December 2009 - Global Economic Watch

The Three Horizons of Growth, from McKinsey Quarterly

12-31-2009 1:03 PM with no comments

As companies age and become more successful, they grow.  As they grow, company leaders have more to lose, so they may be more cautious.  And, Steve Coley, a director emeritus for McKinsey & Company and co-author of The Alchemy of Growth, says that usually leads to declining growth "as innovation gives way to inertia:"  

In order to achieve consistent levels of growth throughout their corporate lifetimes, companies must attend to existing businesses while still considering areas they can grow in the future. The three horizons framework—featured in The Alchemy of Growth,—provides a structure for companies to assess potential opportunities for growth without neglecting performance in the present.

Horizon one represents those core businesses most readily identified with the company name and those that provide the greatest profits and cash flow. Here the focus is on improving performance to maximize the remaining value. Horizon two encompasses emerging opportunities, including rising entrepreneurial ventures likely to generate substantial profits in the future but that could require considerable investment. Horizon three contains ideas for profitable growth down the road—for instance, small ventures such as research projects, pilot programs, or minority stakes in new businesses.

Coley explains the three horizons of growth further in an interactive piece over at McKinsey Quarterly.  Click here to watch and listen.

Posted by Graham Griffith

The Best of The Best of Business Books, 2009

12-31-2009 12:07 PM with no comments

Of all the lists of "Best Business Books of 2009," our favorite is that of Marketplace host Kai Ryssdal.  And we have a few reasons.  First, it includes some of the top books that addressed the changing nature of the markets and the financial system--namely Andrew Ross Sorkin's Too Big to Fail, and Ken Rogoff's This Time is Different.  Second, it includes books from some of the top online econ and finance writers, like Barry Ritholtz of The Big Picture, and Justin Fox, who blogs at The Curious Capitalist.  Third, it has some refreshing surprises, like Chemical Cowboys--a look at the fall of the ecstasy empire by Lisa Sweetingham.  But the main reason this is the Best of the Best of Business Books for 2009?  It is a list of books AND a collection of interviews with the authors of those books.  Take a look and a listen by clicking here.  

Posted by Graham Griffith

Bill George Takes American Business Leaders to Task for Putting Themselves Before Their Companies

12-31-2009 9:12 AM with no comments

Bill George says American business needs leaders who "will always put their institution ahead of their self-interests."  George, former CEO of Medtronic and author of 7 Lessons for Leading in Crisis, teaches management at Harvard Business School.  And he finds plenty of future leaders in his classroom, so when he points to a crisis in leadership as one of the causes of the financial crisis, he does not mean to suggest that we have a scarcity of leaders.  Rather, there are, in his view, too many leaders with skewed priorities:

Watch the full interview with Bill George at BigThink, here.  

Posted by Graham Griffith

Capital Economics Economist Expecting Better Things for Europe in New Year

12-30-2009 9:33 AM with no comments

The recovery has been slow moving in Europe, (and some wonder whether it is coming any time soon in Britain, which is now in the longest recession in the nation's history).  But Jonathan Loyne, Chief European Economist for Capital Economics, is expecting a relatively good year for the Euro Zone in 2010.  From the Wall Street Journal:

Posted by Graham Griffith

Surprise: Global Economic Crisis is the Story of 2009

12-30-2009 9:23 AM with no comments

In case there is any doubt about what the biggest news story of the year was, here's a graphic visualization of the amount of coverage devoted to the topics that most captured our attention.  The graphic is from Good.is/Transparency, using data from Journalism.org:

Click here to use an interactive version of the visualization. 

(Hat tip Barry Ritholtz)

Posted by Graham Griffith

Simplify: Ron Ashkenas on Taking Complexity Out of Your Workplace

12-29-2009 11:54 AM with no comments

Ron Ashkenas, author of Simply Effective: How to Cut Through Complexity in Your Organization and Get Things Done, says no CEO sets out to make his or her company as complicated as possible.  And yet, as businesses grow, they tend to become more complex.  And taking the time to readjust and cut out inefficient institutional complexities is essential to continued growth.  Ashkenas discusses some of the ways managers can create simpler workplaces in this interview with Harvard Business Publishing's Sarah Green:

Posted by Graham Griffith

Mankiw: Massive Monetary Base and Inflation Fears

12-29-2009 9:38 AM with no comments

Greg Mankiw challenges the notion put forward in this Wall Street Journal article that a rapidly expanding--or "exploding"--monetary base is a sign that inflation is around the corner. While this graph seems to spell out inflation:

Mankiw writes at his blog that much of the monetary base is being held as "excess reserves," and The Fed is paying interest on these reserves.  This in turn gives banks incentive to hold the reserves, as long as the interest rate is high enough:

Here is one way to think about it.  The standard way of reducing the monetary base is open market operations.  The Fed sells Treasury bills, say, and drains reserves from the banking system, reducing the monetary base.  But consider what this means in the monetary current regime.  An open market operation merely removes interest-paying reserves from a bank's balance sheet and replaces them with interest-paying T-bills.  What difference does it make?  None at all.

Both reserves and T-bills are interest-paying obligations of the Federal government (including the Federal Reserve).  They are essentially perfect substitutes.  The monetary base, however, includes one of them but not the other, largely for historical reasons.

The bottom line is that when reserves pay interest, the monetary base is a pretty uninteresting economic statistic.

Read The Monetary Base is Exploding.  So What? here.

Posted by Graham Griffith

John Cassidy on the Efficient Market Hypothesis

12-23-2009 9:49 AM with no comments

The New Yorker's John Cassidy's latest book, How Markets Fail: The Logic of Economic Calamity, covers free market thinking from Adam Smith to the Global Economic Crisis.  And in putting the events of the last two years into this deep historical context, Cassidy has grown skeptical about the efficient market hypothesis--the iidea that the efficiency of markets means that the "markets never depart from fundamentals."   Cassidy spoke about the book at the Carnegie Council earlier this month, and he told the audience, in short, that speculative bubbles like the housing bubble discredit the notion that the "market price is always right":

You can watch the full event, and read a transcript, here.

Posted by Graham Griffith

Homeowners Walking Away: Strategic Defaults

12-23-2009 9:01 AM with no comments

2009 is the year of the strategic default.  The Wall Street Journal has several articles this month on homeowners walking away from hefty mortgages even though they can afford to pay.  (This article from James Hagerty and Nick Timiraos is a good place to start). And the Journal's online map of strategic defaults from 2004-2008 is a good tool for seeing just where people are using this "financial strategy": (click here to us the interactive version):

Earlier this month, The Atlantic's Megan McArdle wrote about her disdain for people who can pay but don't:

I am afraid that I am one of those people who have no patience for people who refuse to pay their debts.  People who can't pay their debts?  All the sympathy in the world, even if they accumulated those debts through a series of stupid decisions.  Easy bankruptcy is a good thing precisely because it helps us sort out those sorts of situations quickly, allowing the unhappy bankruptee to get a fresh start.  Yes, some of them go on to make even more stupid decisions.  But most people who declare bankruptcy do so only once, which means they don't make that sort of mistake--or at least, that magnitude of mistake--again.

It is hard to argue on moral grounds that people should live up to their promises.  But Daniel Gross cautions in his MoneyBox column at Slate that homeowners who walk away from their fiscal responsibility are just following the lead of America's financial leaders:

Strategic defaults are the American way, and I'm not talking about strapped middle-class borrowers who prefer spending money on vacations to staying current on their payments. Deep-pocketed companies, billionaires, and institutions that can afford to stay current on payments strategically default all the time.
Morgan Stanley, for example, is a gigantic corporation. As of the second quarter, it boasted total capital of $213.2 billion. It certainly has the ability to make good on obligations incurred by its many operating units. But earlier this month Morgan Stanley said it would turn over five San Francisco office buildings to lenders rather than pay the debt on them. Why? Morgan Stanley foolishly paid top dollar for the buildings in 2007, when prices were really high. The values have plummeted, and tenants are hard to come by. "This isn't a default or foreclosure situation," spokeswoman Alyson Barnes told Bloomberg News. "We are going to give them the properties to get out of the loan obligation." Smells like a strategic default to me.

This makes for an interesting debate.  Read McArdle's post here.  And Gross's post here.

Posted by Graham Griffith

Twitter Has Profitable 2009, But Where Will it Spend in 2010?

12-22-2009 3:38 PM with no comments

Count Om Malik among those who were surprised that Twitter had a profitable year in 2009.  Not that he isn't optimistic about the social media wunderkind's current and future value--in fact, he thinks Twitter isn't charging Google and Microsoft (the companies that accounted for Twitter's revenue this year).  It's just that he didn't expect the company to be in the black by now.  But he does expect Twitter to start spending in three key areas next year:

*New management team including several new “C”-suite executives.
*Infrastructure to scale their network to accommodate future growth.
*Hiring more engineers and other key people as it tries to build out the service.
Which means the so-called profits are going to evaporate and the company will have to dip into its $155 million (VC) cash hoard. Even the soon-to-come commercial accounts might not be enough to make up for all that spending.

Read Twitter May Be Profitable — No, Seriously! here.

