June 2009 - Global Economic Watch


Global Economic Watch


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GE's Immelt on Global Recovery and a New Age for US Economy

06-30-2009 10:59 AM with no comments

General Electric CEO Jeffrey Immelt weighs in on the state of the global economy in this interview with Charlie Rose.  He says we are in a "tough situation." and that while there is recovery in emerging economies (China, Brazil), "headwinds" are going to keep slowing down the US economy.  And, he tells Rose, "this is more than just a cycle....This company and this country is going to come out the other side, I think, looking differently."

Posted by Graham Griffith

Misreading Home Values

06-30-2009 8:12 AM with no comments

We humans seem to have a problem understanding value.  Last week, Mark Thoma alerted us to a fascinating Scientific American article on how we may want to blame our ventromedial prefrontal cortex (VMPFC) for our inability to battle the "money illusion" that makes us think something is worth more than it really is.  And today, economists Hugo Benítez-Silva, Selcuk Eren, Frank Heiland , and Sergi Jiménez-Martín write at Vox that we consistently overestimate the value of our houses by 5 to 10%.  And, they write, "Overly optimistic expectations about the evolution of house prices may have planted the seed of the current mortgage crisis in the US."

Homeowners, it seems, routinely overestimate the capital gains they expect from sale of their homes, so they report a skewed estimated value.  But, the authors found, the problem is much greater if the homeowners purchased their homes during strong economic periods.  There appears to be a strong inverse relationship between interest rates and the value estimation:

Given the characteristics of our data on house purchases and house sales, we observe properties purchased as early as 1955 until 2000. This information enables us to explore whether the timing of the purchase and the market conditions at that time could have lasting effects on the accuracy of the individual in reporting the value of their homes. We document a strong correlation between the evolution of our accuracy estimates over time and the business cycle. In periods of high interest rates and declining incomes, the buyers are likely to have lower appreciation expectations due to the declining housing prices (see Figures 1 and 2 below), and end up assessing, on average, more accurately the value of their homes, and even in some cases underestimating it.

Figure 1. Interest rates and home sales in the US, 1960-2007

Figure 2. Home sales and home prices in the US, 1968-2007

Read How well do individuals predict the selling price of their homes? here.  

Posted by Graham Griffith

Revamping the Repo Market

06-29-2009 2:39 PM with no comments

The repo--or repurchase--market is about to undergo some significant changes.  As the Financial Times reported last week, there is concern that the structure of the repo market sped up the collapse of markets after Lehman Brothers failed last year, and that the Fed needs to "cut the risk of relying on this type of short-term funding, which can evaporate quickly in a crisis and potentially roil a clearing bank."  Marketplace's Paddy Hirsch explains why the government is interested in shoring up the repo market in this Whiteboard video:

Posted by Graham Griffith

Top 1000 Banks: Western Banks Dominate, and Bring Down the List with Massive Profit Declines

06-29-2009 7:23 AM with no comments

The Banker has released its list of the Top 1000 Banks around the world.  The top banks are all familiar names: JP Morgan, Bank of America, Citigroup, Royal Bank of Scotland, and HSBC make up the top five.  Of course, any cursory reading of the front page these last 10 months would help one realize these banks have had a tough stretch.  And indeed the The Banker's report reinforces that notion--this is the first time in four decades that the top 25 banks on the list have registered a loss.  While the Top 1000 as a group brought in $780 billion in profits for last year's report, they made a combined $115 billion in this year's report.  That's a drop of over 85%.  

The losses were built up by banks in the West, while banks in Asia primarily propped up the Top 1000's profits.  The Banker's Geraldine Lamp writes:

US banks made an aggregate loss of $91bn, the EU 27 an aggregate loss of $16.1bn, and the UK’s banks lost, on aggregate, $51.2bn. In terms of return on capital (ROC), the disparate fortunes of the world’s banks is equally as startling. On aggregate, China’s banks in the Top 1000 chalked up an ROC of 24.38%. This compares with an aggregate ROC of -15.32% for UK banks and -10.32% for US banks. Japan’s banks in the Top 1000 achieved an ROC of 4.43% and Brazil’s 15.98%.

