Death by a Thousand Dialogues

Death by a Thousand Dialogues

The currency of diplomacy is conversation and there’s no shortage of that commodity. A host of international gatherings took place recently including the G20 in the beach-side resort of Los Cabos, Mexico and the Rio +20 Environmental Summit in Brazil. Others have finished without the usual fanfare including the U.S.-China Strategic and Economic Dialogue which got hardly a mention while human rights dissident Chen Guangcheng holed up at the U.S. Embassy in Beijing.

So many bilateral, multilateral, and international discussions, so little getting done. By getting done I mean actual, measurable results against the growing wave of problems facing the global economy including unemployment, poverty, healthcare and environmental catastrophes in waiting or already in full bloom. The AP’s Seth Borenstein lays out the numbers for the last two decades – temperatures, pollution and forest destruction – all up.

What’s on tap so often runs flat at these gatherings. Tens of millions are spent on agenda setting, speech writing, and conference rooms. The official preliminary budget for the G20 in Mexico ran to nearly $55 million.  And for that princely sum the content if not the character of these gatherings leaves a lot to be desired.

On the main stage distinguished statespeople routinely talk past each other regarding weighty policy issues, pose for the obligatory photo ops, and then dine on multi-course meals of questionable delicacy. Their subordinates work twenty hour days to finely craft consensus-driven joint statements that in the end say a lot about nothing much at all.

And then they all leave.

Since so much time is spent on honing the words here is a handy template for future world gatherings:

The {name of delegations} emphasized the importance of {insert big problem},
reaffirmed their commitment to strengthening {some vague common action},
and dedicated themselves to continuing consultations on {matters of mutual interest}.
Thank you. Thank you very much and good night.
 

These gatherings do have some value. They add greatly to the local economy. Hotels and restaurants fill to capacity. Heads of state gain potentially valuable face time with their peers. Obama and Putin had a lengthy meeting running two hours which put Syria back in the spotlight. Had it not been for the annual gathering intermediaries would only relay less influential talking points. There’s still no substitute for a good old fashioned face-to-face chat.

Besides the PR value of the summitry circuit, networking, which in principle should lead to game changing coalitions and cooperative action, plays a significant part. But on the environmental front much more is being done at the local level than the national or trans-national. Cities are lowering their carbon emissions not because of global agreements like the Kyoto Protocol, but because of local political and economic pressure.  In a positive turn The World Bank and U.S. Department of State have announced a city to city initiative to cut landfill methane emissions. That’s where the real change happens. The UN’s Rio +20 has also instituted a voluntary commitment feature (in some ways similar to the Clinton Global Initiative although that requires real money projects to participate).

If the G20 or any of the other dozen or so global gatherings want to make a serious dent in the ills weighing on this and future generations then send less people to talk shops and put that money saved to constructive use. There are tens of millions of households without electricity – simple solar powered lighting systems cost less than $100 each or biogas systems fueled by animal waste ($300). The same goes for clean water. A new well can cost between $2-$20 per person.

To avoid the aid trap (populations and governments becoming overly reliant on “free” money) microlending programs offer market-based solutions.   Perhaps an “action speaks louder than words” surcharge should be applied for every delegate to a world conference. Talk is cheap after all, unless of course you’re flying to Los Cabos.

Euro In or Euro Out?

Euro In or Euro Out?

A wave of relief greeted overseas markets last night after Greece’s second round election results came in. New Democracy (a pro-bailout party) won approximately 30% of the vote, narrowly defeating Syriza (anti-bailout) with 27%. Initial sentiment favored the stability of the European Union and the Euro as its currency.

Optimism quickly faded as more practical concerns returned, and rightly so.

This election was never really a referendum on the Euro. In reality most of Greece’s major parties don’t favor a break with Europe’s currency union except for the Communist (KKE) which won a mere 12 out of 300 seats (4%), down from their previous 26 seats in the May elections. Had the anti-bailout crowd won the day Greece may have drifted into a de facto exit (no funds from Europe, government goes bust, hello Drachma). But that risk still remains if real reform doesn’t breath life into the rapidly deteriorating economy – no easy task with the raft of obstacles to be negotiated in such a short period of time.

First there needs to be some semblance of political stability. New Democracy still needs to form a coalition government to get anything done. They will likely turn to the Socialist (PASOK) party which wants to alter the terms, but not reject outright, the bailout plan. Significant government budget cuts and lowering debt (aka austerity) are the preconditions for loans to stabilize government finances.

Once the new Greek government forms they must still agree on a unified negotiating stance regarding the bailout. Europe must concur, then at least some of the reforms have to be implemented before the money will start to flow. Of course there must be some short-term benefits or any coalition will falter, but the temptation to follow well worn paths of stagnation will be difficult to avoid – pouring new found funds into leaky political buckets for example. Even still, new job creation doesn’t happen overnight and economies are more like ocean liners than speed boats trying to change direction (though to stretch the analogy it may be easier once the engines have slowed, but not stalled completely).

Unfortunately none of the current political wrangling addresses Greece’s core problems – high unemployment, corruption, inefficiency and year’s of rising labor costs without gains in productivity that have crippled the country’s competitiveness.

