July 2010 - Global Economic Watch

Understanding the Cost and the Value of Being First

07-30-2010 9:47 AM with no comments

Seth Godin says "the cost of being first is higher than it's ever been."  But is the payoff worth the rising cost?  Godin suggests it is not:

Have you noticed how often stock analysts quoted in the news are wrong? Wrong about new products, wrong about management decisions, wrong about the future of a company? In fact, they're almost always first and almost always wrong.

Rule of thumb: being first helps in the short run. Being a little more right than the masses ultimately pays off in the long run. Being last is the worst of all three.

A few people care a lot about scoops. Most of us, though, care about alert people making insightful decisions. Decide who you're trying to please, then ship.

Read the full post at Seth's Blog, here.  

Posted by Graham Griffith

Marketplace Whiteboard: Shadow Banking's Lasting Dangers

07-30-2010 9:31 AM with no comments

Paddy Hirsch says shadow banking was, for the most part, left alone by Congress and the Obama Administration in regulation changes this summer.  And that may be a problem.  As Hirsch reminds us, shadow banking lends more money to more Americans than any other financial sector.  He explains the potential danger in this Marketplace Whiteboard video:

Shadow banking: still big, still dangerous from Marketplace on Vimeo.

Posted by Graham Griffith

GDP Grew During 2nd Quarter, But Not By Much

07-30-2010 9:15 AM with no comments

The economy grew at an annual rate of 2.4% in the second quarter, according to data released by the Commerce Department this morning.  That is a slowdown from the 3.7% growth rate during the first quarter (this is a revised rate, as the Commerce Department had previously put the growth of GDP for the first quarter at 2.7%).  While the growth is smaller than many expected, it does represent the fourth straight quarter that real GDP rose.  Here's a look at the trend, from the Bureau of Economic Analysis:

And some explanation as to what drove the growth, and what held further growth back:

The increase in real GDP in the second quarter primarily reflected positive contributions from nonresidential fixed investment, exports, personal consumption expenditures, private inventory investment, federal government spending, and residential fixed investment.  Imports, which are a subtraction in the calculation of GDP, increased. 

The deceleration in real GDP in the second quarter primarily reflected an acceleration in imports and a deceleration in private inventory investment that were partly offset by an upturn in residential fixed investment, an acceleration in nonresidential fixed investment, an upturn in state and local government spending, and an acceleration in federal government spending. 

Read the release here.  

Posted by Graham Griffith

WSJ's Brett Arends on Market Myths 'That Just Won't Die'

07-28-2010 4:42 AM with no comments

As Personal Finance Columnist for the Wall Street Journal, Brett Arends tries to look out for the individual investor.  And in this short video, he breaks down four "calming myths" about which investors should be very skeptical:

Four myths not enough for you?  Arends writes about an additional six in this column.

Posted by Graham Griffith

The Real Option to Hold Cash

07-28-2010 4:30 AM with no comments

Nick Rowe, Professor of Economics at Carleton University, takes real option theory to task at the Worthwhile Canadian Initiative blog. Rowe says that real option theory includes the option of doing nothing as one of its "neatest options." But this option overlooks the idea that doing nothing is indeed doing something--especially when cash is involved.

You can't just do nothing with your income; you have to spend it on something. If all things you could spend it on were irreversible, then you can't talk about the option value of doing nothing, or postponing a decision. You have to decide now. You could insulate your house with R20, or buy a new car, or buy a holiday, but none of those expenditures is fully reversible. You can't return the holiday after you have enjoyed it; you can't re-sell the new car and get anything like what you paid for it.

There is one thing you can spend your income on that is very reversible: cash. In fact, if we spend our income on cash, we don't even think of that as spending it at all. We think of that as not spending it. We think of holding cash as doing nothing. In fact, since we live in a monetary exchange economy, our income comes to us as cash anyway. So it's not like we make a decision to invest in cash today, and then reverse that decision next year. We have the cash already, and can decide to spend it now, or decide later to spend it later. Holding cash keeps our options open. Cash is the real real option -- to do anything.

Talking about the option value of doing nothing only makes sense in a cash economy. If we invest in insulation we cannot reverse that decision next year. If we hold cash, we can reverse that decision next year. Holding cash is to hold the option. Holding insulation is to exercise that option, so you no longer hold the option.

Read Cash as the real real option -- to do anything here.