The inexorable rise of Asia, excluding Japan, is also played out in the composition of the Top 1000. The number of banks in the rankings from Asia has risen from 174 two years ago to 193 this year, as the number of banks from the US has dropped from 185 to 159, and from the EU 27 from 279 to 258.

But Lampe adds that this does not mean that the top banks--Western banks--are ready to hand over the reins to banks from emerging economies yet:

With next year’s profits largely determined by the ability of Western economies to emerge from recession and generate growth, it may seem axiomatic that China’s banks – and those from other emerging economies that are weathering the downturn a little more smoothly – will climb even higher up the Top 1000. This cannot be taken for granted. For one thing, the very creativity that got the West’s banks into this mess will be the thing that gets them out of it. Over and over again, Western banks have displayed a remarkable ability to reinvent themselves to keep pace with global change.

You can read the report here.  And watch Lampe discuss the Top 1000 with Brian Caplen, editor of The Banker, below:

Posted by Graham Griffith

David Wessel: Recovery Depends on Housing Market Rebound

06-26-2009 9:25 AM with no comments

David Wessel, economics editor of the Wall Street Journal, says you can forget recovery until the housing market stabilizes:

The foreclosure rate is a driving factor for the weak housing market.  And while this was once a problem for subprime borrowers, more and more "prime borrowers" are losing their homes.  Marketplace's Mitchell Hartman reports:

Posted by Graham Griffith

Behavioral Finance and the Global Economic Crisis

06-26-2009 7:35 AM with no comments

Nicholas Barberis teaches at Yale's School of Management and studies the psychology behind pricing--or why we place the value we do on financial assets.  So when he looks at the root causes of the global financial crisis, he is drawn to the behavior of consumers, investors, and bankers, and the cognitive psychology behind that behavior.  Barberis does not fall into the camp of economists who believe that these are always "rational agents."  In this talk before Yale alumni, he explains behavioral finance, and how irrational decision-making factored in to the economic meltdown (skip to 4 minutes in for the start of the talk):

Posted by Graham Griffith

OECD Report: Beginning of Long, Slow Recovery in Sight

06-25-2009 3:22 PM with no comments

The Organisation for Economic Cooperation and Development's latest Economic Outlook features something the organization's projections haven't shown in two years: projected growth revised upward.  The US is among those OECD nations to have better news in the June Outlook.  In March, the OECD report projected a 4% decline for the US economy this year.  The June Outlook now projects a 2.8% decline.  Large emerging economies all get strong projections:

A recovery already appears to be taking hold in China, helped by major stimulus measures. Chinese GDP growth is forecast to be 7.7% in 2009 and 9.3% in 2010, an upward revision from the OECD’s March forecasts of 6.3% this year and 8.5% next year. In Brazil, economic activity is forecast to fall by 0.8% in 2009 and rebound to 4.0% growth in 2010 (March forecast -0.3% and +3.8%); in Russia, economic activity is forecast to drop by 6.8% in 2009 and climb by 3.7% in 2010 (March forecast -5.6% and +0.7%); and in India, growth is predicted to slow to 5.9% in 2009 before accelerating to 7.2% in 2010 (March forecast 4.3% and 5.8%). 

This interactive map shows the OECD Economic Outlook's GDP growth projections for 2009 and 2010:

And here's Jorgen Elmeskov, acting chief economist of the OECD, explaining the report:

More information on the Economic Outlook is available here.  

Posted by Graham Griffith

Michael Beer and 'Equality of Sacrifice'

06-25-2009 9:38 AM with no comments

Most companies have had to make some tough decisions during the global economic crisis, and few are tougher than those involving personnel.  Michael Beer, chairman of the consulting firm TruePoint, says successful companies take a dual-approach to these decisions by thinking about both the needs of workers and the needs of the company--and that these needs are not mutually exclusive.  He calls companies that take this approach "high commitment, high performance organizations."  These companies are, for example, more likely to make across the board pay cuts and preserve jobs rather than "slicing and dicing."  In this video, Beers describes a policy he calls "equality of sacrifice," and says it is good business in tough times:

Posted by Graham Griffith

US Recession and Recovery's Rapid Pace

06-25-2009 9:31 AM with no comments

Slate's Daniel Gross reports on a talk by deputy governor of the Bank of Japan Kiyohiko Nishimura  titled "The Past Does Not Repeat Itself, but It Rhymes."  As Gross writes, a Japanes central banker...

...is well-situated to comment on the current global crisis, given Japan's own sad history of dealing with the overhang of a credit/real estate bubble—or, more accurately, of not dealing with it. The government and private-sector's uncertain policies condemned Japan to a traumatic lost decade of slow growth.

In his talk, Nishimura points to a remarkable similarity between Japan's economic fall and recovery during the 1990s and the current crisis in the US.  But while the patterns look the same, the pace is completely different.  For the last year, the rate in the US has been about 7 times faster than it was in Japan.  Gross:

According to Nishimura's schema, in less than two and a half years, the United States has experienced as much trauma and recovery as Japan did in about 12 years. All of which means that if the dog-years analogy continues, things could start looking up by early next year. But we shouldn't get too far ahead ourselves. There are other lessons to be learned from Japan's experience of starts and stops. "We should be careful not to be very optimistic," Nishimura concluded. "That's my advice to myself."

Read the A Recession in Dog Years here.  

Posted by Graham Griffith

Vivek Wadhwa: 'Less is More'

06-24-2009 6:51 AM with no comments

Add Vivek Wadhwa to the list of successful entrepreneurs who think there are benefits to starting a company during a recession. Writing in BusinessWeek, Wadhwa, who founded two technology companies, pushes the "less is more" theme hard.  Companies that have to make due with smaller budgets are much more likely to build strong sustainable business models, Wadhwa says.  Equity money, on the other hand, breeds bad habits and comes with a lot of baggage:

First, a CEO will usually feel pressure to bring in a "grown-up" management team. But seasoned managers want big salaries and large chunks of equity. VCs usually expect a portfolio company to use a preferred headhunter to find the rock star VP of sales. Naturally, the headhunter also wants an equity stake, on top of a finder's fee in the neighborhood of six figures. When the rock star manager arrives, he or she expects rock star perks—an assistant, first-class travel, etc. Now imagine these distractions aren't limited to one new hire but half a dozen or more. In my own experience, bringing in a new team meant remaining members of the original team stopped worrying about keeping costs down and didn't care as much if a sales cycle stretched out longer. And the new hires were eager to embrace this unhealthy attitude. It's an attitude that can quickly cripple and kill any new venture.

Second, bringing in outside money usually creates expectations of very rapid growth. VCs want a home run, not a single or a double. And they want the home run within five years or less. But founders, not outside investors, should determine the proper pace of growth for a company. And a founder who is about to lose his or her life savings is far more likely to drive a company towards profitability. A founder in this position turns every person in the company into a salesperson—and that's the best model for a scrappy startup. In the end, creating a culture that emphasizes long-term profitability over rapid growth is critical for success.

Furthermore, in an economic downturn like the current one, increasing sales quickly is far harder since consumers and businesses are spending less. So a focused, eager team is essential.

Read Why Less is More for Startups here.

Posted by Graham Griffith

Small Business Trends Book Review: 'Escape from Cubicle Nation'

06-24-2009 6:32 AM with no comments

Anita Campbell of Small Business Trends has a book tip for budding entrepreneurs who need a kick out the door cubicle.  Pamela Slim's Escape from Cubicle Nation is based on Slim's experience as a corporate trainer, and gives workers the tools for making the leap and starting their own business.  Campbell says it provides the "mental and emotional fortitude and clarity needed to make the jump to entrepreneurship."

One of the wonderful things about this book is its target market: it is crystal clear.  It’s for those who have spent their careers in the employ of some other business, but who have secretly harbored a wish to go out on their own.  If you are currently employed in a corporation somewhere, silently wishing as you sat in endless meetings that you could be your own boss but are not sure how or where to get started, then get this book.  You will devour every page of it — and come back begging for more.

