Posts tagged economics

How to sense a mega-trend

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A client asked us: ”How should we be sensing mega-trends in our industry, tech, and politics?” 

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Here’s the thing about mega-trends: To be one, it has to hit all of the areas you listed: economy, tech, life, politics, etc.

It may be that the mistake that we make is they look to hard for trends in one or another of these categories, but not broadly. And when we do this we end up with mini-trends, or premature investment (e.g., John Deere’s turbine business).

Here’s what I suggest for sniffing out mega-trends.

Ear to the ground: There’s no trumping talking to people. Where I tend to learn the most interesting info on what’s popping is from conversations with people who work in different fields (e.g., an NGO strategist, investment banker, and art school professor).

Also, subscribe to publications across industries: financemuseums, and journalism are a few good ones. 

Non-obvious influentials: I seek out the blogs of people who are leading the conversation like designers and theorists (not business people — though I do peruse WSJ and WaPo daily).

Here are three: 
http://eskokilpi.blogging.fi/
http://emergentbydesign.com/
http://stoweboyd.com/

Watch some social media sources: Quora streams are a wealth if you follow the right people (aside: social media channels tend to suck for innovative ideas and emerging trends):  http://www.quora.com/

I would add — because I think it’s really important — that to fully comprehend a mega-trend, you have to write about it. Writing enables clarity of thought. This last part pretty much sums up why I write here — to collect and catalog what I think and read so I can access it later.

Image cred: Daily Mail 

Entering the era of conservation

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Full disclosure: am wearing purple Birkenstocks while writing.

Economies can’t expand forever, according to this Stephen King — though the dire scenario he describes might as well be the brainchild of the other Stephen King.

The great waves of global growth (e.g., trade, consumer credit, and expanded education), will subside and we will be left with economic stagnation and decline. Sounds Malthusian, right? 

King says: "The end of the golden age cannot be explained by some technological reversal. From iPad apps to shale gas, technology continues to advance. The underlying reason for the stagnation is that a half-century of remarkable one-off developments in the industrialized world will not be repeated."

Yes, given current economic assumptions, we cannot replicate the growth of the last 50 years, in U.S. and elsewhere.

The biggest and most wrought of those assumptions is that of low-cost energy being the most important driver of growth. All one has to do to get a sense of its holy standing in economics and politics is watch Obama dance around the realities of fracking in his effort to cheerlead on natural gas drilling, ignoring its real costs to all of us. 

We can create nothing but marginal growth if we continue to plumb the earth looking for lower and lower quality fuel sources. Tar sands excavation and fracking for shale gas mark a new level of desperation to drive growth. We are like alcoholics drinking the contents of our medicine cabinets.

The first step is admitting there’s a problem with our models, with our growth assumptions. And recalling this: “The future is not shaped by people who don’t really believe in the future.” — John Gardner.

We need to untether ourselves from gas to grow, adopting a new outlook re: renewables, and cast off capital market models that serve the whim of giant pools of money seeking higher and higher returns, and we need to do so in favor of new investment models and expectations around social as well as financial returns — it’s time for more Grameen banks and new models for reducing poverty.

What King’s essay appears to be saying is that global growth is over for everyone and, as such, capital resources will be reapportioned but not expanded significantly in the coming years and decades. With this in mind, we are entering an era of global conservation, and we will be saving what we would have spent, drilled, mined, and taxed.

Beyond our basic order of needs — food and shelter and such — there is the risk of inequality. If we can control for that, we can soften the landing from previous high-growth eras. So long as we continue to be creative in how we reduce poverty and inequality around the world, a slowdown won’t be apocalyptic. So, let’s plan for that and stop trying to squeeze out every last drop of growth having only short-term gains in mind.

Photo: Demonstration in Angelica, NY where the landfill is trying to fast-track a permit for accepting fracking waste from Pennsylvania.

The new mega-trend is transience: adapt assumptions, policies, and business practices

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I reread the Grapes of Wrath in the Great Recession, but only now am I seeing the parallels. Our country was on the move in the Depression, and that’s quickly becoming the new reality for many of us.  

Construction workers have long been a mobile class — moving from boom town to boom town, many in RVs as their homes. And now, even academics are viewed as disposable (or readily replaceable, to be exact).  

My sister recently bemoaned her mobile life in academia, calling herself a “migrant laborer”. She quickly refined the statement, saying that her life was much more comfortable than that of a fruit picker, but that the reality is academic jobs are treated more as short-term roles.

Indeed, research from Northwestern shows that non-tenure track professors are better teachers. Of course they are, the pressure to perform is much higher. Watch for schools using this as a cudgel against those seeking tenure track jobs. 

We’re becoming a nation of freelancers. While that may sound, um, freeing to some people, negative implications abound.

