That '70s Show - WSJ.com

In no way am I begging for a recession in 2008. But if we have one, however bad it may be, it surely won't be as bad as anything resembling the "s-word".

I'm all for growth, but I don't feel like that is the Fed's main responsibility, price-stability is. Sacrificing price stability in favor of growth will leave us with neither.

And it is not just me highlighting this, but also people way smarter than me.

That '70s Show - WSJ.com

Here's the money quote:

One lesson of the inflationary 1970s: A country that will not accept the possibility of a small recession will end up having a big one when the politicians at last respond to the public's complaints about inflation. Instead of paying the relatively small cost of a possible recession, the public pays the much larger cost of sustained inflation and a deeper recession. And enduring the deeper recession is the only way to convince the public that the Fed has at last decided to slow inflation.

Brazil tops MSCI

Brazil is now the largest stock market on the MSCI emerging markets index, and as a long-time investor in the Brazilian equity market I have to say this news has brightened up an otherwise less than stellar day.

So, why is Brazil doing so well? The FT has some thoughts here (watch the video too).

While I buy the argument that the commodities is fueling the bull run, I don't have much support for the "decoupling argument" -- that perturbations in the US market have less and less impact on the emerging markets. (How can the world markets be simultaneously "globalized" and "decoupled"?)

That said, Brazil's insular nature seems to have at least buffered Brazil from what is going on in the global markets. Credit within Brazil remains strong, although IPOs have dropped. The FT also notes that Brazil responded favorably to the Fed's drop in interest rates (how does that play into the decoupling theory?)

Brazil is doing uniquely well as a commodity exporter based of off the huge recent discoveries by Petrobras and the positive impact that news had on its stock price.

Microhoo! Let the lawsuits begin

The longer Yahoo! stonewalls, the more and more of these lawsuits are going to pile up.

You can't blame the shareholders for wanting to see a deal after patiently holding on to Yahoo! stock, and you can't blame Yahoo! management for seeking a better deal; but eventually everything has to find an equilibrium and if no better offer presents itself, Yahoo will have to sell.

Right now, it just feels like Yahoo! is delaying the inevitable.

China and inflation

Paul Krugman again weighs in on China and inflation.

Basically, he says that an increase in the price of Chinese goods is not sufficient to cause US inflation. The actual China cost is just a small percentage of a US price; transportation, overhead and so on form a greater percentage of the total cost of a good.

True. I think China's impact on US inflation is more indirect.

1) China has a huge demand for commodities. It's additional demand is causing the price of the supply to rise.

2) Commodities are priced in US dollars. With the dollar tanking, the price of dollar denominated goods will rise.

This combination will continue to be a nasty one-two punch on the US economy until either demand dries up (not likely) or the dollar strengthens, but it is hard to see how that will happen with interest rates so low and probably going lower.

The s-word

Oh #$%@&#^*$%#@!!!!

U.S. Import Prices Soar, Boosted by Chinese Goods - WSJ.com

Increasing global demand pushes prices up, and a dropping US dollar makes more expensive goods seems even more expensive.

This shouldn't surprise anyone

U.S. Import Prices Soar, Boosted by Chinese Goods - WSJ.com

Update: More on China and inflation.

People want large cap exposure...

And I agree. They're pushing XLG on TheStreet.com.

Me? I'm in VV.

The look pretty similar to me but VV has an expense ratio of only 0.07% vs. XLG's 0.2%. Am I missing something?

MicroYahooNews

Hi, I’m back taking a look at the Microsoft-Yahoo-Anybody else but Microsoft deal. I gotta admit, I’m having fun looking at this from all the crazy angles that are being thrown out there but as I’ve said before, the only deal that makes sense is Microsoft and Yahoo.

The only way to answer the question over which is the best suitor for Yahoo is to answer the Yahoo existential question… is it a technology company or a media company.

Apparently News Corp is looking at Yahoo as well. Not sure what I see is the gain here but who am I to quibble with the genius of Rupert Murdoch?

Yahoo would gain the social networking site MySpace, while Rupert Murdoch’s News Corp would take a 20 per cent stake in Yahoo, according to those close to the situation.

So where does that leave us on the quest for Yahoo existential meaning? Yahoo: I’m a media company… no I’m a search company… no wait, with MySpace I’m now a social networking company!