I would even go so far as to say that if you’ve recently left the corporate world to start a business (say within the last couple of years) this book will be helpful because it will reinforce your commitment and re-energize you.

It may also prove a valuable teaching aid, in that it hits key steps in potential entrepreneurs' decisions to start their own businesses.  Read the full review here.

Posted by Graham Griffith

Ad Industry's Bleak Outlook

06-23-2009 8:09 AM with no comments

The top US advertisers cut their ad spending last year for only the fourth time since 1956.  Ad Age's Data Center Analysis shows that the top 100 advertisers, as a group, spent 2.7% less on ads than the previous year.  This year, not surprisingly, looks worse:

The overall picture for this year is shaping up to be more grim: Measured media spending for the top 100 advertisers tumbled 8.1% in the first quarter, according to TNS.

Moreover, Publicis Groupe's ZenithOptimedia forecasts an 8.7% decline in U.S. media spending in 2009 and 1.7% drop next year, with a tepid recovery -- 1.1% growth -- in 2011. It predicts U.S. spending declines of 5.1% in 2009 and 1.4% in 2010 and then growth of 2.4% in 2011 when it combines media spending and unmeasured disciplines.

Last year's ad-spending drop may seem relatively mild. But full-year figures smooth out the stunning declines that came after financial markets imploded last fall.

Brad Johnson, Ad Age's director of data analytics explains the report here:

You can read the full Ad Age report here.

Posted by Graham Griffith

Applying the VC Model to Medical Research

06-23-2009 7:49 AM with no comments

The non-profit Cure Alzheimer's Fund is applying some financially aggressive tactics to putting funds toward research.  For one, it is shunning building an endowment during the recession in favor of more quickly applying finances toward the work of researchers.  The organization also applies some strategic thinking borrowed from the venture capital field in its search for a cure. And the man behind this approach is Chairman of  Greylock Partners Henry McCance, one of the co-founders of Cure Alzheimer's Fund,

Anthony Tjan, founder and CEO of the VC firm Cue Ball, interviewed McCance for Harvard Business Review, and asked him to explain how VC principles manifest themselves in the organization's approach:

The most important way it did was in our mission: we are daring to be great. VCs don't seek 5% improvements; they try to invest in things that will be transformational, like Google, Cisco, Red Hat, and others. We wanted to apply the same upside-seeking strategy to Alzheimer's research. We looked at the way research was traditionally done and said we needed a much more entrepreneurial and VC mindset towards funding projects that could move us more rapidly to a cure. When we hosted a dinner for some leading neuroscientists, we learned that they spend a disproportionate amount of time, 30 to 35%, filling out bureaucratic forms to receive research grants from the NIH or other well-meaning organizations. The worst part is that the grant making peer review process is so risk adverse resulting in incremental progress. That kind of funding is the equivalent of a one-yard plunge by a full back from the New England Patriots, a far cry from the breakthroughs we wanted to fund. The scientists told me that they don't have any funding available for the twenty and thirty-yard pass kind of research. This was like the early days of VC when some very talented entrepreneurs did not have good funding sources for big ideas. After that, I was convinced that there was a role for Cure Alzheimer's Fund.

Read the full interview, and watch a video of McCance and Tjan's discussion here.

Posted by Graham Griffith

Blinder, Inflation/Deflation Follow-up

06-23-2009 7:40 AM with no comments

After his op-ed on inflation concerns (see post here)--or lack thereof--Alan Blinder spoke about inflation and deflation to Bloomberg.  Take a look:

Posted by Graham Griffith

Online Quiz to Test Small Business Strength

06-22-2009 1:14 PM with no comments

Business professors Jeff Cornwall of Belmont University, and George Solomon, of George Washington University, have created a new interactive quiz to, as Cornwall puts it, "help entrepreneurs assess their susceptibility to the recession."  The Small Business Threat Index is up at Entrepreneur.com.  Click here to take the quiz.

Posted by Graham Griffith

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