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Pacific Alliance and Mercosur: Trade Philosophy Setting Up Divide in Latin America

05-24-2013 7:23 AM with no comments

Members of the Pacific Alliance opened their annual summit in Colombia yesterday, amid expectations that the Latin American free-trade bloc will soon be inviting more members.  The continued growth of the alliance, and its outreach to Asia, may be off the radar a bit in the U.S., but it is a key player in the shaping of the global economy. The Economist points out that Latin America is engaged in an interesting tug of war between two different economic groups and their approach to free trade.  The Pacific Alliance is largely made up of the market-led nations along the western edge, while Brazil leads the more regionally focused Mercosur.  Here is how it maps out:

Read A continental divide here.

Posted by Graham Griffith

The Rise of Suburban Poverty

05-23-2013 7:25 AM with no comments

The suburban poor population has been growing at an alarming rate, according to Elizabeth Kneebone and Alan Berube of the Brookings Institution's Metropolitan Policy Program.  While suburban poverty has increased over 60% since 2000, we still have trouble picturing poverty outside of urban or deep rural areas.  Kneebone and Berube have authored a book, Confronting Suburban Poverty in America.  They also have a lot of helpful supplements, community profiles, and stories online, here

This video highlights the central challenge of tackling the rising poverty rate in the suburbs. 

Posted by Graham Griffith

Marking the One-Year Anniversary of the Facebook Flop

05-22-2013 9:56 PM with no comments

Facebook, always a very, very public experience, really went public.  And despite all the hype around Facebook's IPO, the party never really got started.  Some overeager investors learned a lot about "sure thing" investments that day.  But there are a lot of elements of the Facebook public offering that didn't get a lot of attention.  The Atlantic's Khadeeja Safdar gives the "other half of the story.  And it involves some shady banker behavior, an angry investor, and a nice breakdown of some of the key numbers.  Here is a taste:

An American flag hangs in front of the JPMorgan Chase tower in midtown Manhattan. In early May, rivaling its height was another banner with a Facebook IPO logo. Business journalist Heidi Moore shared a photograph of the building's façade with her Twitter followers on May 4. Radio reporter Ben Bergman retweeted it with a comment: "In Facebook We Trust."

By Aug. 18, Facebook lost about $50 billion in value. But many big investors made huge profits betting against the company, and others avoided major losses by backing out of the IPO just in time. During the roadshow, Capital Group, a large mutual fund and one of Morgan Stanley's preferred clients, pulled out of the deal after initially showing interest, and many other funds followed suit, according to a research analyst who was in correspondence with investors. SAC Capital Advisors, Steven Cohen's $14 billion dollar hedge fund and another one of Morgan Stanley's prominent clients, took a sizeable short position in the stock, said a research analyst. Scott Sweet's multi-billion dollar hedge fund client flipped the stock at $42. His subsequent short made his firm its "largest profit of the year," Sweet said. There's "no way" a retail investor could have known about the lowered projections, unless he or she "had a friend at a multi-billion dollar institution," he added.

A few days after Facebook debuted, Massachusetts's regulator William Galvin issued a subpoena to Morgan Stanley as part of an investigation into research analysts communicating Facebook's revenue prospects to certain institutional investors. Seven months later, Galvin's office settled with Morgan Stanley for $5 million after charging its investment banking division with inappropriately influencing research analysts during Facebook's IPO roadshow -- essentially breaching the "Chinese Wall." When asked about the script he wrote for Facebook's vice president of finance, Grimes testified, "I don't remember if she had a script or not."

Read Facebook, One Year Later: What Really Happened in the Biggest IPO Flop Ever here.

Posted by Graham Griffith

Banks and Startups

05-22-2013 7:01 AM with no comments

When John Mullins went to business school, he didn't hear his professors or fellow students talk about entrepreneurship.  And he went to Stanford, in the heard of Silicon Valley.  Now Mullins teaches at the London Business School, and he spends a lot of his time looking into successful entrepreneurship.  In this interview with the Wall Street Journal, Mullins discusses the challenges of getting financing for startups.  He says banks are of little help--at least at the early stages.

Posted by Graham Griffith

Interest Rate Liberalization Key to China Becoming a High-Income Country

05-22-2013 6:46 AM with no comments

For China to become a high-income country, policy makers have to make some significant changes.  Pingfan Hong, Chief of the Global Economic Monitoring Unit of the United Nations Department of Economic and Social Affairs, says those changes must begin with financial reform.  And top on his list is liberalizing interest rates.  From Project Syndicate:

In many ways, China is breaking the mold. Despite severe financial repression, it has experienced extremely high savings and investment, owing mainly to Chinese households’ strong propensity to save and massive government-driven investment, particularly by local governments.

The adverse effects of financial repression in China are reflected primarily in its economic imbalances. Low interest rates on deposits encourage savers, especially households, to invest in fixed assets, rather than keep their money in banks. This leads to overcapacity in some sectors – reflected in China’s growing real-estate bubble, for example – and underinvestment in others.

More important, financial repression is contributing to a widening disparity between state-owned enterprises (SOEs) and small and medium-size enterprises (SMEs), with the former enjoying artificially low interest rates from commercial banks and the latter forced to pay extremely high interest rates in the shadow-banking system (or unable to access external financing at all).

Interest-rate liberalization – together with other financial reforms – would help to improve the efficiency of capital allocation and to optimize the economic structure. It might also be a prerequisite for China to deepen its financial markets, particularly the bond market, laying a solid foundation for floating the renminbi’s exchange rate and opening China’s capital and financial accounts further – a precondition for the renminbi’s eventual adoption as an international reserve currency.

Read China's Interest Rate Challenge here.

Posted by Graham Griffith

Marketplace: Jamie Dimon As His Own 'Yes Man'

05-21-2013 11:08 AM with no comments

JP Morgan shareholders voted today to keep Jamie Dimon as both CEO and Chairman.  It is certainly an efficient reporting structure for Dimon.  But is it a good long term structure for a major company?  Marketplace's David Gura reports:

Posted by Graham Griffith

McKinsey: Three Steps to Successful Product Development for Emerging Markets

05-21-2013 10:54 AM with no comments

Multinational companies need to grow sales in emerging markets.  That may mean tailoring the product development process that matches the market.  In the McKinsey Quarterly, Sauri Gudlavalleti, Shivanshu Gupta, and Ananth Narayanan note that this requires companies to step out of their comfort zone:

Traditional approaches to product development are coming under strain as emerging markets start to dominate the global economy. Companies that learn to shake up their thinking and effectively challenge the assumptions about how they design, develop, and manufacture products are more likely to master the extremes of this new competitive landscape.

The authors outline three key steps in the product development process.  Here they are, illustrated:

Read the article here.

Posted by Graham Griffith

Lagarde: "Stability and Growth for Poverty Reduction"

05-20-2013 8:01 AM with no comments

The focus at last week's Bretton Woods Committee's Annual Meeting was on poverty reduction.  IMF Director Christine Lagarde discussed her organization's role in the effort to fight poverty around the globe, and she outlined three areas key arguments that are central to the IMF efforts:

1) Economic stability is essential for poverty reduction.

2) Growth and equity are mutually reinforcing, and necessary for sustainability.

3) Fiscal policies can improve equity and lower poverty.

Here is Lagarde's speech:

Posted by Graham Griffith

Central Bankers Failing to Hit Inflation Targets

05-20-2013 7:39 AM with no comments

With the CPI release last week showing prices in the U.S. have risen just 1.1 percent over the last year, The Washington Post's Neil Irwin notes that there is an inflation problem in developed economies around the globe.  Inflation, Irwin writes, "is too low."

