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

Friday Quick Links

February 5, 2010
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Today’s focus remains on jobs:

– The unemployment situation in this country is slightly worse or slightly better depending on how you look at it. First, the jobless rate fell to 9.7%, which is good news.

– But the bad news is that the economy shed another 20,000 jobs in January, deepening the number of unemployed in this country. By some estimates, almost 18% of the country’s workforce is out of a job or can’t find full-time employment. That is a scary number.

– While the numbers indicate that the US economy is poised to start adding jobs again, this graph from Calculated Risk shows just how far we have to go to climb out of the hole (click link for larger version):

– Meanwhile, the US Senate has reached an “impasse” on financial regulation. Reforming the financial system will be a key ingredient to sustaining a long-term economic recovery for the United States.

All in all a rough week, and more signs pointing to the fact that any type of economic recovery will take an extended amount of time to unfold.

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Tuesday Quick Links

February 2, 2010
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– The Obama Administration is set to make $30B available to community banks for small business lending. The proposal comes as part of a broader package of ideas to boost job creation amongst small businesses.

– Former Treasury Secretary Henry Paulson explains the necessity of TARP and other government bail-outs in the wake of Lehman collapsing: “We easily could have had unemployment of 20 percent,” he said. “That would have meant millions of additional jobs lost, millions of additional homes lost, trillions more lost in savings. It would have been terrible.” I know I supported the stimulus on this blog, and this is precisely why I did. The alternative was too terrible to contemplate.

– As the global economy improves, more focus will shift to rising oil prices.

McKinsey agrees with me that deleveraging has the potential to be both a very painful process and a long-term drag on our economy.


Monday Quick Links

February 1, 2010
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Onto another week of business, economic and tech-related happenings:

Barack Obama introduced his federal budget today, which included a record $1.56 T deficit. Most of the added debt resulted from stimulus spending last year to boost the economic recovery.

– More good news for the US economy as manufacturing expanded faster than at any point since 2004. Here’s hoping the jobs situation begins to recover next.

Citigroup is planning to sell off its private equity investment division. President Obama has begun to apply pressure on the financial industry to separate depository institutions from proprietary trading units to blunt risk in the system.

– Exxon Mobil reported a 23% slide in quarterly profit compared to last year. However, the energy giant still topped analysts expectations.

And Toyota has outlined a fix for the faulty gas pedals that caused them to recall millions of cars around the world.


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.


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!


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.


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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.


    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.


    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.


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