It is shaping up to be a beach weekend throughout much of the U.S. We have your assigned beach reading for you. It is a new report from the McKinsey Global Institute, Disruptive technologies: Advances that will transform life, business, and the global economy. The report features 12 technologies that will disrupt the global economy over the next decade. The economic impact will be significant--the report offers a wide ranging predicted economic impact of between $14 trillion and $33 trillion PER YEAR in 2025.
Download the full report here. We'll let you wait for the beach to read it. For now, here's a taste--a look at the 12 disruptive technologies themselves:
The Bureau of Economic Analysis has revised its estimate of first quarter GDP. According to the new report, GDP grew 2.4%, rather than 2.5% as estimated in the first report.
Here is a look at the trend:
Meanwhile, corporate profits fell 2.2% over the quarter, after seeing small increases over the previous three quarters:
Read the BEA release here.
Forget the stock market. If we want real economic advancement, Timothy Bartik says we need to invest our money in our kids. And when we say our kids, we don't mean those in our families, but all kids. In his book, Investing in Kids, Bartik gets us to reconsider preschool as an economic development program. In this TedX talk, Bartik discusses his macroeconomic analysis of preschool:
At the Washington Post Wonkblog, Neil Irwin writes that the Fed is doing a remarkable job of propping up the U.S. economy, largely through its quantitative easing policy. But, he wonders, is that a good thing? And for whom?
There is good reason to think that monetary easing is doing quite a bit of the work offsetting tighter fiscal policy. The Fed’s policies, including buying $85 billion in bonds each month with newly created money, are directly aimed at housing; $40 billion of those purchases are of mortgage-backed securities, meaning the money is being funneled directly toward the sector. And sure enough, a solidifying housing market is an important part of the economy’s holding up. And a second important consequence of Fed easing is to boost the prices of other financial assets, including the stock market.
This isn’t rocket science: The Fed in September introduced a policy meant to boost housing and stock prices, and now, nine months later, housing prices and stock prices have risen quite a bit. Enough, indeed, to (so far) offset the impact of higher taxes that went into effect Jan. 1 and federal spending cuts that took effect March 1.
So far so good. The bad news, though, is that these channels through which monetary policy affects the economy tend to offer the most direct benefits to those who already have high incomes and high levels of wealth.
Data from the Fed’s Survey of Consumer Finances shows that nearly half of families in the upper 10 percent of income own some stocks, and that of those who did the average value of the portfolio was $489,000 in 2010. (It was over $650,000 in 2007, and now that stock prices are back to 2007 levels, it’s a reasonable guess that the 2013 number will turn out to be in that ballpark).
Irwin goes on to discuss the impact of rising home prices, and argues that the benefits in one part of the economy aren't offsetting problems elsewhere. Read the full post here.
In more and more American households, mothers are taking over as the primary source of income for the family. According to the Pew Research Center, in 40% of homes with children, the mom is the key breadwinner. As you can see in the below chart, this is part of a long term trend, and there are two different types of moms driving the numbers:
The income gap between the two groups is quite large. The median total family income of married mothers who earn more than their husbands was nearly $80,000 in 2011, well above the national median of $57,100 for all families with children, and nearly four times the $23,000 median for families led by a single mother.
The groups differ in other ways as well. Compared with all mothers with children under age 18, married mothers who out-earn their husbands are slightly older, disproportionally white and college educated. Single mothers, by contrast, are younger, more likely to be black or Hispanic, and less likely to have a college degree.
The growth of both groups of mothers is tied to women’s increasing presence in the workplace. Women make up almost of half (47%) of the U.S. labor force today, and the employment rate of married mothers with children has increased from 37% in 1968 to 65% in 2011.
Read the full release here.
Here's a basic lesson in currency from Marketplace's Paddy Hirsch. When the U.S. government moved away from the gold standard, there was a risk that people would not believe in the value of currency. This is where fiat currency comes in. And no, Hirsch points out, no cars are involved:
Home prices showed very strong growth in March, according to the latest Case-Shiller Home Price Indices release.
On an annual basis, prices rose 10.3% for the 10-city
composite index and 10.9% for the 20-city composite. That is the largest year-over-year growth since April, 2006. Average home prices rose 1.4% for the Case-Shiller 10-city and 20 city composite. Prices rose in all 20 top metro areas. Here's a look at
the long term trend:
From the release:
“Home prices continued to climb,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow
Jones Indices. “Home prices in all 20 cities posted annual gains for the third month in a row. Twelve of the 20
saw prices rise at double-digit annual growth. The National Index and the 10- and 20-City Composites posted
their highest annual returns since 2006.
“Phoenix again had the largest annual increase at 22.5% followed by San Francisco with 22.2% nd Las Vegas
with 20.6%. Miami and Tampa, the eastern end of the Sunbelt, were softer with annual gains of 10.7% and
11.8%. The weakest annual price gains were seen in New York (+2.6%), Cleveland (+4.8%) and Boston
(+6.7%); even these numbers are quite substantial.
