Businomics Blog

Debt Crisis: A Possible Solution

A friend of mine (whose job depends on other people borrowing money) sent me a link to this solution to the debt crisis, which took the form of a Saturday Night Live skit.

Excess Housing Inventory: How Fast Are We Working it Off?

We have too many new homes on the market.  Take a look.  (This chart shows new homes for sale that are either finished or under construction.  The Census Bureau also counts houses on which construction has not begun.  To me, that's counting some developer's hopes and dreams.  But the picture is similar by either measure.)

The average number of new houses for sale, including the recent sky-high period, is 295,000.  At the recent pace of decline, which has lasted 13 months so far, how long will it take to work off the excess inventory and bring us down to that 295,000 average?  The inventory is declining by about 2,500 units per month, and we have 149,000 more decline to go.  At the current pace, it will take 59 months to work off the excess inventory.  That takes us to the autumn of 2012, five years from now.  But there's good news.  The pace of new construction has slackened, and builders are cutting prices more aggressively to move their inventory.  Of course, all buyers these days have to be prime credits, not subprimes.  And there won't be any investors involved, at least none who are legally allowed to sign papers with sharp objects.  And we still have a glut of existing homes on the market as well as these new houses.

I see little room for optimism about new housing construction.  Sorry.

Businomics: Search Inside It

Amazon has set up it's "Search Inside" feature for Businomics: From the Headlines to Your Bottom Line--How to Profit in Any Economic Cycle.  I had never used the feature for any book, so I tried it out on mine.  Here's how to do it: Go to Amazon's Businomics Page and look above the image of the book; click on the phrase "Search Inside."  You'll have to log in with email address and password.  (If you don't have an Amazon account, you'll have to create one--sorry.)  Then do a search.  If you're at a loss for ideas, search for "Adam Smith."  By picking something at random, you can get a couple of pages of the book to peruse, just as you would do in a bookstore.  Try searching for your industry.

You can buy from Amazon or directly from the Businomics web page--your choice.

eBay's Culture of Analytics: We All Need to Get on Board

Fast Company's latest article about eBay describes how the new chief technology officer created a "culture of analytics."  The old approach had been to set up a new feature or interface and see if it works.  If not, roll it back, returning to the old way.

The new approach was started by Matt Carey, the CTO.  eBay would show a new feature to a sample of users, about one to two percent of the total users.  They didn't know they were guinea pigs.  But their behavior on the site was tracked, in terms of how long they stayed on the site, how many pages they visited, how much business they did, etc.  Now one of the top developers says: "In a Darwinian sense, to be a survivor something has to keep producing."

The remarkable thing about this story is . . . that it's remarkable.  This should be cut and dried, basic business these days.  The data needed to evaluate an experiment at an on-line business are all available, if you just set up the systems to collect and analyze it.  Let's get on with it, guys.

(By the way, I've been watching what you click on to get to my page, and I've reacted.  Traffic is up.  Thanks.)

Consensus Economics Pioneer Passes Away

I'm a big fan of consensus economic forecasts.  You average what we economists are thinking and you get a forecast that has proved, over time, to be more accurate than any one forecaster.  I still pencil out my own prediction, but I tell my business clients that there's good reason to rely on the consensus.

The pioneer of consensus economics, Bob Eggert, passed away last Friday.  Read his obituary here.

Eggert was not only an economist (before retiring, chief economist of RCA), but an entrepreneur, starting up a business to publish--for profit--his tabulation of the consensus forecast.  As a fellow trying to raise some angel finance myself, I have tremendous respect for him.  There aren't too many of us  economist-entrepreneurs out there, and we just lost a great one.

China's Economy: Bank Lending Restrictions to Slow Growth?

China's regulators are asking banks not to grow their loan outstandings between October 31 and December 31.  This is a ham-handed way to slow the pace of economic growth and tame inflation, which is running 6.5 percent in China's official statistics.  That 6.5 percent is an average; foodstuffs are rising by 17 percent, which has to make everyday Chinese people feel like they are experiencing runaway inflation.

Economic growth in each of the first three quarters of this year exceeded 11 percent.  Not too long ago we had been thinking that China's long-run average growth potential was about nine percent.  We can't be too sure about much in this regard, neither the official historic statistics or the estimated growth potential.  But the evidence from accelerating inflation is that the economy is growing too fast.

Our worry now: that blunt instruments will cause trauma. It's quite likely that the new policy will not work gently.  I guess it will seem to not be working, possibly get dialed up, then all the time lags run out and China slows very sharply.  But the exact timing of this process is hard to nail down.

Will China go into recession?  Not in the sense that we know recessions, with real GDP falling for a couple of quarters.  But China's growth will decelerate sharply at some time in 2008 or 2009.  After that, look for a sharp re-acceleration.  In the big picture, it will be a little blip in a long spell of growth.

What impact would a Chinese recession have on the United States? Don't expect too much.  Our exports to China amount to about half of one percent of our GDP.  And a Chinese recession probably would not reduce U.S. exports to China, just slow the growth rate.  So don't worry.

Some basic economic lessons can be taught from this policy.  Some doofus will calculate the change in bank lending from this policy, and compare it the change in bank lending from a developed country's change in monetary policy.  Not apples to apples here.  China's approach will lead to credit rationing, because there will be more demand for credit, at the going rate, than banks are allowed to supply.  The banks will pick and choose among their customers, kowtowing to the well connected.  In a market economy, borrowers sort themselves out based on who is most willing to pay higher interest rates.  So a market-based policy keeps credit flowing to the companies that can best use credit.  Efficiency of the economy is much greater that way.

This is just another example of stupid policy in China.  However, don't get too pessimistic about this country.  They have so much room to grow, that they can survive a lot of stupid policy.  But some day, their advantage over the West in labor costs will be diminished.  If they have not yet adopted world class economic policymaking at that time, they will stagnate at a fraction of U.S. GDP per capita.

Oil Pricing in Dollars: 10 Simple Facts

The price of oil is quoted in dollars.  Does this practice have any real impact on anything?  Here are Mish's 10 Simple Facts:

1) Oil is priced in dollars.
2) Oil trades in Dollars and Euros right now in spite of the pricing unit being dollars. OPEC has recently admitted this fact.
3) Clearly oil does not have to be priced in Euros to trade in Euros, or for that matter priced in Yen to trade in Yen. The same applies to any major currency.
4) Neither Venezuela or Iran hold any dollar reserves. To the extent that either is taking trades in dollars, there is clearly nothing forcing them to hold dollars. By extension there is nothing forcing any OPEC country to hold dollars if it doesn't want to.
5) It takes less than a second for Forex trades to take place. 24 hours a day, 7 days a week, one can sell any currency they want and buy any other currency.
6) The above logic applies to any currency and any commodity.
7) Nothing is stopping anyone at any time anywhere from selling dollars for whatever currency they want to hold. Nor is anything stopping anyone anywhere at any time from selling any major currency for U.S. Dollars.
8) Because currency conversion is instantaneous no one has to hold U.S. dollars to buy oil, copper, gold, iron, lead, wheat, soybeans, or anything else.
9) Dollars are held (or not held) for reasons totally unrelated to pricing unit. Some of those reasons are political, some are based on sentiment, some on trade patterns and trade relationships, and some to suppress the value of local currencies to improve exports.
10) Currencies float and so do the price of oil and commodities. Pricing oil (or any other commodity) in Euros will not cause a price change in dollars. Look at gold which is simultaneously priced in everything as proof.

Read the whole post here.

Investments for a Global Recession

I'm not forecasting a recession, but . . .

My previous blog post about investments for a recession has proved to be very popular.  But I recently looked at Capital Spectator's chart showing returns by industry year to date:

The market is anticipating a domestic slowdown or recession, but not an international recession.  What's the difference?  It's quite possible for the United States to go into recession with the rest of the world continuing on.  Oh, you'll see newspaper articles saying that China's exports will drop if the U.S. goes into recession, but such "echo" downturns are far, far muted.  An American recession would most likely be limited to North America.

The chart shows investors shunning financials and consumer discretionary stocks, which would be hurt by a domestic recession.  But energies, materials, and industrials have done well.  They would normally be very recession sensitive.  What's the deal?

In a globalized world, those sectors--energy, materials and industrials--trade off of international conditions, not domestic conditions.  So if you are pessimistic about the global economy, those sectors should be dumped as well as the financials and consumer cyclicals that have already been dumped.

What about me?  I personally don't think we're headed for a recession.  But if you do, figure out whether you expect a domestic recession or a global recession, and act accordingly.

Professionals Working from Home

The Wall Street Journal recently ran a column by Sue Shellenbarger (subscription required) about professionals working from home.

This subject should be on the strategic planning radar screen of all companies with employees.  Here's why:  in the decade from 2010 to 2020, there will be no net growth of the working age population.  That's because the baby boomers will be leaving their working years, and their children (the "echo boom") will have already entered their working years.

If your long-run business plan has growth of the number of employees next decade, you will have to steal those employees from some other employer.  How do you do that?

I'm not sure how best to do that.  I'm pretty sure that you don't know, either.  But I know the way to learn is to experiment.  Try some folks working from home.  Try hiring some retirees who get more flexible hours.  Try tapping into non-traditional labor sources, such as immigrant  communities.  Try using some high school grads where you previously used college grads.  Try different things, because there may not be one best strategy.  Even if one strategy proves best, you'll have to work out some bugs.  You may find that if you hire work-at-homes, you need different hiring criteria, different monitoring systems, different compensation systems.  The time to work out the bugs is now.

I've talked about this in my speeches to corporate executives, and I don't seem to get much traction.  I fear that many business leaders are thinking, "Yes, that's a problem, but I retire in three years, so it's not MY problem."  Actually, if a person is thinking that, he doesn't deserve the label "business leader."  But if a business is to survive, someone at the top needs to sponsor some experiments to figure out how to deal with the labor dearth of the next decade.

Business Goals vs. Strategic Intuition

Read the first two paragraphs of this Wall Street Journal book review:

Set big goals. Do whatever it takes to reach them. These muscular sentences form the core of commencement addresses, business-advice books, political movements and even the United Nations approach to global poverty. In "Strategic Intuition," a concise and entertaining treatise on human achievement, William Duggan says that such pronouncements are not only banal but wrong.

Mr. Duggan, who teaches strategy at Columbia Business School, argues that the commonplace formula has it backward. Instead of setting goals first, he says, it is better to watch for opportunities with large payoffs at low costs and only then set your goals. That is what innovators throughout history have done, as Mr. Duggan shows in a deliriously fast-paced tour of history.

(The full review is available here; subscription required.)

This message strikes home in two ways.  First, I've been blogging about the trial and error economy, in which companies adjust their actions as they get feedback on what's working and what's not.  That seems to be the essence of Duggan's book, which I have not yet read. (A couple of my key posts about the Trial and Error economy are here and here.

The second way this strikes home is that I've been working on a new business venture.  I'll post more about it here as it gets started, but it's a web-based information service.  As we talk to angel investors, they want to see our plans and goals.  Fine, I understand that.  But I have a forecast that three years into the project, at least half of our content will be driven by customer reaction rather than our own plans.

You could well ask if we should be starting a business if we don't know what to provide our customers.  But as we look around, hardly anybody is really doing a good job at monitoring customers to see what they want.  Here's an example:  suppose a supermarket manager noticed that customers were spending a lot of time in one aisle looking for something, and that half of those customers left the aisle without having placed anything in their shopping carts.  A smart manager would figure out that they are looking for something that isn't there.  Even the ones who buy something from that aisle may have been settling for second best; their time in the aisle indicates that they were looking for something rather than just grabbing their old-time favorite.

It's hard for the old-time supermarket manager to spot this behavior, identify the specific section of the aisle where this is happening, and bring in additional offerings to tempt the shoppers.  But it's pretty easy to do that on the web.  The biggest surprise is how little it's being done right now.

For the business leader or investor, I recommend: think less about plans and goals, and think more about how to identify opportunities and quickly exploit them.