Posted by Graham Griffith

Case-Shiller: Housing Prices Up in Most US Metro Areas, But Long Term Trend Shows 'Sideways' Movement

07-28-2010 3:53 AM with no comments

New data released by the Standard and Poor's/Case Shiller Home Price Indices shows that housing prices rose in May.  The 10-City and 20-City Composites rose 5.4% and 4.6% respectively over their levels in May 2009.  Overall, average housing prices are now at the level they were in October 2003, as shown by this chart from S&P:

S&P's Chairman of the Index Committee cautions us not to put too much behind this upturn, as it does not reflect a major rebound of the housing market, but rather a "sideways" movement of prices.  From the report:

“While May’s report on its own looks somewhat positive, a broader look at home price levels over the past year still do not indicate that the housing market is in any form of sustained recovery,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “Since reaching its recent trough in  April 2009, the housing market has really only stabilized at this lower level. The two Composites have improved between 5 and 6% since then, but this is no better than the improvement they had registered as of October 2009. The last seven months have basically been flat.” 

Read the report from S&P here.  

Posted by Graham Griffith

Razorfish's Bob Lord on BP's Only Option

07-27-2010 5:53 AM with no comments

In a long anticipated move, Tony Hayward resigned as CEO of BP yesterday.  Most analysts viewed the move as essential for the company to have any hope of improving its standing with investors as well as the general public.  Bob Lord, CEO of Razorfish, says there is really one way for BP to restore its brand, and that is to stop the oil spill in the Gulf of Mexico.  And, he says, they should be clear with the public about what they are doing.  

Watch the full Big Think interview with Lord here.  

Posted by Graham Griffith

A 'Paper About Nothing': Using Seinfeld to Teach About Investment Decisions

07-27-2010 5:37 AM with no comments

We're not sure how much Seinfeld resonates with today's students--it has been off the air for 12 years now (though in syndication).  And we're pretty sure almost none of them were paying attention when the Today Sponge was taken off the market in the early 90s.  But we still love the idea that Princeton University economics professor Avinash Dixit is using the popular Seinfeld episode in which Elaine introduced the phrase "sponge worthy" to America to teach students about investment decisions.  Mary Pilon describes Dixit's paper at Real Time Economics:

The paper uses option pricing theory to deconstruct Elaine’s decisions in the “Seinfeld” episode number 119 “ The Sponge.” In it, Elaine’s preferred contraceptive sponge goes off the market, sparking an ultimately fruitless hunt for a greater supply. Her limited supply of contraceptive sponges forces her to reassess their usage, and decide whether a potential partner is “sponge-worthy” or not.

“You are deciding whether or not to make an investment decision,” Prof. Dixit says. “The mathematical techniques are exactly the same as financial options.”

Read The 'Economics' of Seinfeld here.  

Posted by Graham Griffith

Is 9-10% Unemployment the New Norm?

07-25-2010 5:52 PM with no comments

Peter Cappelli, professor of Management at The Wharton School, says Americans have a tendency to accept unemployment rates as "normal" when they stay at the same level for a while.  In the 90s, for example, 4% became the accepted norm.  The "new normal" was 8% in 1981.  And now, we may be resigning ourselves to the idea that 9-10% is normal.  What is different now, Cappelli says, is there are more people who believe that "there is nothing that can be done" about high unemployment.  Here is Cappelli speaking about the current debate over what to do about unemployment today in a Knowledge@Wharton interview:

Posted by Graham Griffith

Business Lessons from the Dead...the Grateful Dead

07-25-2010 2:22 PM with no comments

The Grateful Dead as role models for businesses?  Seems a bit far-fetched.  Until one considers their lasting power and the loyalty they built up among their fans.  In a new book, David Meerman Scott and Brian Halligan, stress that the Dead understood that their brand did not depend on heavy-handed control, but rather a willingness to evolve and innovate.  They write:

The Grateful Dead teaches us to show our brand's playfulness and to trust that our customers will recognize our brand even if it looks a little "different."

When designing your websites, e-books, whitepapers, and social media profiles, give your design professionals some leeway. Yes, you want them to follow your corporate design standards, but let them deviate from those standards as appropriate. Professional designers know how to exercise their skill and incorporate fresh ideas without deviating completely from your brand.

By loosening up your brand, you allow your company to show its personality—and, by extension, its ability to roll with the punches.

The book is titled Marketing Lessons from the Grateful Dead: What Every Business Can Learn From the Most Iconic Band in History, and Scott and Halligan have provided MarketingProfs with an excerpt.  Read it here.

Posted by Graham Griffith

A Fresh Approach in Financial Services

07-25-2010 2:12 PM with no comments

Fast Company's Dan Macsai reports on a new financial services outlets in Austin, Texas that is trying to tap into the large number of Americans (25%, according to Macsai) who do not have bank accounts:

The Mango Store, which opened in Austin in April, reimagines the entire banking experience for this market. Rather than treat the unbanked as transient customers, Mango aims to forge transparent, long-term relationships. Clients pay a one-time $10 fee that lets them "cash" as many checks as they want by loading the money onto debit cards (backed by a local bank). More sophisticated services, such as international money transfers and bill payment, cost extra. Even so, Mango's operating costs -- and, by extension, its fees -- are significantly lower than other alt-finance outlets because it uses its own technology (developed by Mpower) and offers a multitude of services (including Web and mobile-phone apps). "It's a smart strategy," says Jennifer Tescher, director of the Center for Financial Services Innovation. "If Mango helps its customers grow financially, it can stick with them as they climb the ladder."