“Other housing market data reported in recent weeks confirm these strong trends: housing starts and permits,
sales of new home and existing homes continue to trend higher. At the same time, the larger than usual share of
multi-family housing, a large number of homes still in some stage of foreclosure and buying-to-rent by
investors suggest that the housing recovery is not complete.”
Read the full release here.
Just because inflation hasn't hit doesn't mean consumers feel like they have purchasing power. A lot of consumers, in fact, may be feeling that their dollars aren't going as far as they should. At Marketing Profs, Ayaz Nanji points us to a recent Parago survey in which 42% of consumers responded that they have lost purchasing power over the last year. To be honest, we're not so sure their sentiment is accurate, but it does seem to have an impact on their decisions. From Parago:
With this perception of lost power, consumers are looking for more deals. That makes sense. And they want to receive those deals in the places they hang out. Those places are online:
Look at more survey results from Paragon here. And read Ayaz Nanji's summary, at Marketing Profs, here.
Hedge fund manager has become one of the top dream jobs. What's not to like about becoming a billionaire playing with the money of the wealthy? In his Washington Post column, Barry Ritholtz throws a little cold water on some of the myths of hedge funds. And he asks, "Why would anyone in their right mind invest in these funds?"
So many kids dream of becoming LeBron James, but most will never play in the NBA (to say nothing of amassing championship rings). So it also goes with hedge fund investors. Most of the more than 10,000 hedge funds out in the wild are not big moneymakers for their investors. Investors tend to discover “hot” mutual fund managers just after a successful run and just before the inescapable force of mean reversion is about to kick in. Similarly, hedge fund darlings are born at exactly the same moment in their trajectory.
John Paulson is a classic example. The bet against subprime mortgages that he and Paolo Pellegrini created in 2005-06 put them on the map and turned Paulson into a billionaire. He became widely known, and the money flowed in. Within a few years, Paulson was managing a slew of hedge funds, and his assets under management had swelled to $36 billion. Soon after, he hit the skids, with losses of 52 percent in one fund and 35 percent in another.
But the lure of the superstar manager — the guy who can make you fabulously wealthy – continues to attract capital. In 1997, $118 billion was managed by hedgies; as of the first quarter of 2012, that had grown to $2.04 trillion.
Investors have also embraced other non-financial remunerations: Client-only market commentary, access to star managers, attendance at exclusive conferences. These perks generate cocktail party bragging rights, despite the poor performance.
But what about the top-performing funds, such as Jim Simon’s Renaissance Technologies or Ray Dalio’s Bridgewater? Sure, give them a call.
The Lebron James of hedge fund managers are few and far between. This is the crux of the issue with hedge funds. A small percentage have significantly outperformed the markets; an even smaller percentage have done so after fees are taken into account. While we all know which ones have outperformed over the past few decades, no one has even the slightest clue which ones will outperform over the next one. It is akin to picking out from the ranks of high school sophomores who will be the next NBA superstar. Best of luck with that.
Read A hedge fund for you and me? The best move is to take a pass here.
People who know about LIBOR rates understand their importance to everyday transactions. But those people are in a very small minority. The IMF has put together a short video that nicely explains LIBOR rates and their influence in today's economy. We aren't sure about the efforts to make a couple of clearly smart external relations staffers into actors, but we do applaud the IMF for using digital media to do some teaching. Take a look:
Antonio Fatas wants us to consider the not-so-distant future, when the red line (short term interest rates) in the chart below catches up with the blue line (long term interest rates). At that point--or shortly before--the Fed will announce an end to Quantitative Easing.
What will we learn the day Ben Bernanke announces that we are starting that path towards normalization? It might be that we simply learn that he is becoming optimistic about growth in the US. This will be good news. It might not be a surprise to some who expected that type of growth going forward, but it could be a positive surprise to others that thought growth would never come back. In this scenario, it is difficult to think about such an announcement as bad news. We know that QE will end one day, we know that short-term rates will have to increase, so if the announcement was to be a surprise in the sense that it is coming too early, it would mean that there is a positive surprise in terms of growth happening early than expected -- and this has to be good news.
There is a second and more pessimistic scenario: the day Ben Bernanke announces that QE is ending we learn that the economy is not doing much better but that the FOMC has simply changed their mind. That they do not care about low growth, that they want to be tough and that they are ready to stop QE to signal a change in policy. This would be bad news because it represents a change in policy and not a change in our expectations about growth.
Understanding what will happen to markets when QE ends requires to decide about which of the two scenarios above is more likely. I personally see the first scenario more likely than the second one. I do not see a policy reversal in the near future but I do see the end of QE as good news accumulate. But this is my view, what matters is how the stock market will read the communications of the central bank. The words chosen to communicate their actions at that point as well as their credibility will make a great difference.
Read Looking forward to the end of QE here.
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.
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.
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.
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.
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.
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:
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.
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:
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.
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:
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:
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.
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.
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: