns from month to month.

A more frightening version of this, in terms of risk to our way of life, was in residential real estate. Prior to the popping of the real estate bubble, residential real estate in the United States had also had fairly straight line appreciation over a considerable number of years. Again, not only was the appreciation significantly positive, it had little variance.

It reminds me of a favorite “simple wisdom that is obvious but that we tend to forget” type quote:

 

“If something cannot go on forever, it will stop.”
~ Herbert Stein

 

I’ll not be at all surprised if what I’m about to propose has been done before, as it seems so simple. If so, forgive me.

It would seem that one can represent the degree to which a return has been straight line fairly easily as R/V, where R is some measure of return and V is some measure of volatility, likely for the same period of time, but not necessarily so. As this ratio increases, I propose that tail probability, the probability of a significant move, call it a black swan or gray swan event to use Nassim Taleb’s term, increases (tail obesity). My theory is that significant moves become more probable as tension increases, similar to how a major earthquake becomes more likely as tension grows between tectonic plates, and that in some situations this tension increases following periods of straight line appreciation.

It might also be that a formula like (R / R2) / (V / V2), where R is some return, R2 is some return prior, V is some measure of volatility, and V2 is this measure for some period prior (again, likely for the same periods, but not necessarily so), would identify this tail probability more accurately, as it would serve to measure the change in return versus the change in volatility over a period of time.

This, to some degree, goes against conventional wisdom that higher volatility implies higher risk. Note that I’m not proposing that lower volatility implies higher risk, but that high returns over a period of time, when combined with low volatility of those returns, serves to change the shape of the parabola of possible returns. In other words, I’m merely proposing that there may be a way to identify a time when a black swan or gray swan type price movement, to use Nassim Taleb’s term, is more probable than usual.

Also note that I’ve concentrated on straight line positive returns, ignoring similar moves downward, likely to the chagrin of statistical purists. Intuitively, I feel that the tail probability increase is more likely with straight line appreciation, and that the increase in probability at the tail is isolated or at least heavily weighted to the down side. Capitulation happens both ways, of course, but given that there is no limit to upside, while the downside always has to contend with zero, there is simply more opportunity for straight line returns to the upside.

If this is some sort of common knowledge, which I fear as it seems to simple, then egads, and sorry. If not, call it the Hawkins Ratio; my kids will think it is cool.
Originally published 7/7/11 in Science 2.0.
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Real Estate Bubble Soon To Pop – Or Is There A Bubble At All?

Let’s talk residential real estate bubble, shall we? There seems to be a huge real estate bubble that seems ready to pop any day. It is global, huge, and consequently highly dangerous. At least I think so… Fueling this bubble is a confluence of politically forces, cheap money provided by central banks to attempt to reduce the economic effects of the unraveling of historic levels of speculative excess in the stock markets, the vote buying process of subsidizing the financing of homes via the financial black holes referred to as Fannie Mae and Freddie Mac, buyer’s complacency in this environment where they believe they cannot go wrong, and the increasinly widespread use of non-traditional financial methods. First, let’s talk about the cheap money. If the bubble was in the stock market, everyone would be talking about it. Instead, because real estate is not a daily auction market, and is not quotes as an index, and even more notably is thought of by the masses as an asset that never declines in value, it is not a general point of discussion. In fact, those that believe strongly in the bubble, I have found, generally do not bring the subject up due to the social price they have to pay as the one that is attempting to rain on their parade.

“If something cannot go on forever, it will stop.”
~Herbert Stein

Politicians for years have been espousing the societal benefits of widespread home ownership. The points seem difficult to contest, although not impossible. Anyone who believes that less government is better should then believe that government subsidy of any part of the economy is not a good thing. Even for the likely majority that believes this particular subsidy is a good thing, any thinking person among the group should agree that there is a limit. I content that the limit was long ago reached. Buyer’s complacency in this market is widespread. Buyer’s may not draw a parabola of probabilities, but instinctively they think in these terms. The problem with individuals’ intuitive parabolas is that they tend to be much fatter in the direction of the trend. With real estate in particular, there is a now deeply embedded culture of non-risk, characterized by common sayings such as “real estate alway goes up”, “they can’t make any more land”, or “worst case, you own the real estate”. These statements MIGHT be OK if nobody borrowed money to purchase real estate, nobody ever sold or intended to sell, nobody died, and nobody cared if they lost money. Obviously, this is not how the world works.

“It’s only when the tide goes out that you can see who’s swimming naked.”
~Warren Buffet

Finally, no discussion of the residential real estate bubble is complete without discussing the enormous increase in non-traditional financial methods, specifically variable rate mortgages. Buyers are borrowing money with payments they can barely afford as is, in a relatively favorable employment environment, and taking significant risks that there mortage payments will increase VERY meaningfully. The risk of all this is GLOBAL DEPRESSION. It has almost become my expectation. This one is bigger than the stock market crash. I cannot see a clear way out of this mess. Likely the crash in residential real estate, which I now believe will exceed 20%, will initially be fueled by higher interest rates, only to be further fueled by panic selling. In the end 20% may turn out to be way to conservative. With all this being said, let me quickly throw in the caveat that I HAVE NO IDEA, of about anything, for that matter. These are only opinions, and concerns, I suppose. However, I would have expressed similar concerns, albeit less adamantly, about 30% ago. Time will tell…

“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails”.
~William Arthur Ward