If we’re all to be in business for ourselves: who insures us? Who covers for us when we are sick? What entities help us keep our transaction costs low? And, who enables our mobility.

This last point is where I’m fixated now.

Government is working on the first question via Obamacare (all politics aside). Our social networks and relationships will enable us to effectively cover our risks, for those of us lucky enough to be a part of strong professional communities. Nonprofits and professional groups will have to fill in for others, figuring out how to support those that don’t have strong networks to protect against free-rider problems such as professional under-bidding, which erodes our earning capacity (but that’s fodder for another post).

What truly has me worried (mostly because I’ve just moved twice) are the logistics of a mobile nation: 1) tax law prefers we be homeowners — even if it leaves individuals less mobile or even “under water”; 2) finance expects an enormous downpayment on a home when we may be least able to afford it (e.g., when we are moving for a new job); 3) renting has absolutely no financial benefit, and even leases can be expensive to leave, and renters are often vulnerable to horrible and abusive landlords (I’ve suffered through two psychos). 

The rules of the game need to change in response to this new economic reality. Lawmakers need to figure out how to support those of us who move with frequency for work, and stop putting the tax emphasis on stasis, and finance executives need to figure out how to support shorter-term home ownership (if that is indeed better), with lower upfront costs that don’t carry much higher down-the-road risks, particularly if it’s indeed true that home ownership is truly beneficial to communities. Finally, companies that support us in our move need to be much better at helping us get from place to place (current moving and storage solutions are often very expensive and painful to manage — ahem, PODS).

There is a real shortage of support structures and businesses to support a more mobile nation of workers. Time to get on it!

Image: from HomeOwnerNut blog

Weighing the benefits of bunking in

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Many Americans are living in someone else’s home for economic reasons, and these so-called missing households are hindering growth, according to a WSJ piece this week

"The number of so-called missing households—representing adults who would be owning or renting their own home if household formation had stayed at normal rates since the recession—has increased 4% over the past year…

"There are now some 2.4 million such people, many of them living with their parents, but also seniors living with their adult offspring and people renting rooms in a home headed by an unrelated person."

It’s easy to see how savings slow growth, but considering American indebtedness leading up the Great Recession, it’s hard to view this as wholly problematic.

The upside of the economic instability over the past several years will probably be documented by sociologists who will have witnessed closer family and kinship ties forming during a time of increased mutual-dependency.

I’ve experienced this first hand. After years of solo living, I’m spending these summer months as a guest in other people’s homes.

Co-habitation has been an interesting exercise. As an adult we rarely get to wrap ourselves up in the rhythms of others’ lives, and we rarely open our lives to others in a meaningful way (except spouses, of course). But when we do this it can be incredible.

We can get others’ advice over a morning coffee, take a late night stroll after shutting down the laptop and talk about whatever, and we can help them in their lives. We see first-hand what they need — advice on a relationship or job, or help completing a project.

We become better friends and more helpful and attuned siblings and daughters. We also conserve resources by sharing costs and making better use of space, which helps the host and the guest.

While it’s more bottom-line than top-line growth, it’s also important to our economy.

Photo: My old apartment in Washington, DC, which was tiny but big enough to host many friends (>50 guests in 4 years).

Protests surface business leadership lessons

I don’t mean to be dismissive of political instability, but it struck me that there’s something to be learned of the democratic surges happening now. 

The news out of Turkey and Brazil is not wholly unexpected to international affairs experts whose job it is to apply rules of thumb to the political and economic situation in these countries. (If only solutions were as simple.) 

And, it turns out, that these same rules may be applied at the micro- and macro-levels, and are thus helpful to businesses just as they are in the study of foreign affairs.

The rule of thumb I most love is the 4-4-50%, which indicates to a company or country when they are dealing with an effective monopoly (really, an oligopoly capable of collusion). If four of fewer firms or countries control more than 50% of supply, cutoff or high costs become significant risks (and companies should consider acquisition). Remember CNOOC’s Unocal bid? This calculus got to the heart of that matter. (I should note: this isn’t an economists definition of monopoly, but it has real-world use in terms of measuring risk.)

Now, the protests in the emerging economies of Brazil and Turkey are surfacing new lessons for company and country leaders (this was a fabulous WaPo interview with Ruchir Sharma): 

Leaders can outlast their useful lives. 

Countries: “In Turkey’s case, for instance, the real problem there is Erdogan has been in office for a very long period of time. A rule of thumb we use is when a leader is in power for more than a decade it becomes counterproductive for the country. A decade ago, Erdogan was much more conciliatory, much more interested in economics and much less interested in social issues.” — Ruchir Sharma

Companies: Drive-through CEOs don’t have a great record of leadership compared to those in seat for decades, but complacency and a narrowed field of vision can drag a company down. The real challenge for boards of directors is to make sure that CEOs don’t surround themselves with those who agree with them and suppress dissent. 

