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Designating A Trust As Retirement Beneficiary

Designating A Trust As Retirement Beneficiary

By Denise Appleby January 22, 2018 — 7:28 PM EST

It is very common for IRA owners to designate a trust as the beneficiary of the account. A trust is a popular designation because it generally gives the IRA owner some degree of control over how the assets are distributed after he or she is deceased. However, while a trust is an effective estate-planning tool for many, an IRA owner must take some steps to ensure that the outcome is consistent with his or her needs.

Can a Trust Be Your Designated Beneficiary?

Almost anyone or anything can be the beneficiary of an IRA. However, if the beneficiary is a non-person, the IRA owner is treated as having no beneficiary when it comes to determining the beneficiary’s life expectancy for required minimum distribution (RMD) amounts. This means that if the IRA owner dies before the required beginning date (RBD), the beneficiary is not eligible to use the life-expectancy method to calculate post-death distributions. The beneficiary must therefore distribute the assets within five years. If the IRA owner dies on or after the RBD, the distribution period may not be stretched beyond the remaining life expectancy of the deceased.

This rule for non-person beneficiaries also applies to trust beneficiaries, unless an exception applies, in which case the oldest underlying beneficiary of the trust is treated as the beneficiary of the IRA – for purposes of determining the distributions options. In general, the exception applies if the following requirements are met:

  1. The trust is valid under state law.
  2. The trust is irrevocable or will, by its terms, become irrevocable upon the death of the IRA owner.
  3. The beneficiaries of the trust are identifiable.
  4. A copy of the trust documents are provided to the IRA custodian by Oct. 31 of the year immediately following the year in which the IRA owner died.

Why Designate a Trust as the Beneficiary

In most cases, an IRA owner designates a trust as the beneficiary of the IRA in order to have control over the disposition of the assets after he or she dies. The following are some reasons why an IRA owner may designate a trust as beneficiary:

  • Spendthrift beneficiary protection – An IRA owner may be aware that a beneficiary may squander the inheritance. As such, the IRA owner may want the assets to be disbursed according to a certain schedule instead of in a lump-sum payment. The IRA owner may also want some of the assets to be used for specific purposes, such as financing the beneficiary’s education. The IRA owner can ensure these conditions are met by designating a trust that includes the desired payment options. The trustee of the trust would then be responsible for complying with the trust provisions.
  • Providing for children from a previous marriage – An IRA owner may want to ensure that both a current spouse receives income from the assets and children from any previous marriages receive their share of the assets. This can be accomplished by designating a trust that meets certain requirements, such as a qualified terminable interest property (QTIP) trust.

Could Designating a Trust as the Beneficiary Be Problematic?

Designating a trust as the beneficiary of an IRA should be a solution to the IRA owner’s financial planning needs. However, steps must be taken to guarantee that the designation does not create problems for the parties who will inherit the assets. An IRA owner should check with the IRA custodian to ensure that the provisions of the trust are acceptable to the IRA custodian and that they meet regulatory requirements. In addition, the IRA owner should consult with a competent attorney or estate planning professional for assistance in designing the trust. Here are some examples of circumstances that cause the trust to fail to satisfy the needs of the IRA owner:

  • A copy of the trust is not provided to the IRA custodian by Oct. 31 of the year following the year the IRA owner died, preventing the underlying beneficiary of an otherwise valid trust from using the life expectancy of the oldest identifiable beneficiary in calculating RMD amounts.
  • The trust is eligible to disclaim the assets. If this happens, the other primary or contingent beneficiary usually inherits the assets, and the provisions of the trust no longer apply. This can be avoided by including a ‘disclaimer provision’ in the trust. In general, this provision may require that in the event the trust disclaims the assets, the disclaimed assets, instead of going to an individual, must be disposed according to certain provisions of the trust.
  • The IRA custodian does not find the provisions of the trust acceptable, or the provisions of the trust conflict with the provisions of the IRA plan document. When designating a trust as the beneficiary of his or her IRA, the IRA owner should check with the IRA custodian in advance.

The Bottom Line

Designating a trust as the beneficiary of an IRA can be an effective estate-planning tool. However, it is effective only if all the parties involved – especially the IRA owner, the IRA custodian, the trustee of the trust and any attorneys representing the beneficiary – agree on the interpretation of the provisions of the trust and applicable laws. Conflicting interpretations could result in a delay of disposition of the assets and can be quite frustrating for those involved. Designing a trust is a complex process. The IRA owner should seek the assistance of a competent attorney and tax professional to determine if and when a trust is appropriate, the type of trust that suits the IRA owner’s needs and to ensure that estate planning needs are met and maximized.

Published at Tue, 23 Jan 2018 00:28:00 +0000

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Skilled Labor

Skilled Labor

What is ‘Skilled Labor’

Skilled labor is a segment of the workforce with specialized know-how, training and experience to carry out more complex physical or mental tasks than routine job functions. Skilled labor is generally characterized by higher education, expertise levels attained through training and experience, and higher wages.

BREAKING DOWN ‘Skilled Labor’

Skilled labor in an increasingly global competitive world is essential. Developing countries in Asia are rapidly building up their skilled labor pools. Meanwhile, the U.S. and Western European countries, which have dominated economic advancements since the mid-1800s, are paying more attention to preservation and growth of their skilled labor workforce. Corporate America (an informal term for large companies) has extensive formal training programs for both new and existing workers, while small and medium-sized firms may have formal programs, but if not, on-the-job training to build up skills is the norm.

The U.S. Department of Labor (DOL) also provides government-sanctioned programs through the Employment & Training Administration, American Job Center Network and CareerOne Stop, which serves as a directory of local training programs. Some countries in Europe have been on the vanguard of developing skilled labor. Germany is particularly considered a role model with its apprenticeship programs throughout its corporate sector – in auto plants, machine manufacturing facilities, technology hardware and software development offices, banking offices. The U.S. is just beginning to replicate this training model for skilled labor.

The Future of Skilled Labor

With rapid changes in the economy with respect to the growth of knowledge-based jobs, skilled labor of the future may be different from the skilled labor of the past and present. The “rise of the machine” is engendering great debate and a certain level of anxiety among skilled workers, who wonder if they will eventually be replaced on the job by a robot or a computer algorithm. Those who have yet to join the working world wonder what kinds of skills will lead to gainful employment in a new era. High-end manufacturing and many professional services that require specialized knowledge such law, medicine and finance are at this moment under assault from the rise of the machine. Skills in STEM (science, technology, engineering and math) are currently being promoted as the answer to staying competitive in the modern global workforce.

Published at Mon, 22 Jan 2018 21:16:00 +0000

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Exclusive: Blackstone’s Hill hands hedge fund reins to McCormick

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By MabelAmber from Pixabay

Exclusive: Blackstone’s Hill hands hedge fund reins to McCormick

BOSTON (Reuters) – After nearly two decades of growing Blackstone Group into the world’s biggest hedge fund investor with some $74 billion in assets, J. Tomilson Hill is passing the baton.

Blackstone has promoted John McCormick to president and chief executive of hedge fund unit Blackstone Alternative Asset Management (BAAM) and Hill will become its chairman, the company told Reuters on Thursday. The change is effective immediately.

Hill, the face of hedge fund investing at the private equity giant since he was tapped to help put the partners’ money to work in 2000, plans to stay at Blackstone for now. He will remain on Blackstone’s board and its 11-person management committee.

By installing a younger chief at the hedge fund unit, which makes up roughly one-fifth of the company’s assets, Blackstone is laying the groundwork for a generational shift in an industry where many firms have struggled to move beyond their founders.

“There will be a lot of continuity but that doesn’t mean it will be boring,” McCormick, 50, told Reuters. He added that Hill, who turn 70 this year and has mentored him during his 13 years at the firm, urged him to continue shaking things up.

For a quarter of a century, Hill, who came to Blackstone after being ousted as co-chief executive at Lehman Brothers, has added foreign governments, sovereign wealth funds and pensions to the firm’s growing client roster.

When his clients complained about hedge funds’ hefty fees, he pushed for cuts, and when they worried about being lumped into investment pools he pushed managers to create separately managed accounts. When big data crept into investing, he was among the first to make big bets on so-called quant funds like Two Sigma and Peter Muller’s PDT.

He has established strong ties with some of the industry’s best talents, including Paul Singer’s Elliott Management and Paul Tudor Jones’ Tudor Investment Corp.

There have been some setbacks, including the shuttering of Senfina, Blackstone’s “big bet” hedge fund, amid mounting double-digit losses in 2016.

TRANSITION IN FOCUS

While the hedge fund industry has suffered record outflows in recent years due to high fees and sub-par performance, BAAM has pulled in billions in fresh money and manages more than twice as much as its nearest rival, UBS Hedge Fund Solutions.

In the 17 years since its launch, BAAM’s Principal Solutions Business has delivered an annualized net return of 6 percent, beating the S&P 500 Total Return and MSCI World Total Return Indices. It has done so with approximately 30 percent of the volatility, the firm said in a filing.

But Hill has watched fund managers big and small struggle with leadership transition and vowed to do better. It is a key topic in an industry where investors often lock up money for years.

“Succession planning has been on my mind for years,” he said.

