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

Some Thoughts on the Economy

January 28, 2010
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Last night, President Obama made his State of the Union speech to the nation, during which he spent nearly 30 minutes talking about jobs, the economy and our financial situation. He also outlined a number of initiatives to help create job and to begin reforming the financial system. Instead of breaking down those proposals though, I’d rather talk a bit about why I’m fundamentally pessimistic about any sort of near-term economic recovery.

It’s obvious to anyone who has been paying attention that the American economy is in real trouble. We are burdened by a debt level that will soon reach 100% of GDP. Unemployment is very high at 10% and not likely to come back anytime soon. The real estate market is still relatively unstable. While the stock market has had a nice bull-run, many analysts believe the Dow is oversold. And there are several advanced foreign economies (the P.I.I.G.S) who are also facing a pile of debt and the real possibility of becoming insolvent.

Lets break these down a bit. The debt in and of itself isn’t a direct or immediate threat to our situation, but as it continues to grow unabated, it will continue to exert more and more pressure on everything the United States wants to do, from funding services to fighting wars. While the debt level does not have an immediate impact on economic recovery, it sets the stage for later points.

The fallout from the financial crisis has devastated the American workforce. These massive lay-offs capped a decade that had net negative job growth. In other words, many of these jobs are gone forever. The manufacturing sector has been pummeled, but other service sectors have shed jobs as well. These jobs aren’t coming back.

Even worse, the financial crisis exposed a hard truth about America. We are broke. At every level of society, we are out of money. The federal government is broke. The states are broke. Individual consumers are broke. One direct consequence of this situation is that consumers aren’t spending money. Consumer spending is the engine behind the American economy, accounting for up to 70% of our economic output. Now people aren’t spending money, and if they aren’t spending money, then businesses can’t grow and hire more people. We are witnessing the deleveraging of 30 years of out of control spending, and it’s not a pretty picture to watch unfold.

This alone would be enough to make me pessimistic, but there’s more. The real estate market is still in a highly volatile state. Once the Obama administration pulls out the tax credits and the Fed stops buying Mortgage-Backed Securities, there will be a vacuum of demand created. Oversupply is still the primary threat to the housing market, and I wouldn’t be surprised to see further falls in real estate prices as those policies expire. Another real estate collapse would have a hugely detrimental impact on the recovery. More homes underwater, and more borrowers trapped with payments they can’t afford.

Finally, activity in foreign economies poses a real threat to our recovery. There are five countries in Europe, Portugal, Italy, Ireland, Greece, and Spain, collectively known as the P.I.I.G.S, whose debt situation has become critical. Greece in particular is dangerously close to declaring insolvency. Spreads on their short-term bonds relative to the German bund have grown to nearly 350 basis points, a clear indicator that the country is in financial ruin. If Greece were to collapse, it would send shockwaves through the financial system. A meltdown in Greece could have a domino effect on other advanced economies featuring a cycle of ratings downgrades, higher yields and even more printing of money to pay for all the interest. Rapid inflation is a real threat in this scenario.

Other advanced economies are in creaky shape too. The UK has a well documented debt problem. And Japan’s debt is now at 220% of GDP, and they have experienced over twenty years of anemic economic growth. This is why our national debt matters. We are more vulnerable now to financial and economic shocks than we have been in decades. It’s a scary situation.

When I put all these pieces together in my mind, I see a bleak situation. These are not short-term problems that can be worked out in a matter of months. Paying off debt takes time. Building new economic sectors that can provide real long-term job growth takes time. Letting the oversupply on the housing market readjust will take time. The 2000’s were a rough decade, but the 2010’s could be even worse.


Thursday Morning Quick Hits

January 28, 2010
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Following the President’s State of the Union last night, a look around the business economic community

Ford Motors posted an annual profit for the first time since 2005. While the numbers were boosted by special items, this is a huge step forward for the American automaker after it took a beating during the second half of the last decade.

Durable goods orders in the United States rose 0.9% last month, another positive indicator that the American economy is showing signs of life. Unfortunately, this news was buffeted by a greater than expected number of jobless claims, a sign that labor market improvement is coming along more slowly than hoped for.

– I mentioned yesterday that Toyota was forced to recall over a million vehicles from the US market. Now that recall has extended to Europe and China as well in another blow to the automaker.

– And oh yeah, the President gave some State of the Union speech last night. The Wall Street Journal has a nice recap.

Spring 2010 Class Schedule

January 27, 2010
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So with the start of a new semester comes a new set of classes. Here’s an outline of what I’ll be taking this semester:

MBA 523, Investments: This course examines securities (bonds, equity, options) in a much greater level of detail than Advanced Corporate Finance did. Instead of viewing securities from the viewpoint of the corporation, investments treats the subject matter from the viewpoint of the investor. A nice follow-up to Adv. Corp Fin., I’m excited about what this class brings in terms of understanding the financial markets on a deeper level. For example, when I read about what’s happening with Greece’s debt situation, I feel like I understand what’s happening there more clearly than I would otherwise.

