Frightening Economic Growth

Though there is a great deal of confusion among the American public regarding economic growth, it remains a fact that Q3 real GDP is .8% below the peak recorded in Dec. 2007 according to the following WSJ article:

Izzo, Phil, 2010. Economists react: growth remains "too weak." The Wall Street Journal, Oct. 29.

The recovery is way behind and there are few signs to indicate a quick turnaround. There should be quarters recording more than 6% growth, yet most are hoping to maintain 2% growth for the next six months. Some believe that 2% average growth is not possible.

With the anticipated change in the structure of political power almost certain to come from the Tues. election, it is an important time for all Americans to reassess what is needed to bring about economic prosperity.

Unending Deflation in Japan

I have numerous friends in Japan. It is an amazing society in many ways, perhaps the most unique in the world.

For a long time I have been concerned about the Japanese economy.

This recent quote puts things into perspective:

"Japan's core consumer price index dropped 1.1% from a year earlier in September, the Ministry of Internal Affairs and Communications said, making the 19th straight month of decline. The unrelenting slide in prices highlights how Prime Minister Naoto Kan's government has yet to gain a foothold in its fight against deflation, after declaring the battle a top priority."

Monahan, Andrew, 2010. Japanese production falls as deflation tightens grip. The Wall Street Journal, Oct. 29.

Folks in the US need to pay attention to the potentially devastating effects of deflation. Historically, in some cases America has undergone long periods of modest economic growth when recovering from a crash caused by too much speculation. As an example, I wrote the following blog post earlier this year:

1937

Japan has undergone almost 20 years of deflation and weak economic growth. There have been many changes to Japanese society as a consequence of these developments. The lack of growth by the third largest worldwide economy has affected the global balance of trade in ways that as of yet are still not completely understood.

If America experiences deflation, the same fate is possible ... a long period of declining prices and little economic growth.

The Big Week

The upcoming week is huge in terms of anticipated effect on the stock market. The election, the Fed meeting, and the unemployment report probably will cause swings between gains and losses.

Can Inventories Continue to Increase?

I notice that there is more concern expressed regarding the size of the Q3 inventory build in relation to consumer sales (see my previous post - The Diminishing Inventory Build).

This recent statement sums things up:

"As the estimable Dean Baker of the Center for Economic and Policy Research observes, the big boost to July-September GDP came from a $115.9 billion rise in inventories, the largest increase in inventories since the $117.2 billion gain in the first quarter of 1998. Alas, as Dean also points out, the improvement in final demand, which has averaged a pallid 1% in the five quarters since the official end of the recession, was a skimpy 0.6% in the latest three months."

Abelson, Alan, 2010. Goodbye, great bond bull market. Barron's, Oct. 30.

The article goes on to state an important comment by Dean Baker, namely "this report suggests a picture of an economy that may be skirting zero growth in the next two quarters." bold added

For a long time, I have noticed that financial analysts seem to pay much more attention to the pace of inventory build as compared to economists. I very much feel that the amount of inventory held by businesses is an extremely important indicator for many reasons.

In theory, improved operational techniques should mean that inventory is an indication of a management's assessment for future sales. Of course this depends on the ability to forecast customer intentions, something that is highly complex and difficult to accomplish with accuracy.

A slowdown or reversal of the aggregate inventory build would have a negative impact on GDP growth. The prospect of GDP growth under performing during the next few months has gained greater acceptance, hence the apparent decision by the Fed to implement another round of quantitative easing.

All of this indicates that job growth will likely continue to be weak. Some believe that October's unemployment situation could become even worse. The following quote from Alan Abelson's article is one view:

"The consensus, he relates [John Williams, Shadow Government Statistics], is for 45,000 additions to payroll and the unemployment rate to remain at 9.6%. His prediction: a contraction in payrolls, a higher jobless rate and rises in the broader unemployment measures. If he's on the money, remember you read it here first. If, by chance, he isn't, be nice and don't remember." bold added

The effects of the 2000 (.com) bubble and ultra low interest rates 2002 - 2005 continue to haunt the American economy. Predictions of a housing market recovery by 2014 and full employment by 2015 appear to be realistic!