MySpace is a formidable property but for a company that couldn’t fend off one innovative competitor, it seems hard to imagine how Yahoo will fend off two; Google on one side and Facebook on the other. And where’s the (sorry readers) synergy? Yahoo search on MySpace pages? They could displace Google’s ads so I guess that is worth something. Taking down all the Google ads will distract Google for about a nano-second until they find other outlets, Yahoo and MySpace will be distracted for years trying to find interesting ways to integrate the two services.

Shahid Khan, an analyst at IBB Consulting, pointed to the massive internet audience that a Fox Interactive-Yahoo merger would create, and its power in particular content verticals. The two groups could combine Yahoo Sports, for example, with Fox Sports, and Yahoo Finance with the Wall Street Journal and MarketWatch websites.
“If you take a step back, it could make a lot of sense for them,” Mr Khan said.

Huh? Why? A lot of these sites recycle the same content anyway, so where’s the benefit? Firing a couple of writers? Besides FoxSports is on MSN and it doesn’t seem to be doing them a world of good. I get the feeling I’m missing something.

YahooFinance already links to WSJ online content so again, I don’t see the benefit. Firing some of YahooFinance’s writers I suppose? Big savings there! The average cost of running the two sites may be a bit lower, so there are some cost savings there. I bet the two sits share a lot of the same users so the marginal increase in traffic by merging the two sites would probably be low.

At least this part of the deal answers the existential Yahoo question… it is a media site.

YahooNews would just further fragment the market. Yahoo would be on life-support, News Corp has a search engine that it can merge with MySpace for some as yet unimagined benefit, and MSN…well… who knows what happens to MSN.

Google for its part maintains its customer captivity because there is no compelling reason for customers to leave. And as there are no existential mysteries to Google’s technology-being, it is free to continue its assault on MSFT and the rest of the IT industry while MicroYahooNews all try to figure out what it really means to be a “portal.”

I've lost my confidence

I woke up this morning, looked at how my stocks are doing and now, harkening back to my awkward high-school days... I have no confidence.

The global/local paradox

It is not just markets that are globalizing, but companies are as well.

Being a globalized company means more than just having a single corporate HQ and selling abroad. It is the globalization of the HQ itself, with different senior corporate functions being located in many parts of the world.

In doing do, the company in effect becomes a local one. The global company mimics the behavior of an indigenous company because key corporate decisions are made within the country's boarders.... even though those decisions have global impact.

A company truly becomes global when it mimics a local company in as many different countries as it can.

Thoughts on deficit drop

Some quick thoughts on whythe drop in the US trade deficit.

Low dollar means foreign goods are more expensive here, so demand drops. Low dollar also means the US goods are cheaper elsewhere so demand abroad increases. This may be fine while it lasts, but a low currency is not what I would call a sustainable competitive advantage for the US.

The positive side to this, however, is that exports could help lessen the impact of a recession. Recovery could very well be export-lead.

Low confidence could mean that consumers are spending less, that would worsen the impact of any recession. On the plus side, however, if consumers are spending less, that could mean that they are (hopefully) saving more.

If that becomes sustained, that would be a huge plus because it would keep permanent downward pressure on the trade deficit, could boost liquidity without excessive interest rate cuts, and in the long run will make the individual financial situation of US consumers more stable, especially in their retirement.

U.S. Trade Deficit Contracts Despite Record Price of Oil - WSJ.com

Some quick thoughts on whythe drop in the US trade deficit.

Low dollar means foreign goods are more expensive here, so demand drops. Low dollar also means the US goods are cheaper elsewhere so demand abroad increases. This may be fine while it lasts, but a low currency is not what I would call a sustainable competitive advantage for the US. The positive side to this, however, is that exports could help lessen the impact of a recession. Recovery could very well be export-lead.

Low confidence could mean that consumers are spending less, that would worsen the impact of any recession. On the plus side, however, if consumers are spending less, that could mean that they are (hopefully) saving more. If that becomes sustained, that would be a huge plus because it would keep perminante downward pressure on the trade deficit, could boost liquidity without excessive interest rate cuts, and in the long run will make the individual financial situation of US consumers more stable, especially in thier retirement.

