Intersecting Minds: Education, Business and Technology at the North Carolina State Jenkins Graduate School of Management

Another Brief Hiatus: Oslo

October 30, 2009
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In a few hours, I will be departing for Oslo, Norway via a very large boat. CBS put together a cruise to Norway for all the exchange students. Roughly 700-800 of us will be leaving at 3:00 this afternoon for what should be a weekend full of parties and site-seeing. Here’s the itinerary

3:00 pm: Depart for Oslo

7:00 pm: Formal Dinner and Presentation

9:00 pm: Disco Party on the boat

9:30 am: Arrive in Oslo for tour and site-seeing

4:00 pm: Depart for Copenhagen

7:00 pm: Dinner

9:00 pm: Party #2 on the boat

9:30 am: Arrive in Copenhagen

Notice a trend there? It will be a quick trip, but we’re all excited to get out of Copenhagen for a weekend, and the sites should be incredible. Expect a full report on Sunday afternoon. Until then, look for Hal’s inaugural post. See you!

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GDP Growth = Healthy Economy? Uhm No

October 29, 2009
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Earlier today, CNN Money released a new gallery report asking: “Are Things Really Getting Better?” Meanwhile, on their front page, the headline reads: “Economy Finally Back in Gear.”

So does the government’s recent announcement that GDP grew 3.5% last quarter, the economy’s first growth in a year, mean that we’re out of the recession? Um, not exactly. Lets put some additional analysis behind the “Getting Better” article. CNN broke economic indicators down into 7 segments. We’ll tackle them one by one:

1. GDP Growth: As I just mentioned, the economy grew by 3.5%, a strong figure when it stands on its own. But many observers believe this represents artificial growth fueled by government spending (i.e. stimulus dollars and the Cash for Clunkers). Now that many of these dollars have been spent, where does the economy go from here? In other words, are these number sustainable?

2. Job Growth: For the 21st straight month, the economy is expected to layoff jobs, to the tune of 175,000 more losses this month. Here is where things get interesting. Job growth is seen as a lagging indicator for an economic recovery. Many economists will tell you we should see a return to job growth in early 2010. But where will this job growth come from? Which sectors of the economy are set to deliver enough expansion to bring the unemployment rate from near double digits to calmer numbers?

3. Housing: This is probably the ugliest chart CNN has posted out of all of them. Home values are still declining, but at a slower rate. Unfortunately, there’s still a glut of supply out there. Many people are buying homes simply because the government is holding interest rates at all-time lows. It’s never been more affordable to buy a house. But once again, how long can this last? What happens when the government begins raising rates to combat fears of inflation? Will the improvement hold?

And that paragraph doesn’t take into account the expected Commercial Real Estate market bust. That bubble still needs to pop, and its effects on the economy or unforeseen.

4. Inflation: This is an area of concern further down the road due to the still present risk of deflation (if the economy hits the skids again) and the risks of hyperinflation, if the government doesn’t reign in low interest rates quickly enough.

5. Manufacturing: CNN describes growth in the  manufacturing sector as “tepid.” The reason its tepid will be made obvious in my next point.

6. Consumer Spending: This is the traditional boon of the American economy, accounting for 70% of our total GDP. Unfortunately, Americans just aren’t spending the way they used to. The recession has seriously spooked people, and our country has been long overdue for a deleveraging process. Simply put, people are saving more and spending less. That’s why manufacturing growth is down. People just aren’t consuming as much as they used to, and as a result businesses are making fewer items for sale. This also ties back into the job growth picture. If companies aren’t manufacturing, jobs aren’t being created, money isn’t being spent, and the economy continues its downward spiral.

7. Ironic that CNN’s last point of analysis would be a stock market that’s “roaring back.” Smart analysts out there understand that the surprisingly strong bull run over the last six months has been driven by two primary forces. First, we’ve seen a correction off the absurd lows of Q1 2009. Second, we’ve seen investors speculating that global government stimulus would be enough to drive us out of the economic doldrums. Meanwhile, several multinational companies that compose the DJIA and S&P 500 indexes have been reporting strong earnings reports over the last 2 months, serving to fuel the run up even more.

However, I would argue that the stock market at its current point is overvalued. See Tyler Durden’s analysis of market correlations over at Zero Hedge for why fundamental market indicators point to retreat off the bull run we’ve witnessed through the spring, summer and into fall.

In short, our economy is still in grave peril. Real manufacturing growth is tepid at best. Job losses are still the norm. Worst of all, the financial institutions are back to operating the way they were two years ago. Their balance sheets are still saddled with toxic assets. And the national debt continues to explode. Many economists are now saying that this could be a “jobless” recover (which isn’t really much of a recovery), with the most pessimistic saying we could be looking at a decade or more of fluctuation between recession and rebound (think of Japan’s lost decade).

Buckle up folks. This is going to be a hell of a ride.