MBA 529, New Firm Finance: While I don’t have a great deal of interest in entrepreneurialism, it never hurts to learn more about how small and medium-sized business works. This class will take us through the financing process from seed money through the venture capital process.

MBA 543, Planning and Control Systems: PCS delivers the nuts and bolts of operations management from Demand Management to S&OP to Master Production Scheduling to Inventory Management. The class has an intensive focus on practical application, and we’ll be working in teams on a number of simulations throughout the semester. After my Supply Relationship and Logistics courses, this is one of the capstones of my Supply Chain Management concentration.

MBA 590, Supply Chain Practicum: The culmination of my MBA, Practicum is equivalent to an applied thesis. The entire course is composed of a supply chain project at a local company. I will be working with three other MBA students to develop a risk evaluation framework for suppliers in Biogen Idec’s operations department. This is the class I am most excited about because it truly is real world experience where we’ll be applying all of the leadership, project management and supply chain skills that we have accumulated over the last three semesters. It’s also a great segue for getting back into the working world.

Needless to say, this will be a busy but exciting spring. I have an extremely full class load for my last semester, but then I wouldn’t have it any other way. This is why I came back to school after all!

Wednesday Morning Quick Hits

January 27, 2010
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An exciting day lined up:

Apple is making a big announcement at the Yerba Buena Center in San Francisco later today. Many expect Steve Jobs to introduce the Tablet computing device. According to CNN, Jobs has been heard to say that this is, “the most important thing I’ve ever done.” Pretty big news.

The debt situation in Greece continues to worsen as spreads on Greek 10-year notes have reached new highs. This is definitely a situation to keep an eye on as Greece defaulting on its debt would send financial shockwaves throughout the global markets.

The Federal Reserve may consider halting its program to buy mortgage-backed securities in March. If this happens, it would be a huge test of the strength of the economic recovery.

– Toyota is dealing with a major body blow to its earnings recovery after announcing an unprecedented stoppage of US sales due to a faulty gas pedal. The recession hurts, but self-caused failure hurts even more, especially for a company whose reputation is built on quality.

– And oh yea, the President of the United States is delivering some little speech tonight. I think it’s called the State of the Union?? You can bet I’ll be watching that closely, and you probably should be too!

Tuesday Morning Quick Hits

January 26, 2010
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A mixed bag of news today:

S&P warned that Japan’s debt rating could be cut. This comes after the agency downgraded Greece’s debt earlier this year. Concern is growing that several advanced economies, including the United States, are in a bad situation with the amount of debt they are facing.

– On the bright side, Ford announced that it is adding 1,200 jobs to a plant in Illinois to gear up for production of its 2011 Explorer model.

– Also on the good news side, consumer confidence in the US is rising over hopes that the job market is improving. As the Bloomberg article notes, increased consumer confidence generally leads to increased consumer spending, a major driver of the economy.

– And on the downside, Verizon plans to cut 10,000 jobs after missing analyst’s fourth quarter sales expectations.

– Continuing with the jobs theme, Senate Democrats are considering a second jobs-focused stimulus bill valued at $80B. Of course there is controversy on whether or not the bill will actually create any jobs.

New Stimulus Poll

January 25, 2010
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CNN has a new poll out showing that roughly 3 in 4 Americans believes the stimulus has been a massive waste of taxpayer dollars. Sigh. Joe Klein over at Time Magazine has a slew of good points about the stimulus: the inclusion of $275-300B of tax cuts to 95% of Americans, the $250B of direct aid to states, and the lack of shovel ready projects that haven’t come online yet. Klein concludes with these two points:

1. The Obama Administration has done a terrible job explaining the stimulus package to the American people…especially since there have been very few documented cases of waste so far.

2. This is yet further evidence that Americans are flagrantly ill-informed…and, for those watching Fox News, misinformed.

The other point that Klein doesn’t mention is where we’d be without the stimulus and bailouts of various corporate entities, stuck in the middle of the second Great Depression with unemployment somewhere between 15-20% and credit markets completely frozen. While the vast majority of economists agree on this point, it seems that 3 in 4 Americans don’t grasp just how bad things would have gotten without the stimulus.

This is a classic case of damned-if-you-do, damned-if-you-don’t policy by the Obama administration. As such, both Bush and Obama deserve credit, not scorn, for pulling us back from the brink. And Obama certainly deserves more patience than he has been given so far in this debate. The stimulus helped save us from an economic catastrophe, and now it’s slowly but surely distributing funds to projects around the country.

Patience, America! Patience.

Posted in Economy
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Monday Morning Quick Hits

January 25, 2010
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These are tumultuous times we are living in. On to the links:

– Sam’s Club, a retail division of Wal-Mart, is set to cut 10,000  part-time positions following a decision to  hand marketing promos over to a third party vendor.

– Major Wall Street investment banks set aside nearly $40B for compensation, yet this astounding number actually came in well under expectations due to political pressure from the public and the White House. Don’t expect that pressure to yield anytime soon.