What retails sales really look like

Scroll to the bottom of this post to see what retail sales really look like.

Yesterday, there was a lot of excitmenet about retail sales actually ticking up.

But it seems that if you factor in inflation (ie: nominal sales numbers looking good not because there was more valume of sales, but because prices were higher), retail sales were negative.

Canadians: Think Globally, Act Locally

I've been reading a lot recently about how culture and general timidity have prevented leading Canadian companies from expanding globally.

The flip-side seems to be a lack of Canadians willing to invest locally.

It seems VC money is flowing in Canada, but it is from foreign sources. Now, I have no problems with the global flow of capital, in fact, I actively support that. A country such as Canada should be welcoming of VC money from the US and elsewhere. But here's the money quote:

So while the news of VC investments is good, "we need strong Canadian investors if we want strong Canadian companies," says Rick Nathan, president, CVCA and managing director of Kensington Capital Partners.

So true.

Here's the real threat to US competitiveness

If you're really worried about US competitiveness, you should be more concerned about drops in research than about globalization.

Spinning a Global Plan - WSJ.com

Pretty good interview with IBM's Sam Palmisano talking about global ambitions.

Once again the issue comes up about foreign workers being a competition to US ones. I find this line of questioning to be uncreative.

1) This competition will push US workers into higher value jobs.

2) Opening markets abroad is essentially a form of global income redistribution. IBM (or any other company) actively doing business abroad creates jobs and wealth, which in turn creates new markets for goods and services.

Here are some money quotes:

WSJ: There's a lot of worry that globalization means fewer jobs and lower pay for U.S. workers. Is that a legitimate worry?

Mr. Palmisano: It's actually a big opportunity. Why not take advantage of it? The leading nation in the global economy is the United States of America. Great schools. Great capital formation. A system that works.

WSJ: Some would say that if you're helping Vietnam or South Africa build their education systems, it takes away job opportunities from Americans.

Mr. Palmisano: There is a real issue here where I think we need to do something more [in the U.S.]. IBM announced programs where we'll match money put in a learning account, and you can apply those tuitions to get future skills that you think are necessary for you.

WSJ: Can you give an example of a smaller country where your work has expanded rapidly?

Mr. Palmisano: Egypt's growing like crazy. We have a huge software laboratory in Egypt. It's doing development for IBM: software components and middleware. At the same time, it's doing commercial work, which they would view as an export business, you know, for clients around the world. The commercial business is growing double digits, right? Egypt is one of the largest populations in the Middle East and has a government that's trying to modernize its economy.

Finding the dark cloud in the silver lining

Yay!!! Retail sales are up!!!

Boo.... it is because of inflation....

:-(

Here's the money quote:

Part of the gain, however, stemmed from higher gasoline prices. Retail-sales data aren't adjusted for inflation.

Growing like a BRIC

This video gets a little down in the weeds on Brazilian tax policy (aren't you glad you landed on this blog... we have all the fun!) but the broader point here is well made, taxes and regulation in Brazil are respectively high and onerous. Brazil has the lowest growth at around 4%-5%, with Russia growing over 6%, India at 8% and China over 10%. Although interestingly, Brazil scores the highest of the BRIC countries in the Heritage Foundation's economic freedom index, so taxes or no taxes, they must be doing something right... or at least better.

Also, Brazilians seem to be very enthusiastic about globalization and are among the few who would actually like to see the pace of change quicken; far more so than Indians or the Chinese. Without have any data to back this up, a wild guess why this may be is that Brazilians see the benefits of globalization but are frustrated they cannot reap these benefits fully because of their cumbersome tax structure.

Will America export its advantage?... oh get over it.....

Based on a story in the NYT on US colleges opening campuses abroad, the Managing Globalization blog askswill America export its advantage? (see blog post for link to NYT story.

I know the question is rhetorical, but it does seem a little basic. Yes, higher education in the US is one of the most coveted prizes in the world, but opening up campuses abroad is not a wholesale exportation of that prize.

First off, these foreign campuses would mainly be lecture institute rather than research institutes. A main source of US competitive advantage is the research that is generated within its boarders

These foreign campuses also provide an incredible learning experience for US students. The marketplace is global and attending school abroad is a great way for students to learn about that.