Hill has worked closely with McCormick, who has been instrumental in creating and selling many of BAAM’s new products, including taking stakes in established hedge funds, which helped boost revenue.

As head of global strategy for the group, McCormick was instrumental in creating hedge fund products aimed at retail clients.

A plan to make these “liquid alts” widely available in employer sponsored, tax-deferred 401(k) retirement plans, however, has yet to pan out.

HILL‘S NEXT CHAPTER

A trained lawyer who worked at U.S. Treasury and management consultancy McKinsey & Co before joining what he calls a “a rocket ship poised for great things”, McCormick cuts a different figure from Hill, a billionaire art collector often seen on the Manhattan social circuit.

Befitting the secretive hedge fund industry, McCormick keeps a relatively low profile. He gets to the office by 7:30 a.m. and often stays to 8:00 p.m. or later. He recently learned Spanish and accompanies his in-laws to Cuba, he said, which has meant a lot of foreign language radio for his three children as he ferries them to soccer games.

“He is very orderly, thoughtful and very, very smart,” Blackstone Chief Executive Stephen Schwarzman said.

While Hill is stepping back from the day-to-day business, he will remain integrally involved.

“Tom has been at the table for all the major developments and he has done a fantastic job of developing BAAM,” said Schwarzman, who met Hill in the Army Reserves decades ago.

Hill, who is working on plans to build a museum to exhibit some of his Warhols, Lichtensteins and Bacons, has been captivated by using data to make investment decisions.

“I am looking down the road, I am not a looking in the rear-view mirror kind of guy.”

Reporting by Svea Herbst-Bayliss, editing by Carmel Crimmins and Bill Rigby

Published at Fri, 19 Jan 2018 03:38:18 +0000

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How Bank of New York Mellon Makes Money (BNY)

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How Bank of New York Mellon Makes Money (BNY)

By Greg McFarlane | Updated January 18, 2018 — 9:40 AM EST

Founded in 2007, Bank of New York Mellon (BK) is the culmination of a merger of two of America’s most venerable banks. The Bank of New York was founded in 1784, Mellon Financial in 1869. The former was primarily a short-term business lender, the latter a wealth management firm. The resultant firm services more assets than any company on Earth, a total of $33.3 trillion under custody. With $1.9 trillion under management, Bank of New York Mellon is the 5th-largest asset manager in the world.

For Investors Large and Small

True to the history of its predecessors, Bank of New York Mellon has two distinct reporting segments: investment management and investment services. This can be confusing: the former falls under one subsidiary, named The Bank of New York Mellon. Meanwhile, the company’s wealth management business falls under a subsidiary named BNY Mellon. (For related reading, see: Wealth Management: How Billionaires Handle Their Fortunes.)

Smaller subsidiaries, most of them concentrating on trusts, include BNY Mellon Investment Servicing Trust Company; BNY Mellon Trust Company of Illinois; BNY Mellon Trust of Delaware; and The Bank of New York Mellon Trust Company. (For related reading, see: The Future of Mobile Banking.)

No one has ever accused Bank of New York Mellon management of being overly creative when naming its subsidiaries. Which include the firm’s main European operation, The Bank of New York Mellon SA/NV. The company has 46 subsidiaries in total, all of but two them incorporated either in the United States or the British Isles. (The outliers are based in Belgium and Luxembourg.) All told, Bank of New York Mellon operates in 35 countries. (For related reading, see: BNY Mellon Looking Much Better.)

Too Big To Worry About Failing

Throughout Bank of New York Mellon’s brief existence, earnings have been uncommonly consistent. Over the last five years, in reverse chronological order, the firm has earned profits of $3.5, $3.6 billion, $3.8 billion, $3.4 billion, and $3.7 billion. Shareholders’ equity currently sits at $37 billion as of the end of Q4 2017. (For related reading, see: Case Study: The Collapse of Lehman Brothers and Dissecting Bear Stearns’ Collapse.)

Few Seats at the Table

Of Bank of New York Mellon’s two major businesses, investment services is the biggest, accounting for 89% of the company’s noninterest expense. If you happen to be the executive tasked with figuring out what to do with your large company’s cash pile, chances are good that you’re going to contact Bank of New York Mellon at some point. The firm does business with approximately 400 of its counterparts on the Fortune 500 list, along with three-quarters of America’s 100 largest foundations and two-thirds of its 1,000 largest pension funds. Hence the enormous amount of money under Bank of New York Mellon’s administration. (For more, see: The Banking System: Commercial Banks Make Money.)

While Bank of New York Mellon indeed deals in the exclusive province of wealth beyond most people’s comprehension, that’s not the firm’s specialty. Rather, hundreds of thousands of middle-class people rely on Bank of New York Mellon’s investment services expertise to keep their retirement plans solvent and their stock investments promising. (For related reading, see: Midlife Retirement Planning Guide.)

The $276 million of company income before taxes accounted for by investment management operations are nothing to dismiss, either. The segment includes estate planning and private banking for extremely rich people. (Which, again, is small compared to the investment services Bank of New York Mellon sells to the managers of large capital reserves. The indirect beneficiaries of those investment services – ordinary employees and retirees – have a far greater impact on Bank of New York Mellon’s fortunes than do the firm’s necessarily fewer wealthy clients.)

The remainder of the firm’s investment management operations include global equities, currency management, and fixed income strategies. Bank of New York Mellon’s investment management is conducted through many (relatively) small and independently marketed subsidiaries, such as Alcentra, Siguler Guff and more, the majority of which were bought by Bank of New York Mellon (or one of its predecessors) rather than being created in-house. The firm’s acquisitiveness hasn’t subsided, either. 2015 saw the purchase of Cutwater Asset Management, a company with $23 billion under management, which is small enough for a giant like Bank of New York Mellon to re-brand it as a “boutique” investment concern, absorbed and re-branded under its Insight Investment mark. (For related reading, see: Top 7 Biggest Bank Failures.)

The Bottom Line

It’s no coincidence that asset management firms such as Bank of New York Mellon often date back a century or two, or more. Innovation is less important here than is preservation – helping clients not lose their money is at least as important as helping them grow it. (For related reading, see: How Bank of America Holds 1/8 of All U.S. Deposits.)

Published at Thu, 18 Jan 2018 14:40:00 +0000

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Apple Will Allow Owners of Older Phones to Opt Out of Slow Down

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Apple Will Allow Owners of Older Phones to Opt Out of Slow Down

By Daniel Liberto | Updated January 18, 2018 — 4:39 AM EST

Apple Inc. (AAPL) will now let its customers decide whether they want their iPhones to automatically slow down or not.

The company’s CEO Tim Cook told ABC News that the tech giant is set to release a software update that will give users the option to prevent iPhone processors from slowing as batteries age.

Apple made the announcement a month after Primate Labs published data confirming that processor speeds on iPhone 6, iPhone 6s and iPhone 6s Plus devices dramatically slowed down over time. Primate Labs’s revelation attracted plenty of criticism and a lawsuit, despite Apple’s claims that deteriorating performance levels were purposely designed to preserve aging batteries and prevent iPhones from automatically restarting. (See also: Apple Sued After It Admitted It Slows Down Older Phones.)

Cook apologized to customers who believe that processor speeds in older models were weakened maliciously. “At the heart of any decision we make is the user, and we felt it would be better to take something off of the performance to prevent [iPhones from restarting] … We deeply apologize for anybody who thinks we have some other kind of motivation,” he said.

Apple’s CEO also warned that users wishing to use the new software update to prevent future slowdowns from happening risk experiencing random restarts, unless they change the battery.

“We’ve listened to the feedback very carefully and in addition to giving everyone a very low price on a battery if they’d like to get a new battery, we’re also going to, in a developer release that happens next month, give people the visibility of the health of their battery,” said Cook. “It’s very, very transparent. This hasn’t been done before. We will tell someone we’re reducing your performance by some amount in order to not have an unexpected restart and, if you don’t want it, you can turn it off.”

Apple reduced the price of out-of-warranty battery replacements for certain iPhones from $79 to $29 in early January. Cook told ABC News it was “rational” to offer the less expensive battery option, rather than free batteries, because “most people kind of expect to get a [new] battery at some point in time.” (See also: Apple Battery Offer Could Hurt New Sales: Barclays.)

Cook also ruled out the possibility of launching cheaper iPhones. “We put a lot of innovation in these phones, and so we think they’re a reasonable price,” he said.

Published at Thu, 18 Jan 2018 09:39:00 +0000

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Bank of America Recovery Appears to Be Stalling

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A Bank Of America sign is pictured in the Manhattan borough of New York August 21, 2014. REUTERS/Carlo Allegri

Bank of America Recovery Appears to Be Stalling

By Richard Suttmeier | Updated January 17, 2018 — 1:06 PM EST

Bank of America Corporation (BAC), the third largest of the four “too big to fail” money center banks, reported quarterly earnings before the opening bell on Wednesday, Jan. 17. Results were mixed and included a $2.9 billion write-off due to the tax law. The stock did not manage to set a new 52-week high during pre-market trading.

All four “too big to fail” money center banks have now reported fourth quarter earnings. Each bank reported write-offs related to the new tax law, but they see positive benefits in the long term from the low 21% corporate tax rate. Investors beware: these benefits may now be priced into future earnings.