The below-trend inflation is partly attributable to falling commodities prices, and just as policy shouldn’t overreact when a short-term commodity blip causes inflation, it shouldn’t make the same mistake in reverse. But even excluding food and energy, U.S. CPI was up only 1.7 percent, still below the level of inflation the Federal Reserve is aiming for. And the situation in Europe is particularly worrisome; if the euro zone is going to have any hope of rebalancing its economy without a prolonged depression, it will need higher inflation in core European countries like Germany and France, offset by lower inflation in countries like Greece and Spain. Instead, prices are rising too slowly even in the core, and there is deflation, or falling prices, in Greece.

The biggest conclusion to draw from all of this is that warnings that massive quantitative easing efforts would spark explosive inflation are turning out to be as wrongheaded as can be. In the United States and Japan, central banks now have open-ended policies of printing money to buy assets. But while the money seems to be finding its way into asset markets, such as for stocks and corporate debt, it isn’t being circulated so widely as to drive up prices for consumers.

This is the opposite of what the currency war alarmists have warned about. Instead of creating rounds of vicious inflation while trying to expand the money supply in a race to the bottom, central banks are all trying to get inflation up to their target and coming up short. Deflation is looking like a greater risk that inflation, despite the extensive hand-wringing over the latter in the last several years. It’s a currency war in which almost every country is losing.

Read Surprise! Inflation is too low almost everywhere on earth here.

Posted by Graham Griffith

CPI Drops Again in April

05-17-2013 7:58 AM with no comments

After a bit of a jump earlier this year, the Consumer Price Index for All Urban Consumers dropped for the second month in a row in April.  A drop in the gasoline index was key as CPI decreased 0.4%.  The index is up 1.1% over April 2012.  Fom the Bureau of Labor Statistics release:

As was the case in March, a sharp decrease in the gasoline index was the primary cause of the decline in the seasonally adjusted all items index. The fuel oil index also declined while the electricity and natural gas indexes increased; the net result was a 4.3 percent decrease in the energy index. The food index, unchanged in March, rose 0.2 percent in April.

The index for all items less food and energy increased 0.1 percent in April, the same increase as in March. The indexes for shelter, used cars and trucks, new vehicles, and tobacco all increased in April. These increases were partially offset by declines in the indexes for apparel, airline fares, and recreation.

The all items index increased 1.1 percent over the last 12 months, the smallest 12-month increase since November 2010. The index for all items less food and energy increased 1.7 percent over the span; this was its smallest 12-month increase since June 2011. The food index rose 1.5 percent while the energy index declined 4.3 percent.

Here's a look at the CPI for All Urban Consumers over the last year:

Read the full release here.

Posted by Graham Griffith

Cleveland Fed: The Past, Present, and Future of the Federal Reserve

05-17-2013 7:40 AM with no comments

On the occasion of the Federal Reserve's centennial, the Cleveland Fed turned its latest annual report into a helpful historical summary.  Cleveland Fed President Susan Pianalto writes, "we cannot hope to understand modern-day Federal Reserve policies without this context.  You can read the full report here

There are also several videos that accompany the report.  This one features economists discussing the past, present and future of the Fed:

Posted by Graham Griffith

American Household Debt Drops, But Student Debt Grows

05-16-2013 7:27 AM with no comments

Household debt declined a whopping $110 billion across the U.S. during the first quarter, according to the New York Fed.  That's a 1% drop.  Overall, Americans are getting better control over their outstanding debt.  But one area continues to grow: student loans.  From the NY Fed quarterly report:

The problem is greater in some states than others, as this map shows:

Read the full report here.

Posted by Graham Griffith

EU GDP Drops Again

05-15-2013 10:35 AM with no comments

We have some disappointing numbers out of Eurostat this morning.  GDP across the Euro Area declined 0.2% in the first quarter.  The year over year drop was 1.0%.

France, the euro zone's second largest economy, saw its GDP drop for the second quarter in a row.  The data for each country is available here.