The focus of the NYT piece is on Gulf countries. US colleges in the Gulf countries play several beneficial roles there. The colleges promote cross-cultural dialog and help lay the foundation for oil-reliant countries to diversify their economies. The most dangerous state is a failed one. By helping states diversify their economies and become more stable, foreign colleges play an important role in promoting stability.

I could go on but I'll end on this final thought; the basis of US competitive advantage is multi-faceted. This is not to say that this allows the US to be complacent about protecting its competitive advantage, far from it. But it is difficult to point to one element of that competitive advantage and say if the US shares that, then all is lost.

OK fine! Financials do matter...

So here I made the argument that the farther you go from the financial sector, the less of an impact you're feeling from the current recess...ummm... downturn.

Well, despite my efforts to pigeonhole the financial sector, it seems it is really important! At least, according to the newly reformulated DJI. Big oil has been added as well, so I guess that industry is also pretty important.

This news, coupled with manufacturing taking a bit of a back seat on the DJI (Honeywell got booted off) illustrates the direction the US economy is going. Making stuff is out, powering stuff and financing stuff is in.

Recession to be longer than usual: UMich | U.S. | Reuters

Recession to be longer than usual: UMich | U.S. | Reuters

Here's a quote:
Paradoxically, worsening economic conditions will induce families to save money, reinforcing the drag on an economy that has become largely reliant on consumer spending.

True, but increasing US savings would also reduce the trade deficit and would also help shore up the dollar. Increased savings may also do more to boost lending than the current reduction in the interest rates. Increased savings would keep more money in the US system and mitigate the necessity for aggressive monetary policy.

I'm also guessing that consumers with more savings in their accounts would also be a lower credit risk, making them more attractive to banks.

And finally, increased (and sustained) savings in the US means there won't be a generation of pensioners in about 20-40 year without enough money to live off of.

I'm not begging to a long and deep recession, but if it hurts enough to in some ways impact the mentality of the current generation and encourage them to save more, borrow less and spend within their means, then the current period of pain will be worth it in the long term.

And oh yeah… what would a post be without my obligatory warning on inflation (which increased savings would also help mitigate.)

Inflation pressures will linger despite the retrenchment in consumer spending, complicating the task of policy-makers, the University's Richard Curtin said in a report, citing data from industry group The Conference Board.

Buffett: Bank woes are poetic justice | U.S. | Reuters

'nuff said.

Buffett: Bank woes are poetic justice | U.S. | Reuters

The Harvey Dent economy

The economy.... is turning into the deadly Two-Face. Impeding recession pushes interest rates down, but looming inflation would push them up.

The money quote:
He said he expects core inflation, which strips out volatile food and energy costs, to remain above 2 percent, "which is above the range I consider to be consistent with price stability."

Lacker also said it was worrisome to see inflation at current levels. The overall consumer price index rose 4.1 percent in the 12 months to December, while the core rate, which excludes energy and food, climbed 2.4 percent.

"We can't cut interest rates as aggressively in response to weakness in growth as we otherwise would," Lacker said. "We're going to be posed with some problems this year if inflation doesn't moderate the way we'd like to see it moderate."

So why should Google care?

OK... I know what you're saying... you're saying "I read your post on Google's competitive advantage and there is no way Microhoo! can break Google's lock on the customer, so they have nothing to worry about, right?"

Nope, they've got plenty to worry about. In a 1:1 match-up Microhoo! can now directly challenge many, if not all of Google's revenue sources. Because Microhoo! has multiple lines of business (crappy OS immediately comes to mind), it has the resources to enter into a long and protracted price war with Google.

Say goodbye to those profit margins Google! If Microhoo is successful it is going to drive prices straight down. This is probably in retribution for Google thinking it can get into the office productivity space (word processing, spreadsheets and whatever.)

A price war would rendering Google's main sources of revenues (ads, monetizing search) relatively worthless, leaving Google unable to fund further expansions into Microsoft's software space.


Hat tip again Greenwald

Competitive advantage of Google

A few thoughts on the proposed Microsoft/Yahoo deal.

People have been throwing around all sorts of ideas, pro and con, on the deal but at its core, the question on the merits of this deal boils down to one of customer captivity.