Bank of America stock closed Tuesday at $31.24, up 5.8% year to date and in bull market territory at 41.9% above its 52-week low of $22.01 set a year ago today. The stock set its multi-year intraday high of $31.79 on Jan. 16, 2018.  According to FDIC data, Bank of America ended the third quarter of 2017 with $1.75 trillion worth of assets on its balance sheet, which equates to 10.1% of the entire banking system. This represents a year-over-year gain of 3.9%, so this “too big to fail” bank keeps getting bigger. (See also: BofA Net Profit Slumps on $2.9 Bln Tax Charge, Adjusted Income Beats.)

The daily chart for Bank of America

Daily technical chart showing the performance of Bank of America Corporation (BAC) stockCourtesy of MetaStock Xenith

Bank of America has been above a “golden cross” since Sept. 7, 2016, when the stock closed at $15.70. A “golden cross” occurs when the 50-day simple moving average rises above the 200-day simple moving average and indicates that higher prices lie ahead. The 50-day simple moving average was last tested on Nov. 15, when this average was $25.96. The 200-day simple moving average was last tested on Sept. 12, when this average was $23.50.

The horizontal lines show that the stock is above its monthly, quarterly, semiannual and annual value levels of $28.80, $26.90, $25.71 and $20.93, respectively. Not shown is my weekly risky level of $32.24.

The weekly chart for Bank of America

Weekly technical chart showing the performance of Bank of America Corporation (BAC) stockCourtesy of MetaStock Xenith

The weekly chart for Bank of America is positive but overbought, with the stock above its five-week modified moving average of $29.63. The stock is well above its 200-week simple moving average at $18.55, which is also the “reversion to the mean,” last tested during the week of Sept. 30, 2016, when the average was $15.12. The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 93.92 this week, moving further above the overbought threshold of 80.00 and now above 90.00 as an “inflating parabolic bubble.”

Given these charts and analysis, my strategy is to buy Bank of America on weakness to my monthly value level of $28.80 and to reduce holdings on strength to my weekly risky level of $32.24. (For more, check out: Bank Rally Could Escalate in the First Quarter.)

Published at Wed, 17 Jan 2018 18:06:00 +0000

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Mutual Insurance Company

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Mutual Insurance Company

What is ‘Mutual Insurance Company’

A mutual insurance company is owned by policyholders. The sole purpose of a mutual insurance company is to provide insurance coverage for its members and policyholders, and its members are given the right to select management. Federal law, rather than state law, determines whether an insurer can be classified as a mutual insurance company.

BREAKING DOWN ‘Mutual Insurance Company’

Mutual insurance companies exist to ensure that the benefits promised to policyholders can be paid over the long term. Because they are not traded on stock exchanges, mutual insurance companies can avoid the pressure of reaching short-term profit targets. Members of a mutual insurance company have the right to excess premiums, meaning that if losses and expenses are less than the amount of premiums paid into the company, the members would receive either a dividend payment or a reduction in premiums. In general, the goal of the mutual insurance company is to provide its members insurance coverage at or near cost, since any dividends paid back to members represent excess premium payments.

Large companies can form a mutual insurance company as a form of self-insurance, either by teaming divisions with separate budgets or by teaming up with other similar companies. For example, a group of physicians may decide that they can get better insurance coverage and lower premiums by pooling funds to cover their similar risk type.

Mutual insurance companies derive a large portion of their funding from member premiums, which can make it difficult to raise funds in order to acquire companies if the need to expand rises. When a mutual insurance company switches from member-owned to being traded on the stock market, this is called “demutualization.” This shift may result in policyholders gaining shares in the newly floated company. Because they are not publicly traded it can be more difficult for policyholders to determine how financially solvent a mutual insurance company is, or how it calculates dividends it sends back to its members.

History of Mutual Insurance Companies

Mutual insurance as a concept began in England in the late 17th century to cover losses due to fire. It began in the United States in 1752 when Benjamin Franklin established the Philadelphia Contributionship for the Insurance of Houses From Loss by Fire. Mutual insurance companies exist now in nearly everywhere around the globe.

In the past 20 years, the insurance industry has gone through major changes, particularly after 1990s-era legislation that removed some of the barriers between insurance companies and banks. As such, the rate of demutualization increased in the 1990s because many mutual companies wanted to diversify their operations beyond insurance and access more capital. Some companies converted completely to stock ownership, while others formed mutual holding companies that are owned by the policyholders of a converted mutual insurance firm. Holding companies also gain the opportunity to own banking subsidiaries.

Published at Wed, 17 Jan 2018 04:15:00 +0000

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How China Is Locking Up Critical Resources In The US’ Own Backyard

How China Is Locking Up Critical Resources In The US’ Own Backyard

By: Richard Mills | Fri, Jan 12, 2018


In the 1800’s the United States under President James Monroe invoked the Monroe Doctrine, which stated that any effort by European nations to control any independent state in North or South America would be viewed as “an unfriendly disposition towards the United States.”

The intent of the Monroe Doctrine was to free the newly independent colonies of Latin America from mostly Spain and Portugal, so that the States could exert its influence undisturbed.

“The Monroe Doctrine, first articulated in 1823 as a means of blocking external interference in the Western Hemisphere, was the central pillar of US policy toward Latin America until Barack Obama’s secretary of State, John Kerry, told a roomful of Latin American diplomats in 2013 that “the era of the Monroe Doctrine is over.”  The statement was part of an effort to rehabilitate the US image in a region long accustomed to seeing the United States as seeking to control it through persuasion when possible, and force when necessary.In a policy paper published last December, Craig Deare, a dean at the US National Defense University and now Mr. Trump’s top Latin America advisor on the National Security Council staff, denounced Kerry’s statement “as a clear invitation to those extra-regional actors looking for opportunities to increase their influence. He specifically mentioned China.” Is Trump resurrecting the Monroe Doctrine? Max Paul Friedman

The point of mentioning the Monroe Doctrine is to illustrate just how far the United States has moved away from it. Now, the real influencer in Latin America is China, evidenced by the billions worth of investment either through the purchase of mining and energy company stakes, or outright mine acquisitions.

The reason, of course, is to feed China’s insatiable appetite for commodities. As an example, the Chinese are both the largest producers and consumers of aluminum and iron ore, with iron ore imports exceeding the 100-million-tonne threshold for the first time in September 2017.

The enormous political, economic and cultural shift in China, from a developing agrarian society to a modern, urban one, has led to some remarkable developments, all of which are good for commodities.

China’s New Silk Road is a $900 billion initiative meant to open channels between China and its neighbors, mostly through infrastructure investments. China, long ago put a lock on much of Africa’s vast resources.

Last April President Xi Jinping announced a grand scheme to transform a backwater called Xiongan, south of Beijing, into a city triple the size of New York. Consulting firm Wood Mackenzie estimates that building the city will call for around 20 million tonnes of steel, 400,000 tonnes of aluminum, and 250,000 tonnes of copper during the first 10 years of construction.

The Made in China 2025 initiative, which aims to make China’s copper industry more efficient, is expect to grow Chinese copper demand by an additional 232,000 tonnes by 2025. This isn’t counting the need for more copper for railways, electric vehicles, car motors and power transformers.

While iron ore and copper have been the hot targets of overseas acquisitions by Chinese firms as they seek to feed an economy that up until 2015 was growing at double digits, the Chinese have also gone after gold, nickel, tin and coking coal. More recently the most desired metals are those that feed into a tectonic global shift from fossil fuels to the electrification of vehicles. This has meant a hunt for lithium, cobalt, graphite, copper and rare earths – metals that are used in electric vehicles, of which China has become the world leader.

The most interesting part of this trend is not that China is acquiring mines and mining company stakes abroad – that has been going on for at least a decade – but that the overt attempts to lock up the world’s mining and energy resources, some of which are critical to the future world economy, are happening under the nose of the United States in Latin America, in countries previously subject to the Monroe Doctrine and in one case, right in their own front yard.

Rare earth robbery

In 2016 Molycorp’s Mountain Pass Mine in California was shut down because it couldn’t compete with the low rare earth oxide prices coming out of China – which has cornered the market in REOs with about 95% of the world’s production. The timing was bad because Molycorp had just invested $1.25 billion to expand the light rare earths facility. It was forced into bankruptcy, until last summer when an investor group with ties to the Chinese government bought the mine for $20.5 million, beating out American bidders including ERP Strategic Minerals.

While this purchase likely flew under many radars (rare earths haven’t been in vogue among investors for years), it should be greeted with considerable alarm. The Coalition for a Prosperous America is calling on the US government to block the sale on national security and economic grounds. Why? Because rare earths are critical to US military technology, and Mountain Pass was the only rare earths mine in the country. Electric systems in manned and unmanned aircraft, atomic batteries that power guided missiles, and lightweight materials used to make jet engines and rocket noses, all rely on REEs. Without a domestic supply, the Americans must rely on Chinese sources of rare earths to build “made in America” military and space equipment.