– In another sign the broader economy is struggling, corporate bond yield spreads widened for the first time in two months as investors feared the recovery was stalling.

– The war of words between China and the US over internet chicanery continued on Monday morning. The Chinese rebuked a call by the US to investigate hackers accused of probing US computers.

– Apple continues to gear up for the mass release of its tablet computer device.

    Back to Your Regularly Scheduled Program

    January 25, 2010
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    We’re now two weeks into the semester and it’s time to really get this blog back in the swing of things. As such, I’ll be coming back to a regular feature before I left for the summer, the daily morning link update. I’m currently working on post summarizing this semester’s courses as well as some of the projects I’ll be working on.

    I’m also going to begin work on producing some more video content for the blog. Please pass any video ideas on in the comments section.

    Finally, there is a lot going on in the world of business and finance right now with the Obama administration beginning a push for greater regulation of the financial industry. I’ll try to pass on some news and analysis there from an MBA’s perspective.

    This is going to be a great semester and I’m looking forward to blogging my way toward graduation.

    Posted in Economy, People

    Obama’s Strategic Gamble

    January 20, 2010
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    Watching the Massachusetts Senate race has been fascinating on a number of levels, but there’s one in particular tossing about my brain, and it concerns President Barack Obama’s strategy for tackling major issues when he was elected. Obama has long been known to play strategy over tactics, and it’s the major reason he was able to defeat Hillary Clinton for the Democratic nomination in 2008. He takes the long view.

    Looking back to Obama’s nomination we can sketch a basic outline of Obama’s domestic agenda. First, stabilize the economy. In early 2009, we didn’t know if we were going to fall off a cliff. While he took a lot of criticism from both the right and left, Obama managed the $787B stimulus that likely prevented our economy from sliding towards a second Great Depression.

    Then, instead of approaching financial reform and staying focused on the economy, Obama chose to tackle health care reform. Obama knew the time was ripe to act considering Democrats had just earned a 60-seat majority in the Senate and a large majority in the House, and with a decisive Obama victory, they had the necessary political capital to burn.

    You can see the logic in Obama’s thinking. If the Dems could finally pass health care, they would have a signature accomplishment to point to. In addition, this bill would help millions of people. Once voters could have a year or two to let the effects of the bill sink in (i.e. no more denial of coverage for pre-existing conditions, extension of coverage to 30 million+ people), then they would be much more amenable to further legislative action. Health care reform would truly be a landmark. And from there Obama would have an improved ability to work on other major issues such as financial reform, environmental reform and education.

    Almost a year later, Obama’s gamble is on the verge of failing. The ineffectiveness of the American legislative system has still not produced a signed health care bill. To the contrary, the bill has undergone such criticism from both the right and left that not even 40% of the nation supports the bill in its current form. And with Scott Brown’s victory tonight in Massachusetts, it appears as if House Democrats will now wilt on trying to pass the legislation.

    Even worse, the economy has continued to be miserable. While Wall Street prepares to pay out tens of billions in bonuses, the unemployment rate remains above 10%. Populist anger is real, and it has increasingly become pointed at the current administration. While Reagan, Clinton and Bush may have dug this hole, the public is expecting, fairly or unfairly, for Obama and the leadership in Congress to pull us out. When they fail to see results, they take out their frustration at the polls.

    With Brown’s election to the Senate, the chances of health care passing have dimmed considerably, and Obama’s strategic gamble looks like it will come crashing down on him and the Democrats. Unless some version of health care gets passed soon, the left will lose faith in Obama and Congress, and the Republicans will become increasingly oppositional to any other legislation going forward.

    Hindsight is 20-20, but I wonder what would have happened if Obama had chosen to pursue financial reform first and then gone after health care. The people needed to see effective government in action to buy into Obama’s campaign pledges. And the last year of hapless governing by the Democrats and obstinate opposition by the Republicans is what we have received.

    And Just Like That…

    January 11, 2010
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    I’m back on campus here in North Carolina State ready for my first day of class. Does it feel really different? It’s hard to say right now. In some ways it does, and in some ways, it’s like I never left. The people are the same, the MBA lounge is the same, and I’m sure the intensity of the coursework will be the same.

    But at the same time, I’m carrying the weight of the past 8 months with me, too. The internship at Genentech over the summer and the time spent in Denmark have broadened and clarified what it means to be here in Raleigh. For one thing, I’m extremely aware of how little time we have left until graduation: 4 months. And while that sounds like a considerable length of time, it’s really not. Between school work, assistantship activities and fun activities, we’re going to be so busy that the time will slide by almost without us noticing.

    I think about my friends back in Europe often. I wonder what they’re doing, and how they’re classes are going. And if I close my eyes I can picture CBS and Solbjerg Plads and the library where I spent so many hours studying. I do miss it, but I’ve moved around enough in my life at this point that the effects seem somewhat blunted.

    I’m ready for this semester to start, our last one before graduation, and I’m anticipating the challenges and successes that are sure to come with it. Here’s to a great one.