Economic Impact of Oil and Coal: Not Good

October 28, 2009
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Those damn scientists are at it again. One of the major arguments against implementation of energy reform and climate change legislation is that putting together such a system would impose a huge drain on our economy. Guess what? That drain is already happening.

The National Research Council recently released a report estimating the hidden costs of our petroleum and coal-based energy system. The NRC puts the quantifiable costs at $120B. And yes, that’s a B, not an M, as in $120 billion. These are just the measurable costs. According to the report

($120B is a) number that reflects primarily health damages from air pollution associated with electricity generation and motor vehicle transportation.  The figure does not include damages from climate change, harm to ecosystems, effects of some air pollutants such as mercury, and risks to national security, which the report examines but does not monetize.

I’m not qualified to get into a deep policy discussion around the merits of a cap-and-trade system vs. a straight carbon tax. Nor am I ready to dig into other policies and incentive systems that could mitigate the problem, but it’s clear that the economic argument against action isn’t nearly as strong as it once was. Will effective energy reform legislation cost a lot of money? Yes. But according to this report we’re already paying a good chunk of that in hidden costs that show up in our health care bills right now. And that doesn’t even include the unquantifiable damage done to the environment and our addiction to Middle Eastern oil.


The 5 Guiding Principles of CBS

October 27, 2009
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I just ran across this video on the Facebook profile of one of my friends, and I thought it was worth sharing:

I recognize no less than four of those exchange students. Carolina (who starts the video), Edoardo, Grace, and Edward. Nice work guys.

 


Facebook Marches On: International Version

October 27, 2009
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When I began work as a Social Media Developer for NC State a little over 12 months ago, many websites were vying with Facebook for supremacy of the social networking world. Facebook’s strongest international competitor, Orkut, boasted 67 million members, located primarily in Brazil and India. Orkut’s popularity in these two countries seemed well established as late as 6 months ago. But it now appears that Facebook is making major inroads in these markets as well.

From TechCrunch, Facebook has shown appreciable year-over-year growth of 225+% in India, while Orkut has only grown by 38% in that same period. Even worse for Orkut, their growth actually declined between July and August, in a sign that users are migrating over to Facebook. The analysis from TechCrunch includes many reasons for this shift, not least of which is Facebook’s increasing market share, as well as the availability of Facebook in many Indian language dialects.

Meanwhile, Facebook has eaten into Orkut’s advantage in Brazil as well. While ultra recent data isn’t available, this blog post dated July 1st from inside Facebook suggests the same trendline in Brazil as in India.

As Facebook aggressively pursues international markets and continues to add to its already enormous user base, dont’ expect these trends to stop. Facebook is already the dominant platform in America and Western Europe (nearly every Dane I meet has an account, including many adults), and that has major drawing power for non-users because if all of my friends are there, I want to be there too.


Introduction

October 26, 2009
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I’m happy to announce that I’ll have some company on this website pretty soon. Hal Lusk, another 2nd year MBA student from my class will be posting here from time to time here. Hal is a really sharp guy with a lot of interesting ideas, and he is going to make a fine edition to the blog. Knowing Hal, I’m sure his contributions will be thought-provoking and entertaining, and I’m looking forward to our interactions.

Welcome, Hal.


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Taking Control of My Education

October 26, 2009
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A lot of my friends back at home have been asking me how classes are going out here, and how it compares to education back in the States. I’ve already talked about the specifics of the Danish system (100% finals, non-compulsory lectures, etc.). But I wanted to expand a little bit on how that system is affecting my study habits and interests here in Denmark vis-a-vis my experiences at NC State.

In all honesty, I spent the first several weeks here not really doing a whole lot. My finals were far in the future, the classes were kind of all over the place, and there wasn’t any real structure to follow. I wasn’t really doing a great job of adjusting to my new environment, and as a result, I began feeling really unsatisfied with my academic experience here. Where was the structure? Where were the assignments? At the end of the day, I just wasn’t really sure how much I was learning, and that became increasingly frustrating to me.

After going through a period 0f self-reflection and talking to friends and family back home, I realized I needed to adjust my approach. In the United States, I was going to learn whether I wanted to or not. The courses demanded it. Here, I needed to take much more control over my educational experience. If I didn’t want to learn, I wasn’t going to learn (and my grades would almost certainly suffer as a result). So over the last several days and weeks, I’ve begun to refocus myself.

Now, I set aside time each day to go to the library and teach myself the material I find interesting. Instead of relying on teachers and syllabuses to tell me what to study each day, I set my own schedule and pick the topics that are grabbing my interest. For example, there’s a reason I chose finance as a supplementary concentration to supply chain. Oddly enough, I like finance. And now I set aside several hours each day to pore over valuation problems, options analysis, and risk management techniques.

The same is true for my other courses here. I’ve spent less time studying for my Logistics class, but that’s because a lot of that material has been covered in other courses and experiences I’ve had in the States. Rather than bog myself down in reviewing material I already know, I’m trying to learn new material that will add to my skill set.