Mission critical for “the big four”  

Rare earths aren’t the only minerals that the United States is woefully dependent on foreign mines. While the US has consistently maintained that a strong domestic metals industry is an essential contributor to the nation’s economic and security interests, the fact remains that since the 1990s the US has lost control of several critical mined commodities. Written about in a previous Ahead of the Herd post, chromium, cobalt, manganese and platinum group metals represent the metallurgical Achilles’ heel of the United States because of their widespread role and vulnerability to supply disruptions. Six of the world’s top 10 cobalt mines are in the DRC, hardly a stable jurisdiction for mining, where resource nationalism – the tendency of governments to grab control of their own natural resources – is a continuous threat.

Manganese is another striking example. Most of the world’s manganese comes from South Africa, Gabon and China. There are no producing manganese mines in North America. Aside from iron ore, manganese is the most essential mineral in the production of steel. If manganese imports were suddenly stopped, there would be no US steel industry – making this one of the most critical, and vulnerable, supply chains for the nation. The States gets most of its electrolytic manganese from China. EM is used as an aluminum and copper alloy, but its most important application is in lithium-ion-manganese batteries. If the US can’t access competitively priced and reliable supplies of EM, a host of high-tech new applications will be lost to foreign competitors.

While much of the rest of the world is scrambling to tie up control of strategic minerals, America has deliberately hamstrung itself. After World War II the US set up the National Defense Stockpile to acquire and store strategic minerals for national defense purposes, but in 1992, the bulk of these stored commodities were sold off. In 1985 the secretary of the US Army testified before Congress that America was more than 50 percent dependent on foreign sources for 23 of 40 critical materials essential to US security.

Trump gets it

In December Donald Trump issued a directive that aims to identify new domestic sources of strategic metals. The thrust of the directive is to reduce US dependence of foreign supplies of these materials. “The United States must not remain reliant on foreign competitors like Russia and China for the critical minerals needed to keep our economy and our country safe,” Reuters quoted President Trump saying.

While this is certainly a step in the right direction, the United States appears to be doing little to gain access, through acquisitions, joint ventures or off-take agreements, to the materials of the future that are essential in the making of smart phones, computers, military equipment and renewable energy technologies.

The Chinese, on the other hand, are way ahead in foreign mine acquisitions and off-takes. So far ahead that it is unlikely that the United States will ever be able to catch up, and break free of their current state of critical metal dependence. Below are just a few examples.

Argentine gold tie-up

Last summer Shandong Gold partnered with Barrick, the world’s biggest gold producer, to purchase a 50% stake in the Veladero gold mine on the Chile-Argentina border. The $960 million deal included Shandong, China’s top gold miner, studying the possibility of building the massive Pascua Lama gold deposit Barrick has been trying to develop on the same border. The Chinese firm could also work with Barrick to explore other mines in the El Indio gold belt of Chile.

Brazil’s vulnerability is China’s gain

Brazil, one of the best mining jurisdictions with a wealth of minerals including iron ore, gold, copper, manganese and bauxite, should be tightening control of its mineral riches as it struggles through a major recession fueled by a corruption scandal. Instead the country has opened its doors to foreign investment: namely, Chinese.

According to Dealogic Chinese M&A of Brazilian companies totalled $10.8 billion in 2017 and $11.9 billion in 2016. Chinese banks and investment groups have committed $15 billion of a $20-billion China-Brazil Fund, a Beijing-managed fund to finance infrastructure projects that was launched in 2016. The fund is to speed resource development, including rail projects. There’s also the $10 billion “dollars for oil” loan between China Development Bank and Petrobas, the Brazilian state oil company. In return for paying off Petrobas’ debts, China gets oil supply commitments for Chinese buyers.

Next door in Venezuela, despite the basketcase of an economy run under President Nicolas Maduro, China is also investing heavily, hoping to cash in on the country’s natural resources that were plundered by the late dictator Hugo Chavez. In July the government signed agreements totaling just over $1 billion to expand mining in the country gripped by low oil prices and hyperinflation. Venezuelan state-owned CARBOZULIA will partner with Chinese state mining giant Yuankuang Group, as well as a Colombian engineering firm, to renovate mining and port infrastructure in Zulia state to the tune of $400 million. A second $180 million deal has the Venezuelan government working with Yuankuang and China CAMC to jumpstart nickel mining. In a third agreement, Defense Ministry-owned CAMIMPEG signed a $580 million deal backed by joint Chinese and Venezuelan investment to provide services in the areas of mining and gas production, reports Venezuelanalysis.com.

The great lithium grab

Speculation of a lithium shortage, led by Tesla which is helping to drive demand for EVs, almost tripled the price of lithium carbonate to over $20,000 a ton in 10 months. The burgeoning energy storage market for intermittent wind and solar power is also poised to become a major demand driver for lithium.

It is no surprise then that China, where the market for EVs is booming, wants to lock up lithium supply contracts before the price shoots up any further, and to meet the government’s ambitious plans to expand EV production.

Last July, among the bidders interested in Potash Corp’s 32% position in Chilean major lithium producer SQM, was Chinese private equity firm GSR Capital. A few months later Sinochem, China’s state chemical firm, joined the race for the $4-billion stake. In August GSR bought Nissan’s electric vehicle battery business and last fall Chinese carmaker Great Wall Motor signed an agreement with Pilbara Minerals, the Australian lithium miner, to secure supplies for the next five years, the Financial Times reported.

China Molybdenum bought the Tenke copper and cobalt mine in the Democratic Republic of Congo last year for $2.65 billion in an effort to secure a supply of cobalt for EV batteries. In November Chinese battery maker Contemporary Amperex Technology Co Ltd (CATL) said it is “looking into upstream investments in raw materials, mostly cobalt” to ensure stable supply as demand for electric vehicles (EVs) soars, according to Reuters.

The Chinese are also investing in early-stage lithium plays. In December Bacanora Minerals, which has a lithium project in Mexico, announced that NextView Capital, a Chinese institutional fund manager, has acquired a 19.89% equity interest, in exchange for a lithium battery offtake agreement.

While most North American EV enthusiasts are focused on Tesla and its Nevada gigafactory, experts see the real growth happening in China. According to a report by Bloomberg Intelligence, Chinese gigafactories will pump out 120 gigawatt hours annually worth of electric batteries by 2021, compared to Tesla’s 35.

That’s enough to supply batteries for around 1.5 million Tesla Model S vehicles or 13.7 million Toyota Prius Plug-in Hybrids per year according to Bloomberg New Energy Finance.

Warming up to South American copper

Electric vehicles use a lot of copper, and China hasn’t been shy about orchestrating a major increase in copper imports to meet the expected demand. Geologist and newsletter writer Dave Forest noticed that Chinese imports of copper concentrate from both world-leading copper nation Chile and less prolific red metal producer Peru, have both increased in the past couple of years.

He notes that together, Chile and Peru accounted for 55% of China’s total copper concentrate imports of 17.05 million tonnes in 2016. The next-biggest supplier, Mongolia, only shipped 1.50 million tonnes.

Two large Peruvian copper mines are owned by Chinese companies. Chinese state-run Chinalco owns the Toromocho copper mine, while the La Bambas mine is a joint venture between operator MMG (62.5%), a subsidiary of Guoxin International Investment Co. Ltd (22.5%) and CITIC Metal Co. Ltd (15.0%). The Chinese-backed Mirador mine in Ecuador is slated to open in 2018.

Most of the metal produced under these off-take agreements will NEVER come to the market anyplace other then in China. Those metals that do can have their China to U.S. supply shut down any time the Chinese want.

Rise of the petro-yuan

There is one more important development set to increase China’s global commodities dominance, and that is the recent announcement that China is shaking up the oil futures market. Because most commodities are traded in USD, the greenback has a huge advantage over other currencies.

China has long wanted to reduce the dominance of the USD in commodities markets, and its strategy is to launch a crude oil futures contract priced in yuan and convertible into gold. Crude oil futures, either Brent or WTI, are currently priced in USD.

The yuan-denominated oil futures will allow exporters like Russia and Iran to avoid US economic sanctions and circumvent the US dollar. Zerohedge quotes Adam Levinson, CEO at Graticule Management Asia, warning Washington that besides allowing Chinese companies to hedge oil prices, the futures contract will also increase the use of the yuan, “and thus the acceleration of de-dollarization and the rise of the petro-yuan. “I don’t think there’s any doubt we’re going to see use of the renminbi in reserves go up substantially,” says Levinson.

Conclusion

It’s hard to escape the conclusion that China, both through its enormous purchasing power, and its financial muscle that allows it to make substantial investments in mining and energy resources overseas, is assuming a position of world dominance in the commodities markets. Credit must be given to Chinese leadership for forward-thinking in developing its EV industry and for making strategic acquisitions of commodities like copper, manganese, vanadium, lithium and other battery metals that will provide a steady feedstock for the new electrified economy. But scorn must also be heaped on the United States and other countries that have failed to prepare. In the US, public infrastructure is crumbling, the automobile is still king in most states, few cities have decent transit, and many still consider global warming to be a hoax. The situation isn’t much better in Canada.

North American politicians really need to get with the program; to invest in and facilitate the mining of critical metals in North America; to scour the globe for mines that can provide the feedstock for the industries of the future, and invest in them; and to block the sale of strategic mineral assets like Mountain Pass to foreign buyers. If none of this is done, we are quickly heading into a two-tier world of haves and have-nots. Where the haves are countries like China that seized the opportunity to acquire the world’s finite resources while they were still available, and the have-nots are forced to cow to the victors who will control and set the prices of the spoils.