Posted by Graham Griffith

The Power to Predict

05-15-2013 8:14 AM with no comments

Having a lot of data is only helpful if you know how to use it.  With each passing month of the big data era, organizations are getting better and better at learning how to find the right bits of information and then use those bits effectively.  In his book, Predictive Analysis: The power to predict who will click, buy, live or die, Eric Siegel explains how organizations are mining data to predict consumer behavior.  He spoke about his findings with BigThink:

Posted by Graham Griffith

Fast Company Names Nate Silver 2013's Most Creative Person in Business

05-15-2013 8:00 AM with no comments

In a win for the social sciences, Fast Company has put Nate Silver in the top slot of their 100 Most Creative People in Business list for 2013.  Silver is best known as the former baseball stats genius who applied his modeling skills to predicting likely outcomes in political races.  His coldly analytical approach proved much more instructive than all of the bluster and narrative of the omnipresent punditry.  And his work contains a lot of useful lessons in how to apply data across all sectors.  Fast Company's Jon Gertner:

Silver is by no means the first to mine interesting conclusions from big data sets. Nor is he the first to become known for using statistical models as an innovative tool. Depending on how you define it, big data has been around for a while. It was a crucial element in tracking patterns in early epidemics (such as the black plague in London in the 1600s) as well as trends in the U.S. census (beginning in the late 1800s). You might consider the D-Day invasion at Normandy, or even the Apollo lunar missions, as strategic triumphs of complex problem solving and big-data analytics. In the early 1970s, a group of academics published a book called The Limits to Growth that used a fairly sophisticated statistical model to test the sustainability of Earth. (The planet and society are likely doomed, the program concluded.) In his book and in conversation, Silver is quick to point out that the most familiar, and arguably most successful, applications of big data involve National Weather Service predictions and hurricane warnings, which rely on huge data sets and wizardly models and have become increasingly accurate and precise. But other familiar examples abound too. The quants on Wall Street have been helping hedge funds interpret complex trading data for years. Watson, the IBM computer that won at Jeopardy! and is now being applied to medical treatment and financial planning, is a success with a certain kind of big data--"unstructured data," as IBM likes to call it, which describes information formatted as natural language rather than numerical figures. Palantir, a willfully obscure company that crunches big data in the name of national security, is another. Above all are Amazon, Facebook, Google, and Twitter, which stand as the foremost practitioners at making informed conclusions from customer data. By vacuuming up the exhaust from web users, such companies have made extraordinary gains in efficiency, trend-spotting, sales, and--at least in Google's case--research that sometimes translates into societal rather than corporate advantages. "Google is doing a better job predicting the flu than the CDC," observes D.J. Patil, the former chief data scientist at LinkedIn, who now works at venture capital firm Greylock Partners.

Silver is taking on such challenges as a solo practitioner, though he places his work more in the realm of "medium data," involving, say, hundreds of thousands of data points rather than the millions or billions mined by researchers at Google or Amazon. But the size of the information pile matters less than the measure of clarity it can yield. As a kid in East Lansing, Michigan, Silver grew up a sports fanatic but wasn't much of an athlete. "I played soccer up through eighth grade," he tells me. "It was my least worst sport." After earning a bachelor's degree in economics at the University of Chicago, he took a job with a consulting company that left him frustrated and unfulfilled. So he began to work on his PECOTA statistical system in the evenings. The choice of baseball, a sport unusually rich in statistics and measurement, was fortuitous (this abundance is why the sport also lent itself, more famously, to Billy Beane's predictive calculations chronicled in Michael Lewis's book Moneyball). After gaining a reputation for expertly dicing baseball stats, Silver wondered whether he could do a better job of predicting political elections than the Beltway pundits. In 2007, he started sifting through poll data and posted his analyses anonymously, at first on the Daily Kos blog under the name Poblano. (A fan of Mexican food, he once created a website to rate Chicago's burritos.) Eventually Silver revealed himself as the author, set up the independent FiveThirtyEight blog (named after the number of voters in the electoral college), and became a minor celebrity outside the insular world of baseball statistics. A few years later, the editor of The New York Times Magazine ran into Silver on a train platform in Boston and invited him to bring his now high-traffic blog to the Times, which is where he remains, for the moment.

Read the Silver profile and access the full list here.

Posted by Graham Griffith

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