Though Republicans will likely make huge gains during the 2010 elections, taking control of the house, I feel the party does not have much of a plan to get America on a path to prosperity. The chances that the Republicans will be able to cut the massive Federal budget deficit appear slim.

I remain unsure that political change in terms of election results will translate into economic prosperity.

GDP Growth Q3, Welcome News

The estimated 2% growth in GDP for Q3 is welcome news indeed. It means that the US economy is not sliding backward and the chances of a double-dip recession are less.

However, the US economy is growing at less than its potential. Further natural repair based on free-market forces is perhaps the best way to narrow the difference between growth potential and reality.

The unemployment problem in the US remains a serious issue as does the prospects for housing. A full recovery will likely take years in these two areas likely will take years and perhaps continue to be an issue in the 2012 elections.

The Tea Party and Political Change

There is no question that a political avalanche will happen next Tues. as many Democrats, some long standing in elected office, are voted out of power. Election polling is never certain, however by all indications Tues. will be a rout.

A great danger exists that America will shift too far to the right, over compensating for what has proven to be disastrous efforts at reviving the economy by Democrats. The mounting national debt and extremely high unemployment continue to cause great stress for American society in spite of at least 2.5 trillion dollars being spend on fiscal and monetary efforts to turn things around. The most recent news of quantitative easing II, to the tune of perhaps $500 billion, is more likely to raise commodity prices rather than put people back to work. The public is angry and there is backlash against intellectual, political, and economic institutions from significant majorities in the middle class based on the belief that experts are no longer able to make the best decisions.

All too often in American politics, constituencies with a public mandate take political action to an extreme. This was true in 2008 as Democrats took a broad legislative path on progressive social issues including national health care and I believe that it will be true again in 2010 as many Republican candidates with Tea Party backing have taken what I consider to be poorly thought out, radical positions. Some of the public statements attributed to Tea Party backed candidates for office are truly amazing, calling for the abolishment of the Dept. of Energy, the Federal Reserve, and the purging of "liberal" CEO's in major corporations, including General Electric. Some of the Tea Party positions appear to have no basis in Republican or conservative doctrine.

For example, the following quote reflects a shifting position that diminishes the distinction of party and political philosophy, an ongoing development of great concern to me for many years:

"Underlying all of this is a deep tea party suspicion that big government is in cahoots with big business and Wall Street, against the rest of America. This has been the conventional view among leftist conspiracy theorists for years but it's now emerging full-throttle on the right."

Reich, Robert B., 2010. Why business should fear the tea party. The Wall Street Journal, Oct. 29.

For the GOP to be successful in leading America to prosperity, there must be moderation and a concrete plan of action that resists the forces of radicalism. I am not convinced that such a plan exists.

This could be disastrous to the Republican Party and the voice of loyal moderates who wish to see less government, a reduced national deficit, and economic prosperity while avoiding extremist positions that can only have the unproductive outcome of enraging the minority Democrats and independent voters.

Scandit - Socal Shopping App for the iPhone

I think this is extremely interesting iPhone technology involving the scanning of bar codes for consumer products along with links into social networking and data sharing:

Scandit

Review from ubergizmo

Look for big things from social shopping and Scandit! I think the folks have a marvelous idea that will take-off and will help people to get the best prices on merchandise!

It should be a big hit during the holiday shopping season!

Africa

Though the continent has a long way to go regarding infrastructure, for some time investors and countries have been interested in African agriculture. I am aware of several efforts by the Bill and Melinda Gates Foundation to unleash some of the potential of Africa as a major biofuel, livestock, timber, cereal grains, and fruits and vegetables producer.

I think Indonesia and other areas in S.E. Asia also have potential to further develop agriculture.

This extremely interesting article in the WSJ outlines some of the private investment opportunities:

Henshaw, Caroline, 2010. Private sector interest grows in african farming. The Wall Street Journal, Oct. 29.

From the article, an amazing statistic:

"To meet growing global food demand the United Nation's Food and Agriculture Organization estimates an extra six million hectares need to be brought under cultivation every year for the next 30 years. With sub-Saharan Africa estimated to hold up to 60% of the world's remaining uncultivated land suitable for farming, the region's agriculture is starting to look an interesting investment." bold added.