China’s global resource grab, and the ramifications for the rest of the world, are on my radar screen.

Are they on yours?

If not, maybe they should be.

By Richard Mills


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Published at Fri, 12 Jan 2018 15:22:35 +0000

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Ford plans $11 billion investment, 40 electric vehicles by 2022

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Ford plans $11 billion investment, 40 electric vehicles by 2022

DETROIT (Reuters) – Ford Motor Co (F.N) will significantly increase its planned investments in electric vehicles to $11 billion by 2022 and have 40 hybrid and fully electric vehicles in its model lineup, Chairman Bill Ford said on Sunday at the Detroit auto show.

The investment figure is sharply higher than a previously announced target of $4.5 billion by 2020, Ford executives said, and includes the costs of developing dedicated electric vehicle architectures. Ford’s engineering, research and development expenses for 2016, the last full year available, were $7.3 billion, up from $6.7 billion in 2015.

Ford Chief Executive Jim Hackett told investors last October the automaker would slash $14 billion in costs over the next five years and shift capital investment away from sedans and internal combustion engines to develop more trucks and electric and hybrid cars.

Of the 40 electrified vehicles Ford plans for its global lineup by 2022, 16 will be fully electric and the rest will be plug-in hybrids, executives said.

“We’re all in on this and we’re taking our mainstream vehicles, our most iconic vehicles, and we’re electrifying them,” Ford told reporters. “If we want to be successful with electrification, we have to do it with vehicles that are already popular.”

General Motors Co (GM.N), Toyota Motor Corp (7203.T) and Volkswagen AG (VOWG_p.DE), have already outlined aggressive plans to expand their electric vehicle offerings and offer them to consumers who want luxury, performance and an SUV body style – or all three attributes in the same vehicle.

Mainstream auto makers are reacting in part to pressure from regulators in China, Europe and California to slash carbon emissions from fossil fuels. They also are under pressure from

Tesla Inc (TSLA.O)’s success at creating electric sedans and SUVs that inspire would-be owners to line up outside showrooms and flood the company with orders.

GM said last year it would add 20 new battery electric and fuel cell vehicles to its global lineup by 2023, financed by robust profits from those very same traditional internal combustion engine vehicles in the United States and China.

GM Chief Executive Mary Barra has promised investors the Detroit automaker will make money selling electric cars by 2021.

Volkswagen said in November it would spend $40 billion on electric cars, autonomous driving and new mobility services by the end of 2022 – significantly more than when it announced two months earlier it would invest more than 20 billion euros on electric and self-driving cars through 2030.

Toyota is racing to commercialize a breakthrough battery technology during the first half of the 2020s with the potential to cut the cost of making electric cars.

Ford’s president of global markets, Jim Farley, said on Sunday that Ford would bring a high-performance electric utility vehicle to market by 2020. The company will begin production of a hybrid version of its popular F-150 truck at a plant in Dearborn, Michigan, in 2020.

“What we learned from this first cycle of electrification is people want really nice products,” Farley said.

‘THINK BIG’

Ford’s shift to the electric vehicle strategy has been more than six months in the making after Hackett replaced former Chief Executive Mark Fields in May.

The plan was finalized in recent months after an extensive review, a person familiar with the process said. In October, Ford disclosed it had formed a team to accelerate global development of electric vehicles, whose mission is to “think big” and “make quicker decisions.”

Some of the electric vehicles will be produced with Ford’s JV in China aimed at the Chinese market. One aim of Ford’s “Team Edison” is to identify and develop electric-vehicle partnerships with other companies, including suppliers, in some markets, according to Sherif Marakby, vice president of autonomous vehicles and electrification.

China, India, France and the United Kingdom all have announced plans to phase out vehicles powered by combustion engines and fossil fuels between 2030 and 2040.

Reporting by Nick Carey and Joseph White; Additional reporting by David Shepardson in Detroit; Editing by Sandra Maler and Peter Cooney

 

Published at Mon, 15 Jan 2018 00:12:14 +0000

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Berkshire energy unit names CEO to replace potential Buffett successor

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Warren Buffett, chairman and CEO of Berkshire Hathaway, speaks at the Fortune’s Most Powerful Women’s Summit in Washington October 13, 2015. REUTERS/Kevin Lamarque/File Photo

Berkshire energy unit names CEO to replace potential Buffett successor

(Reuters) – Berkshire Hathaway Inc’s energy unit on Thursday named William Fehrman as its new chief executive to replace Gregory Abel, who was promoted a day earlier to oversee more Berkshire units, and potentially succeed Warren Buffett.

Fehrman, 57, joined the energy unit, Berkshire Hathaway Energy Co, in 2006.

He had been chief executive of its MidAmerican Energy Co subsidiary, which provides electric and natural gas service in four Midwest U.S. states, and BHE Renewables, which builds wind and solar farms. Adam Wright, 40, a MidAmerican vice president, will become that unit’s new chief executive.

Berkshire on Wednesday added Abel, 55, and Ajit Jain, 66, who oversees its reinsurance operations, to its board of directors, and gave them new oversight over its more than 90 business units. This confirmed expectations of many investors and analysts that Abel and Jain are the frontrunners to become Berkshire’s chief executive whenever Buffett, 87, is no longer in charge. Berkshire Hathaway Energy is 90 percent-owned by Berkshire, and has in recent quarters generated roughly one-sixth of its Omaha, Nebraska-based parent’s operating profit. This included $1.98 billion for the parent in the first nine months of 2017. The unit serves the central and western United States, Alberta, Canada and Britain, and operates HomeServices of America, the majority owner of Berkshire Hathaway HomeServices and one of the largest U.S. residential real estate brokerages.

Fehrman, through a spokeswoman, had no comment.

Berkshire Hathaway Energy used to be called MidAmerican Energy but rebranded itself in 2014.

It is one of several Berkshire units to take its parent’s name, which is closely associated with Buffett, the world’s third-richest person and one of its most admired investors.

Abel has used big acquisitions to help expand Berkshire Hathaway Energy, but had a setback last year when his $9 billion offer for Texas power transmission company Oncor was trumped by a higher bid from San Diego-based Sempra Energy. Berkshire Hathaway Energy has not disclosed Fehrman’s expected compensation. Abel was awarded more than $58 million, mainly in incentive pay and bonuses, in 2015 and 2016.

Buffett typically receives less than $500,000 in annual compensation, including security to keep him safe, to run Berkshire.

Reporting by Jonathan Stempel in New York; Editing by Tom Brown

Published at Thu, 11 Jan 2018 21:32:26 +0000

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Earlier: Small Business Optimism Index Declines in December

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By geralt from Pixabay

Earlier: Small Business Optimism Index Declines in December

by Bill McBride on 1/09/2018 06:40:00 PM

Wednesday:
• At 7:00 AM ET, The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

Earlier from the National Federation of Independent Business (NFIB): Average Monthly Optimism Sets All-Time Record in 2017

The Index of Small Business Optimism lost 2.6 points in December, falling to 104.9, still one of the strongest readings in the 45-year history of the NFIB surveys. The highest reading of 108.0 was reached in July 1983, only slightly above November’s 107.5. The lowest reading of 79.7 occurred in April 1980. Two of the 10 Index components posted a gain, five declined, and three were unchanged. The decline left the Index historically strong and maintained a string of exceptional readings that started the day after the 2016 election results were announced. Following the election announcement, the Index rose from 95.0 (a below average reading) for October and pre-election November, to 102.0 in the November weeks after the election, and then to 105.0 in January. This surge in optimism has led to 2017 achieving the highest yearly average Index reading in the survey’s history. The average monthly Index for 2017 was 104.8. The previous record was 104.6, set in 2004.

Job creation was slow in the small-business sector as owners reported a seasonally adjusted average employment change per firm of 0.01 workers. Clearly, a lack of “qualified” workers is impeding the growth in employment. … Nineteen percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 1 point), second only to taxes. This is the top ranked problem for those in construction (30 percent) and manufacturing (27 percent).
emphasis added

Small Business Optimism Index

Click on graph for larger image.

This graph shows the small business optimism index since 1986.

The index decreased to 104.9 in December.

Note: Usually small business owners complain about taxes and regulations.  However, during the recession, “poor sales” was the top problem. Now labor shortages are moving to the top.

Published at Tue, 09 Jan 2018 23:40:00 +0000

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Federal regulator rejects Trump coal rescue plan

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Here's what Trump has said about bringing back coal jobs
Here’s what Trump has said about bringing back coal jobs

Federal regulator rejects Trump coal rescue plan

  @MattEganCNN

Federal regulators have rejected a controversial Trump administration proposal that would have propped up slumping coal companies.

The Federal Energy Regulatory Commission dismissed Energy Secretary Rick Perry’s call to subsidize power plants like coal and nuclear that maintain a 90-day supply of fuel on site. Perry cited a need to improve the resilience of the nation’s power grid, especially from severe weather.

The proposal, which was supported by coal mining companies like Murray Energy, was widely seen as an attempt to help the coal and nuclear industry. Coal, in particular, has been crushed in recent years by the rise of cleaner energy like natural gas and solar and by tougher environmental regulation.