Reinvestment is key. 

Countries: “Infrastructure as a share of GDP in Brazil is two percent. That’s about the lowest I know for any emerging market. The average is five percent, and China is 10 percent. Investment spending in Brazil is low, too.” — Ruchir Sharma

Companies: If you’re not reinvesting in R&D if you’re a pharma company, or training your people if you are a services company, you are probably going to start losing to competitors. Neglecting your core business in favor of other, non-essential investments will result in slowed growth. Watch for companies that are focused on non-core M&A — they don’t have their eye on the ball.

Surely, there are many more lessons to be had here as well, but these two struck me immediately.

17 Rules for a Sustainable Economy

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I’m a believer in the idea that place matters, and being thoughtful about where the things we buy/support come from. I’m seeing the importance of a principled approach from my perch on a farm in upstate, NY, where smaller scale economies ensure local livelihood. 

In his 17 Rules, Wendell Berry underscores the importance of cultural and ecological principles for sustaining local economies and local communities:

"1. Always ask of any proposed change or innovation: What will this do to our community? How will this affect our common wealth.

2. Always include local nature – the land, the water, the air, the native creatures – within the membership of the community.

3. Always ask how local needs might be supplied from local sources, including the mutual help of neighbors.

4. Always supply local needs first (and only then think of exporting products – first to nearby cities, then to others).

5. Understand the ultimate unsoundness of the industrial doctrine of ‘labor saving’ if that implies poor work, unemployment, or any kind of pollution or contamination.

6. Develop properly scaled value-adding industries for local products to ensure that the community does not become merely a colony of national or global economy.

7. Develop small-scale industries and businesses to support the local farm and/or forest economy.

8. Strive to supply as much of the community’s own energy as possible.

9. Strive to increase earnings (in whatever form) within the community for as long as possible before they are paid out.

10. Make sure that money paid into the local economy circulates within the community and decrease expenditures outside the community.

11. Make the community able to invest in itself by maintaining its properties, keeping itself clean (without dirtying some other place), caring for its old people, and teaching its children.

12. See that the old and young take care of one another. The young must learn from the old, not necessarily, and not always in school. There must be no institutionalized childcare and no homes for the aged. The community knows and remembers itself by the association of old and young.

13. Account for costs now conventionally hidden or externalized. Whenever possible, these must be debited against monetary income.

14. Look into the possible uses of local currency, community-funded loan programs, systems of barter, and the like.

15. Always be aware of the economic value of neighborly acts. In our time, the costs of living are greatly increased by the loss of neighborhood, which leaves people to face their calamities alone.

16. A rural community should always be acquainted and interconnected with community-minded people in nearby towns and cities.

17. A sustainable rural economy will depend on urban consumers loyal to local products. Therefore, we are talking about an economy that will always be more cooperative than competitive.”

Brown vs. Blair: Lessons from Britain’s New Old Guard

I’m no Anglophile (I do love hot tea and Hot Chip), but there’s no denying the oratory and intellectual gifts of British leaders.

I listened to Former Prime Minister Tony Blair speak last fall to a group of executives, and I met Former Prime Minister Gordon Brown this month at Georgetown University - different venues, different views, and a few different ideas.

Blair and Brown rose together as leaders of the New Labour movement, Blair as a true politician and Brown as a pedagogue by training and trait. Watching, comparing, and contrasting the two former prime ministers is an interesting study that holds valuable insights for business leaders.

Both spoke of the shifting economic balance of power from developed to developing economies and the new approaches it demands. Blair spoke to the role of businesses, Brown to the role of institutions and individuals. And both underscored the point that global problems require global solutions, and no country, corporation, or citizenry can truly afford to sit on the sidelines. 

Lessons from Blair
Blair’s focus is on companies as the engine for change, and he implores business leaders to avoid responding to change with retrenchment. He believes they face one of their finest moments to engage and collaborate with the new market players. Change demands focus on three fronts, according to the former prime minister:

1) Redefining the relationship between government and the private sector, particularly in light of pending tax reform, regulatory changes, and strengthened global oversight. 

2) Balancing hard and soft power when dispelling dangerous myths, and galvanizing those around you to embrace change. 

3) Embracing the rise of non‐western economies (e.g., Indonesia, Brazil, India, Mexico, Russia, and several African economies). 

Lessons from Brown
Brown is concerned about individual ideals as well as the mindset at the international-organizational level. Change demands new thinking on three fronts, according to this former prime minister:  

1) Individual governments and multinational institutions (corporations and banking networks) are not set up to address the economic and social challenges we face. Even bilateral agreements are insufficient, as problems tend to seep across borders. 