Further, less that 2% of African farmland has irrigation systems in place and yields are far below the world average.

There remain huge hurdles for Africa to overcome before it transforms into an agricultural power. However, I believe a combination of proper infrastructure investments and technology will prevail.

The future of the world depends on agriculture, water, and energy. At MIT we view these as interrelated and the opportunity for significant contributions in research and technological advancement.

Profit Margins and Quantitative Easing

It appears that investors are looking almost exclusively to quantitative easing as the main tool for stimulating economic growth and the prevention of a double dip recession.

However, I think it is very much overlooked that quantitative easing is likely to play a role in increasing commodity prices at a time when most corporations are having difficulty growing the top line. The recent issues at P&G in terms of raw material cost increases and the effect on profit might be a general leading indicator for industry.

Higher cost and low revenue growth means lower profits, sometimes called a margin squeeze. This perhaps will happen across industries.

Wall street is extremely sensitive to eroding profit margins and will penalize individual stock prices at the hint of any such decline.

Stock markets still have not achieved a balance in considering macroeconomic factors, fundamental analysis, technical analysis, speculation, and high frequency trading. I believe that continued government intervention disrupts the natural balance that happens in an efficient, free market with a diversity of players.

Uncertainty Regarding Petroleum Reserves

Estimating untapped petroleum reserves has always been a quantitative business issue of concern to me. Investors in energy companies make decisions based on estimated reserves, yet these numbers are little more than a guess.

The following quote would appear to be a major development in the petroleum industry:

"The U.S. Geological Survey said Tuesday that Alaska holds less oil and natural gas onshore at the National Petroleum Reserve and in nearby state waters than previously thought.

The agency now estimates that the area, on and near land in Alaska's North Slope owned by the U.S. government, holds 896 million barrels of conventional, undiscovered oil, about 10% of the amount the agency predicted was there in 2002." bold added

Sweet, Cassandra, 2010. U.S. cuts estimates of untapped alaska reserves. The Wall Street Journal, Oct. 27.

Asian Agriculture - China's Demand for Grain

For some time, I have been following the food production situation in Asia.

Overall, I think there are strains on the Asian agricultural system that are structural and have far reaching implications. Food price inflation is an important issue for the region with prices increasing at a double digit rate in India, China, and other countries. In turn, this is placing upward pressure on international grain prices. A shortage of rice in 2008 caused a great deal of angst among government officials. In addition, the issue of land availability has prompted significant acquisitions in areas outside of the region, principally Africa.

Combined, these developments paint a picture of business opportunities for American farmers.

This article continues to document Chinese government concerns about food security:

Yap, Chuin-Wei, 2010. Hot potato in china's rising food costs. The Wall Street Journal, Oct. 27.

I especially like this quote from the article:

"Over the next decade, China's annual grain demand is likely to reach 573 million tons, which is above its current production levels. With marginal increases in crop yield shrinking and arable land harder to find, the bet is on that Beijing may swiftly become more reliant than ever on global markets for an essential class of commodities it is desperate to keep mostly home-grown."

Through work at MIT, we hope to apply advanced methods to improve the productivity of agriculture.

Japaneses Style Stimulus - A Sophisticated Approach

It is amazing that the Yen has strengthened to 80 per dollar. This is causing significant changes in Japan in terms of the outlook for the economy and the structure of Japanese society.

I think the following article is important in describing a few of changes that are almost certain to reshape Japanese corporate structure.

Shimmura, Kazuhiro, 2010. Japan approves extra stimulus spending. The Wall Street Journal, Oct. 26.

At first glance, the idea of more stimulus spending for a country that already has significant national debt equally around 200% of GDP seems reckless.

However, the plan put forth by the ruling Democratic Party of Japan does not include the use of government bonds as a means of financing. The intent of the move is to stimulate the Japanese export oriented economy given the strong value of the Yen.

I think this quote from the article is important:

"The package also comes with government financial support for corporations investing overseas to take advantage of the strong yen.

Backed by government funding, including foreign-exchange holdings, the state-run Japan Bank for International Cooperation will provide loans to private companies, when needed, for business activities in developed countries. Such activities may include mergers, acquisitions and investment projects such as power-plant and high-speed train construction." bold added

This appears to be a sophisticated policy of international industrial development to take advantage of the Yen's purchasing power overseas. It is in sharp contrast to the Chinese policy of pegging the Yuan thus suppressing international purchasing power.