In a blow to Trump’s campaign promise to help coal country, FERC on Monday terminated a rulemaking process that Perry had launched.

The independent agency, which is run by bipartisan commissioners appointed by the president and confirmed by the Senate, faced a Wednesday deadline to rule on the matter.

FERC did decide to take steps to evaluate the resilience of the power system. It directed regional transmission organizations and independent system operators, which move electricity through the grid, to submit information. FERC said it expects to “promptly decide whether additional Commission action is warranted to address grid resilience.”

“This is a good day for everyone who cares about good governance and healthy markets,” said Justin Gundlach, a staff attorney at Columbia University’s Sabin Center for Climate Change Law.

Gundlach slammed the Energy Department proposal as a “gambit that sought to funnel money to uneconomic coal-fired power plants in a way that would have ignored the law.”

Former New York Mayor Michael Bloomberg, a U.N. special envoy on climate change, called the FERC decision a win for “consumers, the free market and clean air.” He said Perry’s proposal was an attempt to “prop up the coal industry by forcing American consumers to pay more for energy.”

Former FERC commissioners warned in a letter last year that the Energy Department proposal would raise costs for customers and “disrupt decades of substantial investment made in the modern electric power system.”

The FERC decision is bad news for coal companies hurting from a wave of retirements of coal-fired power plants that have switched to cheaper fuels like natural gas. Between 2010 and 2015, coal plants accounted for more than 52% of retired power plant capacity, according to government statistics.

Murray Energy argued the new rule would ensure that coal plants would be there to supply electricity when it’s most needed, especially during extreme weather like the recent cold weather in parts of the United States.

“If it were not for the electricity generated by our Nation’s coal-fired power plants, and nuclear plants, we would be experiencing massive brownouts and blackouts in this Country,” Murray wrote in a statement to CNNMoney. (Murray CEO Robert Murray filed a defamation lawsuit last year against John Oliver, HBO and CNN owner Time Warner(TWX), alleging “character assassination.”)

The Energy Department said the rule was needed to “address the crisis at hand” regarding the resilience of the electric grid. The department cited the 2014 extreme cold snap known as the Polar Vortex as well as natural disasters such as Hurricanes Sandy, Harvey and Irma.

However, some analysts pointed out that power outages are usually caused by downed power lines, not a short supply of fuel. Less than 0.1% of all electricity disturbances over the last five years were caused by fuel supply emergencies, according to a report by the Rhodium Group, a research firm.

Apple(AAPL) wrote a letter to FERC on Monday urging the agency to reject the Energy Department proposal and stating that the “grid is not facing a crisis.”

Apple warned the proposed rule would “inhibit, rather than promote, a well-designed and competitive electricity market that can drive down costs for consumers and unleash competition.”

Climate activists cheered the FERC decision.

“FERC’s announcement is a return to reality after months of billionaire coal and nuclear executives pressuring DOE and FERC to illegally setup bailouts for their uneconomic plants,” Mary Anne Hitt, director of the Sierra Club’s Beyond Coal campaign, wrote in a statement.

Published at Mon, 08 Jan 2018 22:44:28 +0000

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Q4 GDP Forecasts

Q4 GDP Forecasts

by Bill McBride on 1/05/2018 07:25:00 PM

From Merrill Lynch:

Core capital goods shipments and orders were revised down in November. The trade deficit widened more than expected. These data sliced 0.2pp from 4Q GDP tracking, bringing us down to 2.3%.
emphasis added

From the Altanta Fed: GDPNow

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2017 is 2.7 percent on January 5, down from 3.2 percent on January 3.

From the NY Fed Nowcasting Report

The New York Fed Staff Nowcast stands at 4.0% for 2017:Q4 and 3.4% for 2018:Q1.

CR Note: This is a wide range of forecasts (from 2.3% to 4.0%).

Looking back at the October forecasts for Q3, Merrill was 3.0%, the Atlanta Fed at 2.7% and the NY Fed at 1.5% (the BEA reported 3.0% before revisions).

For Q2, the July forecasts were Merrill at 2.1%, the Atlanta Fed at 2.5%, and the NY Fed at 2.0% (the BEA initially reported 2.6%).

Read more at http://www.calculatedriskblog.com/2018/01/q4-gdp-forecasts.html#jXtrdJxfujehwieK.99

Published at Sat, 06 Jan 2018 00:25:00 +0000

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December Jobs Up 148K Following ADP 250K “Overheating” Estimate

 

December Jobs Up 148K Following ADP 250K “Overheating” Estimate

By: Mike Shedlock | Fri, Jan 5, 2018


Initial Reaction

Today’s establishment survey shows jobs rose by 148,000. The household survey (Table A) shows employment only rose by 104,000 while unemployment fell by 40,000.

Mark Zandi, chief economist of Moody’s Analytics, offered this amiusing comment as noted by ADP: “The job market ended the year strongly. Robust Christmas sales prompted retailers and delivery services to add to their payrolls. The tight labor market will get even tighter, raising the specter that it will overheat.

BLS Jobs Statistics at a Glance

  • Nonfarm Payroll: +148,000 – Establishment Survey
  • Employment: +104,000 – Household Survey
  • Unemployment: -40,000 – Household Survey
  • Involuntary Part-Time Work: +102,000 – Household Survey
  • Voluntary Part-Time Work: +100,000 – Household Survey
  • Baseline Unemployment Rate: flat at 4.1% – Household Survey
  • U-6 unemployment: +0.1 to 8.1% – Household Survey
  • Civilian Noninstitutional Population: +160,000
  • Civilian Labor Force: +64,000 – Household Survey
  • Not in Labor Force: +96,000 – Household Survey
  • Participation Rate: flat at 62.7 – Household Survey

Employment Report Statement

Total nonfarm payroll employment increased by 148,000 in December, and the unemployment rate was unchanged at 4.1 percent. Employment gains occurred in health care, construction, and manufacturing.

Unemployment Rate – Seasonally Adjusted

https://s3-us-west-2.amazonaws.com/maven-user-photos/mishtalk/economics/zmfATcSa4EegwR7v_znq6Q/sS-GmF5UmkedCZslC_hqwg

Nonfarm Job Change from Previous Month

https://s3-us-west-2.amazonaws.com/maven-user-photos/mishtalk/economics/zmfATcSa4EegwR7v_znq6Q/EGdK3EtcqkWQJuISOv_DuQ

The above chart and the following chart from the BLS show establishment survey jobs, not household survey employment.

Nonfarm Jobs Change from Previous Month by Job Type

https://s3-us-west-2.amazonaws.com/maven-user-photos/mishtalk/economics/zmfATcSa4EegwR7v_znq6Q/5cnMKhL9EUO0n0Dfs4IY9w

Hours and Wages

The Average Weekly Hours of all private employees was flat at 34.5 hours. The average weekly hours of all private service-providing employees rose by 0.1 hour to 33.4 hours. Average weekly hours of manufacturers was declined by 0.1 hour to 40.8 hours.

The Average Hourly Earnings of private workers rose $0.07 to $22.30. Average hourly earnings of private service-providing employees rose $0.07 to to $22.06. Average hourly earnings of manufacturers was flat at $21.14.

Birth Death Model

Starting January 2014, I dropped the Birth/Death Model charts from this report. For those who follow the numbers, I retain this caution: Do not subtract the reported Birth-Death number from the reported headline number. That approach is statistically invalid. Should anything interesting arise in the Birth/Death numbers, I will comment further.

Table 15 BLS Alternate Measures of Unemployment

https://s3-us-west-2.amazonaws.com/maven-user-photos/mishtalk/economics/zmfATcSa4EegwR7v_znq6Q/HDjiu0ncd0i_bTz98iNf1A

Table A-15 is where one can find a better approximation of what the unemployment rate really is.

Notice I said “better” approximation not to be confused with “good” approximation.

The official unemployment rate is 4.1%. However, if you start counting all the people who want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

U-6 is much higher at 8.1%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.

Some of those dropping out of the labor force retired because they wanted to retire. The rest is disability fraud, forced retirement, discouraged workers, and kids moving back home because they cannot find a job.

Strength is Relative

It’s important to put the jobs numbers into proper perspective.

  1. In the household survey, if you work as little as 1 hour a week, even selling trinkets on eBay, you are considered employed.
  2. In the household survey, if you work three part-time jobs, 12 hours each, the BLS considers you a full-time employee.
  3. In the payroll survey, three part-time jobs count as three jobs. The BLS attempts to factor this in, but they do not weed out duplicate Social Security numbers. The potential for double-counting jobs in the payroll survey is large.

Household Survey vs. Payroll Survey

The payroll survey (sometimes called the establishment survey) is the headline jobs number, generally released the first Friday of every month. It is based on employer reporting.

The household survey is a phone survey conducted by the BLS. It measures unemployment and many other factors.

If you work one hour, you are employed. If you don’t have a job and fail to look for one, you are not considered unemployed, rather, you drop out of the labor force.

Looking for jobs on Monster does not count as “looking for a job”. You need an actual interview or send out a resume.

These distortions artificially lower the unemployment rate, artificially boost full-time employment, and artificially increase the payroll jobs report every month.

Final Thoughts

There is a clear weakening pattern in establishment survey jobs from year to year. Hurricanes distorted the last four months of data, twice in each direction.

Last month I commented “The final hurricane impact is still unknown at this point.”

This month it is clear the hurricane impact is over.

Weak wage growth has not kept up with inflation, despite the BLS purporting otherwise.

By Mike “Mish” Shedlock


Mike Shedlock

Mike Shedlock / Mish
Mish Talk

Mike Shedlock

Michael “Mish” Shedlock is a registered investment advisor
representative for SitkaPacific Capital Management. Visit http://www.sitkapacific.com/ to
learn more about wealth management for investors seeking strong performance
with low volatility.

Copyright © 2005-2017 Mike Shedlock

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Published at Fri, 05 Jan 2018 10:44:01 +0000

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American workers in 2018: Show me the money

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Republicans reveal final tax plan details
Republicans reveal final tax plan details

American workers in 2018: Show me the money

  @CNNMoney

America’s red hot job market is missing one ingredient: Strong wage growth.

It’s a big reason many Americans still feel left out of the recovery from the Great Recession.

Usually, when unemployment is this low — 4.1%, the lowest since 2000 — wages go up significantly. Companies have a hard time finding workers, and they have to pay more to recruit and retain them.

Not so in this job market. As of November, wages were only up 2.5% compared with a year ago. And since October 2010, the economy has added jobs every month, but wage growth has averaged a paltry 2.2%.

The final jobs report for 2017 comes out Friday, and it could offer hints about whether wage growth is finally starting to pick up.

In some corners of America, there are signs that it’s already happening. Small and medium-sized businesses are really feeling the pressure to find workers and raise wages.

The share of employers who found few or no qualified job applicants in December was at an all-time high, 54%, according to a report published Thursday by the National Federation of Independent Business, which polls firms with 500 employees or less.

About 23% of employers told NFIB that they plan to pay employees more in the next three to six months. That matches a level last seen in March 2000, and the only time it was higher was December 1989. NFIB has conducted its survey for 40 years.

Mike Olsen is in that boat. When he founded the education tech firm Proctorio in 2013, he says it wasn’t hard to find a qualified engineer in Scottsdale, Arizona. But now it’s become his biggest employment problem.

“We used to have the advantage, and now I feel like we don’t,” says Olsen, 29. “As unemployment decreases, these employees have the upper hand.”

To keep the workers he has, Olsen says he’s raised wages 15% in the past year. An entry-level engineer at Proctorio earns $75,000 to $80,000 a year.

Proctorio, which has 28 employees, designs camera technology that monitors students during exams to prevent them from cheating. Its technology monitors facial expressions, eye twitches and mouth movement. About 500 universities use Proctorio.

“We’re doing about 3 million exams a year. We have a lot of people trying to cheat,” Olsen says.

But he’s struggling to find qualified engineers and customer service advocates. He’s also looking for a “professional cheater” to poke holes in the software they’re developing.

Olsen is confident he’ll find a qualified cheater, but for his typical job postings, he can’t hire just anybody: Only one in 10 applicants is worth a phone call. Of the people who get phone calls, he figures one in 20 makes it to an interview. And out of that group, one in 10 gets a job offer.

Proctorio is also in a particularly hot job market. In Phoenix, small businesses raised wages in December more than any other metro area — 5.25% from a year ago, according to a report by Paychex, a payment processor, and IHS Markit, an analytics firm.

That makes sense: Unemployment in Phoenix is 3.7%, below the national average. Arizona did raise its minimum wage this week to $10.50 an hour, but for many employers like Olsen, that’s not the biggest problem.

He’s competing for engineers against Amazon(AMZN), which has an office in nearby Tempe, Arizona. Olsen says some of his engineers came to him last year saying they had offers for more money elsewhere. Knowing how hard it would be to replace them, Olsen has had no choice.

“We had to match it,” he says.

He adds that Proctorio is a business that only succeeds with speed: Schools need to know immediately if a student has cheated. Having engineers work together well as a team to make that fast judgment call is critical for the company.

Olsen has also decided to match competing offers because battling with Amazon is only his second-biggest problem. His first: A lack of skilled workers in the Phoenix area.

Olsen says many engineers educated in Arizona prefer to move to tech hubs like Austin or the Bay Area. That means Olsen has to pay up to persuade more to stay.

“I think we’re going to have to keep increasing” wages, Olsen says. “But it’s probably not sustainable.”

Published at Thu, 04 Jan 2018 15:26:53 +0000

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America could soon be crowned oil king

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Russian oil facing competition from U.S. shale
Russian oil facing competition from U.S. shale

 America could soon be crowned oil king

  @MattEganCNN

America could be crowned the oil world’s new king in 2018.

The United States is poised to ramp up crude oil production by 10% in 2018 to about 11 million barrels per day, according to research firm Rystad Energy.

Surging shale oil output should allow the United States to dethrone Russia and Saudi Arabia as the planet’s leading crude oil producer, Rystad predicted in a recent report. The U.S. hasn’t been the global leader, nor ahead of both Russia and Saudi Arabia, since 1975.

“The market has completely changed due to the U.S. shale machine,” said Nadia Martin Wiggen, Rystad’s vice president of markets.

The prediction shows how the fracking revolution has turned America into an energy powerhouse — a transformation that President Trump has vowed to accelerate by cutting regulation. This long-term shift has allowed the U.S. to be less reliant on foreign oil, including from the turbulent Middle East.

U.S. oil production slipped — but didn’t completely collapse — after Saudi-led OPEC launched a price war in late 2015 aimed at reclaiming market share lost to shale and other players. A massive supply glut caused crude to crash from around $100 a barrel to a low of $26.

Cheap prices forced shale companies in Texas, North Dakota and elsewhere to dial back. Domestic output bottomed at 8.55 million barrels per day in September 2016, down 11% from the recent peak in April 2015, according to the U.S. Energy Information Administration.

global leaders daily oil output

But the resilient oil industry, led by the shale hotbed of the Permian Basin of Western Texas, rebounded nicely last year. The comeback was driven by higher crude prices as well as new technology that makes it cheaper and easier to frack.

The EIA recently forecasted that U.S. crude oil production would jump to an average of 10 million barrels per day in 2018. That would take out the previous annual record of 9.6 million barrels set in 1970.

Rystad Energy is even bullish on American oil. The Norwegian firm sees U.S. crude output hitting 11 million barrels per day by December, narrowly surpassing global leader Russia and OPEC kingpin Saudi Arabia.

Others are skeptical. Byron Wien, vice chairman of Blackstone’s(BX) private wealth solutions group, predicted this week that fracking production would be “disappointing” in 2018, lifting crude oil prices above $80 a barrel.

Crude climbed above $61 a barrel on Wednesday for the first time in 2-1/2 years. The recent bump in prices has been driven by a pipeline explosion in Libya and protests in Iran.

Bigger picture, the oil rebound has been caused by solid demand and the whittling down of the epic supply glut that caused prices to crash in the first place. A big key behind fixing the oversupply problem has been OPEC and Russia dialing back their pumping. In late November, OPEC and Russia agreed to extend oil production cuts until the end of 2018. The production cuts have helped stabilize oil prices, paving the way for U.S. shale output to ramp up.

By contrast, Trump has vowed to usher in an era of “American energy dominance,” in part by reducing red tape around oil drilling.

Last week, a U.S. safety regulator proposed rollbacks to offshore drilling rules. The Bureau of Safety and Environmental Enforcement, which was formed in the wake of the deadly 2010 BP oil spill, estimates the revisions would slash industry “compliance burdens” by at least $228 million over 10 years.

The rule change “moves us forward toward meeting the Administration’s goal of achieving energy dominance without sacrificing safety,” BSEE director Scott Angelle said in a statement on December 28.

Rystad Energy said market forces, not deregulation, has underpinned the upswing in U.S. oil output.

“I don’t think it’s had a significant impact,” Rystad’s Martin Wiggen said of Trump’s efforts to roll back environmental regulations.

She added though that there is “not a fear under the Trump administration that he will suddenly outlaw shale.” Bernie Sanders called for a national ban on fracking during the 2016 campaign.

Regardless of the driver, the ramp-up in oil pumping has lessened the need for the U.S. to rely on oil from unstable places like Venezuela and the Middle East.

“The fact that the U.S. produces more oil is a fantastic development in terms of security,” said Martin Wiggen.

U.S. oil imports have dropped by 25% over the past nine years, according to the EIA. At the same time, the U.S. oil exports have flourished since the 40-year ban on shipping crude overseas was lifted in 2015. Exports have more than tripled over the past year to record highs. The U.S. still imports more oil than it exports, but that gap is shrinking.

Published at Wed, 03 Jan 2018 22:00:37 +0000

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Google Sheltered $19.2B With Tax Maneuvers: Report

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Google Sheltered $19.2B With Tax Maneuvers: Report

By Daniel Liberto | January 3, 2018 — 6:18 AM EST

Alphabet Inc.’s (GOOGL) Google avoided paying as much as $3.7 billion in taxes last year after legally moving 15.9 billion euros ($19.2 billion) to a Bermuda shell company, regulatory filings from the Netherlands have shown.