Unsurprisingly, this process has been very rewarding for me. I wake up and I find that I’m excited to head off to school because I know I’ll be learning what I want to learn, and writing about topics that truly interest me. It has taken some time to find my academic groove here, but now that I have, I’m not sure if I would trade it for the more structured American approach. Much like everything else here, it’s a cultural trade-off, and one that I’m learning to appreciate as we move closer to our final exams.


More on China

October 25, 2009
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Following up on my post from a few days ago about China, none other than foreign affairs expert Fareed Zakaria penned a story seconding my opinion on China’s emergence during the global downturn:

China entered the crisis in an entirely different position. It was running a budget surplus and had been raising interest rates to tamp down excessive growth. Its banks had been reining in consumer spending and excessive credit. So when the crisis hit, the Chinese government could adopt textbook policies to jump-start growth…

And look at the nature of China’s stimulus… China will spend $200 billion on railways in the next two years, much of it for high-speed rail. The Beijing-Shanghai line will cut travel times between those two cities from 10 hours to four. The United States, by contrast, has designated less than $20 billion, to be spread out over more than a dozen projects, thus guaranteeing their failure. It’s not just rail, of course… Two out of the world’s three largest ports are Shanghai and Hong Kong.

China is also well aware of its dependence on imported oil and is acting in surprisingly farsighted ways. It now spends more on solar, wind, and battery technology than the United States does.

Zakaria is positively glowing about China and its prospects for joining the United States as a true global superpower. However, there’s another side to this argument. For all that China has accomplished in the last decade, and especially in the last 12 months, it still has a long ways to go to match the United States. The Economist articulates this position quite well in its special report on the Sino-American relationship. Key graph:

China may have growing financial muscle, but it still lags far behind as a technological innovator and creator of global brands. This special report will argue that the United States may have to get used to a bigger Chinese presence on its own soil, including some of its most hallowed turf, such as the car industry. A Chinese man may even get to the moon before another American. But talk of a G2 is highly misleading. By any measure, China’s power is still dwarfed by America’s.

While China may indeed be a long ways from matching American influence and power, there is no doubt that it has emerged as the nation most likely to make that attempt. Any attempt to battle climate change, prevent another global financial meltdown, contain rogue nations such as North Korea and Iran will have to start with the United States and China as the two main players. Everyone else will be following their lead.


Facebook Finds A Potential Revenue Source

October 23, 2009
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Since its inception in 2004, Facebook has struggled to find a way to make money. The social networking giant may have found its remedy. Bloomberg has the story:

The company is testing a payment system to gain a cut each time an online-game player buys a digital tractor, weapon or hat on the site. That would give Facebook a piece of the hundreds of millions of dollars that are being pulled in by Zynga Inc., creator of “Farmville” and “Mafia Wars,” and Playfish Inc., maker of “Pet Society.” The social-games market will almost triple to $2 billion by 2012, estimates ThinkEquity LLC.

Skimming the microtransactions that make up the social games market could be the answer for Facebook. I’ve long thought that eventually Facebook would need to go to a fee-for-service model of some sort to generate a steady revenue stream and positive cash flow, but then they would face a huge backlash from their user base. Now it appears as if Facebook has a way out, particularly if they can figure out the credit system discussed in the article.


The New Global Economy

October 22, 2009
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Just a few hours ago, China announced year-over-year economic growth of 8.9% for the third quarter. This news spurred economic activity around the world as investors from the United States to Europe to Asia reacted to the strong report. Amongst the effects:

  • The Shanghai Composite Index fell as investors worried that China may now withdraw stimulus funding
  • The US Dollar strengthened against all major currencies based on the same worry about China withdrawing stimulus funding and its continual purchase of government-issued US Treasuries
  • Growth in industrial production has helped companies with a manufacturing presence in China. The Bloomberg article makes special note of Volkswagen, who saw a 13.9% increase in sales over last year of their automobiles

Watching the global economic recovery unfold, it’s clear that China and other surplus-carrying nations will be the ones who lead us out of the recession. If China continues to spur consumer spending, its huge population has the potential to move alongside the United States as the primary driver of global economic growth. Since WW2, US consumer spending has driven the global economy forward, but one of the causes of the global economic downturn has been over-reliance on the US economy and consumer spending to drive growth. By mid-2005 the US consumer had reached a negative savings rate, and this was obviously an unsustainable means for driving expansion. Meanwhile, China (and many other Asian countries, i.e. Japan and Korea) that were sporting large foreign account surpluses also had populations with very high savings rate.

In other words, a huge imbalance existed. It now appears that the global economy is beginning to rebalance as the United States personal savings rate has crept back towards the 6-8% range, and the Chinese consumer has begun to pick up spending. As China continues down this path, they should see their influence and impact on the global economy continue to grow. Now, many exporting countries and businesses are becoming more attracted to China and the explosive growth that has now apparently returned.

This is the direction of the new global economy: a waning, but still powerful, American influence complemented by the growth of the huge, emerging market that is China.


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