Posted by Graham Griffith

Reading the Future of Hiring in Temp Worker Data

12-22-2009 2:37 PM with no comments

In the surprisingly positive (or at least less negative than expected) unemployment numbers last month, the category that showed the highest growth was "temporary workers."  As Louis Uchitelle reports in the New York Times, 52,000 temporary workers were hired last month.  The hiring of temp workers has, in the past two recessions, signaled a turnaround in unemployment and the economy.  Uchitelle:

As demand rose after the last two recessions, in the early 1990s and in 2001, employers moved more quickly. They added temps for only two or three months before stepping up the hiring of permanent workers. Now temp hiring has risen for four months, the economy is growing, and still corporate managers have been reluctant to shift to hiring permanent workers, relying instead on temps and other casual labor easily shed if demand slows again.

So is the fourth quarter surge in temp hiring a sign of a faster, and not-so-jobless recovery?  Bill McBride of Calculated Risk isn't so sure, and he points us to an article by the San Francisco Chronicle's Tom Abate, in which one Bureau of Labor Statistics economist suggests that we probably have to wait several months to start to see real job growth:

BLS economist Amar Mann said an analysis by the San Francisco office suggests that employers are getting more sophisticated about using temp hiring as a clutch to downshift into recessions and upshift into recoveries.

Mann said temp jobs started down a month after overall employment dropped during the 1990-91 recession. But by the 2001 downturn, employers started cutting temps about five months before they started issuing pink slips to the general workforce.

In the current recession, he said, companies began shedding temps 12 months before they started cutting permanent payrolls.

A similar pattern prevailed in the two prior recoveries, Mann said. Temp jobs came back at the same time as overall employment after the 1991 recovery. Temporary employment rebounded five months before the general job market turned positive following the 2001 dip.

If that pattern holds, it could be next summer before general payrolls start to grow.

Read In economic woes, firms count on temp workers here.

Posted by Graham Griffith

Marketplace Whiteboard: Commercial Real Estate

12-22-2009 10:19 AM with no comments

One of the biggest hurdles on the path to economic recovery is the commercial real estate sector.  Some economists believe the Fed's decision to keep target interest rates at their near-zero level had a lot to do with fears that this sector is not out of the woods yet.  Marketplace's Paddy Hirsch explains why commercial real estate is a key place for the Fed to focus right now:

Watch out below! from Marketplace on Vimeo.

Posted by Graham Griffith

Average Annual Compensation, by US County

12-22-2009 9:56 AM with no comments

The Bureau of Economic Analysis has released a new report on compensation by county.  The figures are for 2008, and they show that American jobs paid, on average, $56,116 that year.  That was up 2.6%.  80% of counties across the US saw average compensation per job rise.  Total compensation was up 2.3%, and was outpaced by inflation, which rose 3.3%. 

The real value in this report is the county-by-county breakdown.

Small counties--those with less than $1 billion in total compensation--saw a 3.1% rise in total compensation.  Average annual compensation per job rose 3.7%.  Of the 2,265 counties designated "small" by the BEA, Eureka County, NV has the highest average annual compensation at $91,585, and Petroleum County, MT has the lowest at $27, 285.  72.8% of all US counties fit the "small county" designation, and together they represent 8.3 % of total national compensation.

Large counties, on the other hand, represent 5.4% of the total counties in the US, and 65.9% of total compensation.  Among these counties, New York County (Manhattan) had the highest average annual compensation (and highest in the nation)--$117,509.  El Paso County, TX, had an average annual compensation of $42,730. 

Read more from the Bureau of Economic Analysis here.

Posted by Graham Griffith

Boomers and Social Media to Drive Top Franchises in 2010

12-21-2009 10:46 AM with no comments

Over at Small Business Trends, Joel Libava of The Franchise King Blog shares his thoughts on the franchising opportunities to watch in 2010.  The big opportunities are tied to demographics.  And Libava expects growth in businesses that cater to Boomers' retirement needs:

Millions of baby boomers are retiring every year, and medical advances will allow these folks to live longer, more productive lives. The franchise industry has been starting to capitalize on this trend, with franchise concepts being launched to allow these retired folks to enjoy themselves, longer. 

That means franchises like cruise lines, and health clubs that cater to the Boomers.

Libava is also bullish on the health care sector, the "Green" sector, home-based franchises, supplemental education franchises, and some food franchises like Five Guys and several Mexican food franchises.  And across all these sectors, he's looking at businesses that have recognized the power of social media to connect effectively with customers.  Read The Top Franchise Trends for 2010 here.

Posted by Graham Griffith

NASA's James Hansen Aruges That Steadily Increasing Carbon Tax is Good for Business

12-21-2009 9:23 AM with no comments

Today people around the world are trying to figure out whether the international agreement reached at the Copenhagen Summit on climate change marks a major step forward in global negotiations, a compromise that fails to address the real challenges, or both.  James Hansen, director of NASA's Goddard Institute for Space Studies and climatologist at Columbia University, has come to the conclusion that businesses need to be the driving force behind and push to fight climate change:

Watch the full interview with Hansen here.

Posted by Graham Griffith