2) The strength of global institutions (and corporations) lies in their ethical underpinnings. Human beings share a common understanding of ethics, and we should follow our instinctive tendencies toward empathy and cooperation to create new structures. 

3) Investment and development must head off a race to the bottom in terms of standards (e.g., capital requirements for banks, and pollution controls). Companies should be meeting needs beyond their bottom line.  

It’s always a good idea to learn from the views of leaders who’ve faced diverse challenges (one faced a war; the other a global economic meltdown) and have had time to reflect on their successes and failures. It provides us a framework for our own actions.

Photo: AP

Higher Labor Costs Cometh

Marx wrote that “the production of too many useful things results in too many useless people.” If you watch Downton Abbey, you can see that tension playing out through the British class system of the early 20th century.

Fast forward to today, and the story is far more complex. Yes, there are too many qualified people who cannot find steady employment, but there are also many companies that can’t find the talent they seek. 

Fear of inflation and commodity costs abound, but should it change a company’s outlook? Maybe not. But what about labor costs? For many companies, the answer is yes. I have summarized four points below to help business owners, casual economists, and investors make sense of the current business environment. 

  • Pricing power and profits do not always go hand-in-hand. Profits depend on relative pricing power (growth in prices relative to unit costs). Rising profits, therefore, imply that selling prices are improving relative to production costs. With high unemployment rates and unprecedented productivity, costs have been low for many companies. But they are rising alongside demand for scarce talent, as well as commodity costs.
  • There is usually a temporary profit spike early in recoveries when there is a surge in productivity growth and a slowdown in compensation costs, but that doesn’t tend to last as labor costs pick up. Don’t assume that growth rates will be even, and watch for rising labor costs. 
  • The rule of thumb for developed economies is that labor costs dominate business input costs. While the costs of energy and other raw materials are significant, labor costs are the largest business costs. In the nonfinancial corporate business sector, labor costs are roughly three times more significant than non-labor costs, according to Merrill Lynch. Factor in expected pay raises and hiring costs, looking at the supply and demand for the labor you seek. For startups, this may mean that locking in full-time talent may be less costly now than in the near future, even though labor costs are often your riskiest investment.

     
  • Rising commodity prices will not hit companies as hard as many pundits believe, but some companies may feel the pain of consumer restraint. Watch commodity prices, but know that they don’t necessarily spell inflation. It may be a good time to revisit your supply chain costs and find a more efficient distribution model. 

Further reading:
Planning for Change, As the World Turns from stepwise 
Five misconceptions about productivity from McKinsey Quarterly

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Why Did the Yen Need an Intervention?

I have been struggling to understand the headlines over the past few days that have charted the increasing value of the yen against the U.S. Dollar and other currencies, ultimately leading to an intervention today.

Finally, I bit the bullet and called a friend at Merrill Lynch who told me that the yen’s rise is due to the unwinding of the carry trade. You see, global investors have been borrowing in yen, and investing in other currencies to take advantage of Japan’s low rates, and the growing value of other currencies (mostly in Asia). Now, investors are buying back their yen as instability and uncertainty mounts.

Don’t worry though the giant global pool of money will likely seek a new intermediary for its currency market gambit, and the bubbles will continue to form. 

Why Municipal Finances Matter to Small Businesses

The municipal bond saga poses a significant threat to small businesses, which should expect higher taxes and more aggressive tax auditing as state and local governments look to close budget shortfalls.

Many companies are located in states that are tipping dangerously toward default (check your state’s status), and the likeliest and most assured way out of such a debt fix is to raise taxes and pursue tax revenues more aggressively.

So while Congress takes up the task of rationalizing the corporate tax system (to the disadvantage of many small businesses, by the way), expect unevenness at the state and local levels. Already Illinois has proposed raising the individual income tax rate by about 66% and California is considering temporary increases on income and sales taxes to plug the state’s $25.4 billion budget hole. Higher property taxes (for many) are anticipated as well. 

Raising individual tax rates is the go-to deficit response for many states, and such a move would impact the majority of small businesses located in those states.

Does this mean that you should consider a move if you operate in a high risk state? Not necessarily. Keep in mind that the best place to locate your small business may not be in a state with lower-than-average tax and regulatory costs. Rather, you should go where your customers and the best talent live.

Finally, it isn’t too much of a stretch to foresee states pursuing taxable income earned out of state. Be sure that your books are in order so you don’t face a tax double-whammy in the states where you have business operations. 

As always, follow the cardinal rules of small business accounting (see above and below):

  • Compile good books and records for your business activities.
  • Retain required receipts and other documentation for a minimum of three years.
  • Use separate bank accounts and credit cards for your business and personal finances.

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