Folks should anticipates more Japanese investment in the United States as a result of this stimulus package.

The Macroeconomic Factor in Stock Prices

Most of the drop in today's stock market traces to a slight backing-off by the Fed regarding the size of the quantitative easing program.

As I have written on previous blog posts, macroeconomic policy seems to be a major driver of the stock market these days. I think profit reports continue to play a role, however the huge amount of government intervention in terms of fiscal and monetary policy are creating distortion and an over reliance on various macroeconomic announcements such as the Fed's inclination toward quantitative easing.

At this stage, I think the economy must repair itself. This will take time and might include another recession within the next few years.

The current threat to stock prices is an over reliance on macroeconomic news and high frequency trading. The market needs more focus on profits and the condition of the consumer.

There are some preliminary indications that retailers feel consumers might be tapped out once again in terms of spending.

Profit Squeeze

I think the Fed is beginning to realize that any substantial quantitative easing effort is likely to raise raw material costs for many companies that do not have enough power in the marketplace to raise prices, hence a profit squeeze for many companies.

The Q3 results reported to day for P&G might be just the beginning.

The Diminishing Inventory Build

I noticed an article in the WSJ today that mentions a declining rate of inventory build. I think this is significant news as it comes during a critical time in holiday sales preparations. There continues to be a great deal of uncertainty. The blip in consumer spending might actually add to the uncertainty as retailers attempt to project buying intentions during the holiday season.

I will have more to write about this development soon.

Bond Prices

I think the net few months will be an interesting time for the bond market. The prospects for quantitative easing of about $500 million along with the massive needs to finance the national deficit should play out as investors bid at government auction.

Q3 GDP Growth Estimate

It seems like the consensus is that Q3 GDP growth was about 2%, slightly higher as compared to Q2. Most believe that the uptick in consumer spending justifies the increase.

Of course if Chinese imports continue to increase then the growth rate could be reduced similar to what happened in Q2.

This is still not enough growth to make any impact on reducing the unemployment rate in the US. I think there remains much more repair needed for the US economy.

The Shrinking Japanese Economy

For a long time, I have been concerned about the economic prospects for Japan, mainly regarding the large budget deficit, slow GDP growth, deflation, lack of domestic demand, few natural resources, low birth rate, and aging population.

This article in the WSJ provides a nice analysis of the situation in Japan:

Sanchanta, Mariko, 2010. Japanese firms send work overseas. The Wall Street Journal, Oct. 24.

The article focuses on the strong value of the Yen in relation to the Dollar and the emphasis on an export oriented economy rather than domestic demand.

It is surprising that some of the leading Japanese auto manufacturers outsource as much as 70% of production overseas.

In addition, it is amazing that consumer prices in Japan have increased just 8.5% since 1990!

The following quote from the article sums up the situation in Japan:

"'There are worries about the economy—domestic demand will not pick up, especially with the population declining and a greater proportion of retirees eating into their savings. It's a gloomy outlook for household income,' says Credit Suisse's Mr. Shirakawa. 'Domestic investment and consumption will continue to shrink.'"

More on MiFi

I have been using MiFi for one day and it seems to be working very well. For most of what I do online the download speed is acceptable. Large files over 5 MB seem to hang a bit.

I am considering dropping my ATT 3G service for iPad and use the MiFi or everything.

The ATT service works very well, however, it is an extra expense.

The Cloud - Huge Upcoming Change in Computing

One of my favorite areas of research at the MIT Data Center Program (2003 - 2009) involved cloud computing.

Most of my work was with co-authors Hyoung-Gon (Ken) Lee and Stuart J. Allen and involved novel ways of linking mathematical models and data together using the Internet along with new approaches to computer semantics. Some of the base of this work was the M Language co-developed with David Brock. This is an early paper on our ideas relating to business systems:

Lee, H-G and E.W. Schuster, "MRP as a Service: An Alternative Way to Execute Models for Business Processes." E-Mail Advisor (November 2007).