According to Bloomberg, which followed up on an earlier report from Dutch newspaper Het Financieele Dagblad, the search engine giant used legal loopholes, known as “Double Irish” and “Dutch Sandwich,” to prevent a large chunk of its international profits from being taxed. (See also: Double Irish With A Dutch Sandwich.)

Most of Google’s overseas advertising revenue was first collected by an Irish subsidiary before being transferred to Google Netherlands Holdings BV, a Dutch company with no registered employees. From there, revenues were sent to Bermuda-based Ireland Holdings Unlimited. No tax is paid on corporate income in Bermuda.

The company’s filings with the Dutch Chamber of Commerce showed that Google moved 7 percent more money through this tax structure than the prior year. As a result, it was reportedly taxed 19.3 percent on global profits in 2016, saving the company about $3.7 billion.

Despite attracting criticism for its tax-saving methods, Google’s use of “Double Irish” and “Dutch Sandwich,” appear to be perfectly legal. The Irish government put a stop to “Double Irish” arrangements back in 2015, although companies have been given permission to continue using the loophole until the end of 2020.

“We pay all of the taxes due and comply with the tax laws in every country we operate in around the world,” a Google spokesman said in a statement given to Bloomberg. “We remain committed to helping grow the online ecosystem.”

This latest revelation of tax dodging strategies by Google comes as the European Union explores ways to make U.S. technology companies, many of which use tax shelters, pay up more. Last year, Google was excused from paying a 1.12 billion euro ($1.35 billion) French tax bill after a court ruled that the company’s Irish-based subsidiary responsible for collecting ad revenues sold in France had no permanent base in the country. (See also: Google and Facebook’s Growing Ad Dominance Calls for Caution: Pivotal.)

Published at Wed, 03 Jan 2018 11:18:00 +0000

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What is the average annual dividend yield of companies in the chemicals sector?

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What is the average annual dividend yield of companies in the chemicals sector?

A:

Operations management refers to a focus on the practices designed to monitor and manage all of the processes within the production and the distribution of products and services. The largest activities that operations management focuses on are product creation and service development, and the efficiency with which both are distributed. Managing purchases, monitoring inventory and preserving quality are the primary goals. Operations management often includes analyzing a company’s internal processes. Ultimately, the way that an organization carries out operations management depends upon the nature of products or services that it offers.

Health care is an extremely diverse industry. It primarily includes institutions and practitioners that offer services for the diagnosis, treatment and prevention of injury, illness, disease, and other physical and mental impairments. There are a wide variety of specialties that focus on specific treatments. Health care refers to primary, secondary and tertiary care, as well as to public health. Social and economic conditions largely affect access to health care, as do the policies and management of services. For a health care system to function efficiently, necessary aspects include generous financing, a well-trained and well-paid workforce, credible information on which policies can be structured, and health facilities that are well-maintained and reliably managed.

Operations management is essential for the efficient functionality and provision of health services. Because the health care sector is currently undergoing a considerable amount of reform, the jobs of those who manage health care operations are changing as well. Some of the most prominent examples of operations management in health care include controlling costs and improving the quality of service provided to patients.

Controlling Costs

One of the first areas of focus for operations managers is cost control. The current health care system overuses expensive, technological and emergency-based treatment. High costs from care often remains uncompensated due to patients being uninsured. A prevalence of services in expensive settings creates a burden on taxpayers, health insurance holders and health care institutions themselves. The goal for operations managers is to help strike a balance between necessary high-tech treatment and community centers that offer preventative services. Primary care institutions are also a part of keeping patients from needing expensive emergency services.

Cost control also affects the levels and quality of services that are provided to clients. Inefficiently managed costs cut down on budgets, limiting the technology and equipment that can be purchased and used to provide necessary services. For operations managers, the goal is to streamline costs and to create necessary funding to maintain adequate levels and quality of services offered.

The Bottom Line

Operations management plays a vital role in the health care industry. It is responsible for the oversight of health care facility operations, how efficiently they function, and how capable they are of providing adequate and reliable treatment to the community they serve.

Published at Wed, 03 Jan 2018 00:54:00 +0000

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New U.S. tax law could impact paychecks by February

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By ddzphoto from Pixabay

New U.S. tax law could impact paychecks by February

NEW YORK (Reuters) – The first paychecks of 2018 will be dispatched soon, but it may be weeks or months before taxpayers and payroll processors know how the new U.S. tax laws will affect your take-home pay.

The Internal Revenue Service said it expected to issue guidance in January on how much in taxes employers should withhold based on the new tax rates. Employers and payroll services would then implement those changes starting in February.

You might not even notice when it happens because the effect on your paycheck could be relatively small, depending on your income and your tax situation.

“When the taxes are reduced by 1 to 3 percent, that’s not going to be a huge noticeable difference. It’s not going to be hundreds of dollars,” said Pete Isberg, vice president of government relations at ADP, the largest payroll processor in the United States, servicing the paychecks of one out of every six workers.

A difference of $1,000, for instance, would be less than $40 a pop for a worker paid biweekly.

Your paycheck is not actually a clear indicator of whether your overall taxes have gone up or down because of the new tax law. There may be other factors in your tax situation – such as owning a property or having multiple children – that could affect how much you owe Uncle Sam at the end of the year.

Be prepared for tax uncertainty until you do your taxes for 2018 a year or so from now. You cannot even estimate your taxes until tax professionals and do-it-yourself services like TurboTax update their software. And that cannot happen until the IRS releases the new withholding tables and issues more guidance on the specifics of other tax changes.

“We will be ready to help our customers. We just need more information,” said David Williams, executive director of the Intuit Tax and Financial Center.

WAITING FOR W-4 FORMS

You may be tempted to get a jump on the IRS and change how much tax is taken out of your paycheck by adjusting your W-4 form, but that may be premature, warned Isberg.

The IRS said in its last note that it would be attempting to work with existing W-4 forms for now.

The standard federal W-4, which all employees fill out, is based on the notion of “allowances,” which you could adjust based on your personal situation.

In the past, a single person with three children and a home in a high-tax state like New York might have listed themselves as married and claim one allowance per person, plus a few extra because they were likely to itemize their deductions and owe less. A married person with a freelance spouse who owes quarterly taxes might have listed themselves as single to have enough taken out to cover both of them.

The goal of people adjusting their withholding was to come as close as possible to paying the correct amount of tax – rather than owing money at the end of the year or ending up with a giant refund.

But it will all be different math for 2018.

“For first few weeks of January stay put, and see what the IRS comes out with,” said Isberg, who also cautioned that employees should keep an eye on tax changes at the state level.

Above all, do not panic, said Farsheed Ferdowsi, president and CEO of Inova Payroll, which handles paychecks for more than 3,000 companies.

“When you have changes in taxes, it usually goes a lot smoother than most people know,” Ferdowsi said. “If the first (paycheck) is wrong, it catches up on the next one.”

Editing by Lauren Young and Lisa Shumaker

Published at Tue, 02 Jan 2018 21:41:43 +0000

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How reliable are Glassdoor salaries?

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How reliable are Glassdoor salaries?

By Lisa Goetz | Updated December 31, 2017 — 2:11 PM EST

A:

Information entered into Glassdoor.com is crowdsourced and unverified. While some of the salary information posted on the website may be accurate, some of it is not. Career seekers looking for specific salary information should browse several websites such as Payscale.com and the U.S. Bureau of Labor Statistics website to get as accurate a salary picture as possible.

Crowdsourced Career Site

Glassdoor, a tech company founded by Robert Hohman, Rich Barton and Tim Besse and headquartered in Mill Valley, California, burst on the scene in 2007 as a one-stop shop for people looking to make career decisions. At the time, the website was seen as innovative because it included information about companies that career seekers were looking for but could not find on other websites. In particular, the website sought feedback from insiders – company employees – about benefits, interview practices and leadership. Users even uploaded snapshots of their workplace interiors.

Salary is often the most guarded piece of information held by companies, but Glassdoor lifted the veil of secrecy by making it possible for users to report the amounts of money they earned. The most important reasons users post information considered private, such as their salaries, is because Glassdoor allows them to do so anonymously.

Glassdoor also offers services to employers seeking to use the brand approach to attract talent. The company provides tools for employers to post open positions and a platform on which to market their brands. This aspect of Glassdoor’s business has drawn criticism about the accuracy of surveys, salary information and the rose-colored picture some of the site’s users paint about their employers. Glassdoor’s toughest critics assert that some employers may have influence over the information that users post about them.

Accuracy Questions

While some Glassdoor users share accurate information about their salaries, some users do not. Experts note that the website attracts employees who may be dissatisfied with their jobs, who use the website as a place to rant or vent grievances. There’s also no way to confirm which data is current and whether a company has increased or decreased a salary for a position since the time the user made the entry.

Consulting Additional Sources

Career seekers should not dismiss Glassdoor salary information because some of it is accurate; it is just not easy to know how much of it is accurate. Salary averages for positions at large corporations on the website are more likely to be accurate than averages posted for positions at small companies. Generally, the larger the data sample, the more accurate the information. Some classified ads and job postings on company websites include salary, and this information can be compared to information on Glassdoor to confirm whether Glassdoor’s salary information is accurate.

Published at Sun, 31 Dec 2017 19:11:00 +0000

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