For whatever reason, people like to use Google and while it is very easy to click and use another search engine, many people don't. While there are no financial switching costs, there may be some psychological ones (I know how to "Google" something on the net, I have no idea how to "Yahoo" or "Microsoft" something.) So this psychological hold Google has on customers is its one and only competitive advantage.

There is no technology competitive advantage. I think for most users, Google, Yahoo and MSN are essentially the same. Hard-core techies could probably point out some performance differences, but my mother can't.

It isn't about scale. Marginal costs are meaningless online, each new user costs nothing to the company. Maybe Microhoo's! fixed costs will come down somewhat due to synergy (whatever) but ultimately the average costs between Google and Microhoo will remain little changed, so there aren't any cost advantages to be had.

So what other competitive advantages are there? I can't think of any. The only thing Google has to protect its position is the fact that users are simply accustomed to using Google. Microhoo! therefore has only one goal, to break users of the Google habit.

If Ballmer and co. can do that, then this deal is worth something. If they can't, then adding the number 2 position with the number 3 position will not equal a number 1 position.


Hat tip: A lot of this thinking is powered by the writings of Bruce Greenwald. Prof. Greenwald, in the unlikely event you're reading this, I hope I got it right.

Succumbing to unnatural forces

From the Big Picture.

Here's the money quote:

Consider how many of our current problems are due to ill-considered poorly thought attempts to avoid a cyclical recession. Not only is our mess man-made, but it was totally unnecessary.

Interest rates are down... but who's lending?

Paul Krugman wins the "downer-of-the-day" award... but he's got a point, this current credit crunch sucks worse than a bunch of the previous ones.

Which to my mind raises a question about the Fed... what is the use of cutting interest rates of no one is lending? The current economic malaise was caused by too much cheap money, not a need for more of it.

Slowing China, cheaper commodities

A slowing China could take some of the strain off of the commodities market. China's buying a whole lot of trees and rocks and liquefied dinosaurs and stuff, and that is driving prices up. If they slow down, maybe the prices of commodities will recede a bit as well.

Obviously the question of a slowing China is how controlled it will be. A hard landing has some people losing sleep.

A recession... or something like it.

look, I'm not going to say the economy is not in trouble... it is and it may get worse before it gets any better.

Hell, it may get much better, and then get much worse all over again for an entirely different reason.

But I cannot help but think the current economic hit we're taking is smacking the financial sector particulalry hard and their whining is getting the rest of us down. So the farther you get from financials, the less of a whack you may be getting.

Factories Remain Solid as Orders Increase - WSJ.com

China exports inflation

I guess I'm in the mood to read and write about inflation this evening...

Here's a piece in the NYT about China's inflation being exported to the US.

Krigman, however, thinks the piece overstates the case.

You know, it wasn't that long ago that I'd spend my Saturday nights out partying rather than blogging about economic issues that, in all truth, I really don't know a whole lot about.

Inflation in Europe

The Europeans are taking inflation much more seriously. But I'm wondering if their main inflation worries are trying to stamp out inflation expectations amongst the population.

When workers begin to expect inflation, they build it into their wage demands and in effect it becomes a self-fulfilling prophesy. People get inflation because they expect it and price it in themselves.

The ECB seems to be aware of that and is trying to nip expectations at the bud.

I would thing that other price increases, especially for imported goods, would be mitigated by the super-strong Euro. (Strong Euro increases the ability by Europeans to buy goods on the global market.)

Let's talk about inflation, baby

FINALLY... amongst all of the talk about interest rates and recession, someone bring up the problem of inflation.

I've been yabbering on about inflation for a while but it seemed no one was paying attention to me... I was starting to take it personally.

Greg Mankiw weighs in with:

A rise in expected inflation is not consistent with the conventional wisdom that the economy is on the verge of a serious slump driven by inadequate aggregate demand.

My thoughts (sorta) on that here and here.

In a nutshell, recession talk in the US may be fueled by low domestic demand, but high global demand for products will keep pushing prices up at the exact same time the US dollar (read, American’s ability to buy stuff) drops.

Please get fiscal policy out of the way...

I'm going to agree with Mankiw on this one, the current mess is no place for fiscal policy. I don't have high hopes for the current stimulus package.

I would even go one step farther and suggest that the Fed's monetary policy isn't helping much either.