(Published by the Cutter Consortium: Arlington, MA)

This is another early paper that represented several years of research. It won the Plowman Award in 2004 given by the Council for Supply Chain Management Processionals.

Brock, D.L., E.W. Schuster, S.J. Allen, and P. Kar, “An introduction to semantic modeling for logistical systems,“ Journal of Business Logistics 26, no. 2 (2005), pp 97 – 117.

From the beginning, I was convinced that Software-as-a-Service (SaaS) and cloud technology would radically change business computing. Based on the theory of the M Language, we prototyped three applications. These are now being spun out to industry through the MIT Technology Licensing Office. This link provides more information:

One Page Descriptions of MIT Software Licenses

A recent article does an excellent job of analyzing the direction of cloud computing. This is the reference:

Veverka, Mark, 2010. A private party. Barron's, Oct. 24.

Mr. Veverka writes that some technical aspects of cloud applications are advancing much more quickly than anticipated, thus accelerating a shift to utility based computing where third party data centers do processing on demand for a variable fee based on usage. This is a radical change for corporate IT systems. The following quote outlines the implications:

"Such economics, says Price, could mean the most dramatic transformation of enterprise technology in 20 years arrives ahead of schedule. It would be comparable to the disruption caused when client-server personal-computer systems surpassed mini-computers and big-iron mainframes." Bold added

While cloud computing will lower costs for corporations there is a huge downside, namely weak demand for hardware, software, personnel, and technical services. This leads one analyst to make a dim assessment:

"'It's possible that we could see another nuclear winter in tech spending,' says Walter Price Jr., who has been managing technology funds for more than 25 years." bold added

I know that many traditional enterprise software vendors have resisted the move to cloud computing products because the profit margins are much lower. However, I think eventually cloud computing will win out.

For who are interested in more information about cloud computing and some aspects of our work at MIT, please see the following links from my blog:

Update - The M Language and Agriculture

More about Aggeos, Inc.

AgMES

Abstract for Our Paper

Machine Understandable Semantics

Google, Metaweb, and our Research in Semantics and Syntax

The New Writing

An Idea for Future Publication

Semantics and Models

Semantic Enterprise

Update on OSMPS

The Importance of Machine Understandable Semantics

PC's and Complex Software

Web of Things

Our Paper in IJORIS

From XML Daily Newslink. Tuesday o2 June 2009

New Paper, Computer Semantics

Oracle and the Future of Packaged Software

Cloud Computing Software

More on Cloud Computing

Presentation

New Article - Freely Available for Download (IJORIS)

New Paper, Computer Semantics

For 2011 I hope to announce several new publications along with the implementation of our work in the agricultural industry through Aggeos, Inc.

MiFi

Today, I have purchased a MiFi Wireless Internet Hot Spot that can support up to five devices. It is smaller than a deck of cards and offers speeds comparable to entry level DSL (up to 1.4 MPS).

If it works as advertised, this technology has many possibilities.

iPad and Internet Bandwidth

Almost two months ago, I purchased an iPad with 3G for MIT use. It has been a great help to me. The lack of a USB port and Flash, though concerning, are not significant reasons to avoid purchasing the iPad. I very much recommend the iPad as a productivity tool in academics and business.

The 3G includes 2 GB of bandwidth each month ($25). I have never kept track of my home usage of Internet bandwidth and was surprised to learn during the first two months that I can easily stay within the limit as a single user.

With this knowledge, I am considering the purchase of a MiFi Mobile Hotspot. These devices include plans with a 5 GB limit limit ($60) that are equal in cost to land line phone and DSL. The speed is about the same as low-level DSL. The mobility is worth a great deal to me as I sometimes travel to places where connectivity is limited.

I have had so much trouble with the quality of cable and DSL Internet access in Nashua, NH that the MiFi Mobile Hotspot is beginning to look like an attractive option considering my typical usage is below 5 GB per month.

I do all of my calling using 3G cell. There is no longer a need for me to have a ground line for phone service.

Margins

In reading the Q3 financial reports in the WSJ, I notice that margin erosion seems to be an issue.

This hurts short and medium-term prospects for profits and calls into question the ability of many corporations to grow the top line. In essence, corporations are buying sales thus reducing margin.