Read the full article here.

Posted by Graham Griffith

Bernanke: ''Economic outlook remains unusually uncertain"

07-22-2010 5:18 AM with no comments

Federal Reserve Chair Ben Bernanke's appearance before Congress yesterday seems to have had an effect on markets in the US and abroad.  With the US economy as it now stands, Bernanke spoke in measured terms about recovery, with jobs and consumer spending as leading reasons for the üncertain"future":

An important drag on household spending is the slow recovery in the labor market and the attendant uncertainty about job prospects. After two years of job losses, private payrolls expanded at an average of about 100,000 per month during the first half of this year, a pace insufficient to reduce the unemployment rate materially. In all likelihood, a significant amount of time will be required to restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009. Moreover, nearly half of the unemployed have been out of work for longer than six months. Long-term unemployment not only imposes exceptional near-term hardships on workers and their families, it also erodes skills and may have long-lasting effects on workers' employment and earnings prospects.

In the business sector, investment in equipment and software appears to have increased rapidly in the first half of the year, in part reflecting capital outlays that had been deferred during the downturn and the need of many businesses to replace aging equipment. In contrast, spending on nonresidential structures--weighed down by high vacancy rates and tight credit--has continued to contract, though some indicators suggest that the rate of decline may be slowing. Both U.S. exports and U.S. imports have been expanding, reflecting growth in the global economy and the recovery of world trade. Stronger exports have in turn helped foster growth in the U.S. manufacturing sector.

Inflation has remained low. The price index for personal consumption expenditures appears to have risen at an annual rate of less than 1 percent in the first half of the year. Although overall inflation has fluctuated, partly reflecting changes in energy prices, by a number of measures underlying inflation has trended down over the past two years. The slack in labor and product markets has damped wage and price pressures, and rapid increases in productivity have further reduced producers' unit labor costs.

 Read the full speech here. 

Posted by Graham Griffith

An Argument for Putting Customers Second

07-21-2010 10:31 AM with no comments

Vineet Nayar, CEO of HCL Technologies, Ltd., believes that businesses must hold customers in high regard.  He just doesn't think they necessarily need to come first anymore.  In a provocative new book, Employees First, Customers Second, Nayer argues that value is created when customers connect with employees.  It is at that "interface,"according to Nayar, where good businesses move forward.  And so a business's growth depends on those employees being the best they can be.  And so the business of management, in Nayar's view, is "to be in the business of encouraging, enthusing and enabling the employees to create the differentiated value."

Nayar spoke about the book recently with Harvard Business Publishing's Sarah Green:

For more of Nayar's thoughts on Employees First, Customers Second, click here.   

Posted by Graham Griffith

One Common Mistake by Young Entrepreneurs

07-21-2010 10:18 AM with no comments

In an interview with Entrepreneur's Scott Gerber, Matt Wilson, co-founder of Under30CEO, spoke candidly about his own mistakes in trying to break out of the 9 to 5 world and start his won company.  And he shared his ideas on what challenges young entrepreneurs, in particular, face in the business world.  And, he says, many fail because they forget one of the most basic  pieces of tunning a business: figuring out where the money is coming from:

One of the biggest mistakes young entrepreneurs make is neglecting their revenue model. Today there are so many businesses that haven't figured out how to monetize themselves yet. To me, the word monetize is redundant in business. If you don't have a business model, you aren't really in business--it's just a hobby. Sure, investors are dropping millions of dollars into companies with hopes of being acquired by Google, but without a solid business model behind it, you are just building "castles in the sky."

Seasoned investors and accomplished entrepreneurs can help mentor young people to overcome this hurdle. Show them your financials and focus on how to generate cash flow. There are thousands of people out there who want to see young people succeed--you just need to ask.

Read the full interview at Gerber's column, here. 

Posted by Graham Griffith

5 Tips for Small Businesses When Growth Means Expansion Overseas

07-19-2010 9:18 AM with no comments

When a successful small business looks for new markets, that can mean looking to reach customers overseas.  Such a move can reap rewards, but it requires some significant shifts in approach.  Verne Harnish, who writes under the "Growth Guy" monniker, is all for taking the leap.  Over at CNNMoney.com and Fortune Small Business, Harnish, CEO of the consulting firm Gazelles Inc., lists 5 strategies for any small business owner looking to go global:

1. Set ambitious goals;

2. Go multilingual;

3. Focus narrow and deep;

4. Source globally;

and 5. Follow the customer.

Click here to read Harnish's description of these strategies.

Posted by Graham Griffith