Too much indiscriminate budget cutting could very easily send Greece into depression, political paralysis, and continued social unrest (clearly not the path that increases middle class job growth, investment, and business creation). More stimulus won’t do the trick either if it follows the tried and failed policies of the past – wasteful government spending and bloated bureaucracies that don’t add real and lasting value.

Greece’s mess remains largely self imposed and the solutions, though daunting, are well within reach. Political unity however may be harder to sustain than agreement on lofty job creating plans and policies.  Markets remain wary because Greece’s election hasn’t solved the country’s key problems. Greece isn’t even the worst of Europe’s difficulties. The much larger economies of Spain and Italy continue flirting with disaster and France remains on unstable ground. More volatility in the weeks and months to come reflect the current economic reality that is Europe far more than debates over whether the Euro or the Drachma will keep the lights on.

 

Photo: Parthenon, public domain.
Are ETFs the New CDOs?

Are ETFs the New CDOs?

As if the wizards of finance hadn’t done enough already. Remember when collateralized debt offerings (CDOs) entered common usage? Mortgages were sliced up, repackaged, and re-sold into “synthetic” products barely resembling the underlying property on which they were supposedly based. Sounds a lot like how bologna is made. When the housing market went bust CDOs transmitted and amplified the effects of the downturn taking some venerable banks along with them. Now exchange traded funds (ETFs) are racing to take the place of their derivative cousins.

In the simple version an investor buys shares in a publicly traded fund that say indexes to the U.S. Fortune 500. As money flows in, the fund then buys actual shares of those companies and the investor owns a small percentage of that diversification.

Synthetic ETFs,  however have bet money on collections of other ETFs without ever actually owning the underlying stocks. The interconnected nature of the financial markets means that if ETFs stumble they not only affect the holders of those securities but ripple across the murky derivatives markets as well.

Jodi Xu in the FT’s Debtwire noted recently that money provided by ETFs accounted for 41% of the high-yield retail space for the first 19 weeks of 2012, up from a previous 10%. In some weeks they accounted for over 80%. Some bond fund managers chased ETF performance as the fast money ran in and out exposing yet another sector to a potential fall should the financial merry-go-round suddenly stop spinning.

Concerns surfaced back in 2011, especially for banks looking to boost profits, and in particular European banks. Those risks have turned into a present-day problem. The FT reported on May 23rd: “More than three-quarters of the synthetic exchange traded funds listed in Europe are at risk of closure after failing to attract sufficient inflows in their first three years since launching, according to Rick Genoni, global head of ETFs for Vanguard. . . [Genoni] noted that half of all ETFs, including synthetic and non-synthetic, launched in Europe in the last five years were in the “danger zone”.

At some point maybe banks will get back to lending real money to actual companies that sustain and create much needed jobs, all for a reasonable profit. That doesn’t take financial wizardry, just common sense.

 
Photo credit: Brian P. Klein, 2012 – Industry lost along the rails, east coast U.S.

 

The Jobs Week That Wasn’t

The Jobs Week That Wasn’t

Bad news on U.S. employment numbers last week (a paltry 69,000 new jobs) left many wondering how long it might take for this economy to reach escape velocity from a slow burn. A scrappy little California start-up, SpaceX, made it to the international space station and back. What’s taking the rest of the country so long to recover?

Bureau of Labor Statistics employment data* (2002-2012) show the depths of the crisis and partial rebound. Beyond how steep the initial decline and gradual the return that little flatlining from January 2012 onwards is even more troubling. Even at an average 150,000 new jobs per month pre-crisis employment numbers are still 2 1/2 years away which would mark a total 80 months for full recovery. Compare that to previous recessions at the mind-numbing depths become painfully obvious.

The 1990-1993 recession (34 months for  employment recovery) and the 2000-2003 tech bubble burst (27 months) look like speed bumps compared to the present sink hole of unemployment.

Perhaps those 2007 employment levels were artificially high to begin with considering all of the new homes being built and the incredible levels of household debt-fueled spending. On the positive side at least the economy is growing at roughly 2% and 4.2 million new jobs have been created. It could be worse (Greece or Spain).

Still the disconnect between top line gross domestic product (GDP) growth, financial sector recovery (seven out of the ten largest U.S. banks reported significant 1Q 2012 profits), and incredibly anemic job growth poses some troubling questions for a middle class recovery, if there is one at all. The National Economic Council’s Alan Kreuger gave a detailed speech to the Center for American Progress back in January detailing the hit on the middle (good graphs in the Reuters summary.)

The slow pickup in lending to small and medium sized enterprises (SMEs) contributed to the problem. The WSJ reported back in May that the U.S. lagged other countries in lending and the largest banks were slower than all the rest. Recent lending levels seem to have recovered, but how much is actually feeding into SME growth rather than say mergers and acquisitions remains unclear.

We know SMEs drive new job creation, especially during recessions and yet they still struggle to get access to capital. Even for new and innovative companies venture capital funding is down 35% in the first quarter of 2012 compared to the same period a year ago and far from its 2008 peak. Perhaps the crowdfunding movement will take its place. Websites like kickstarter.com, previously home to small project donations for everything from documentary films to food trucks, broke the funding bar at $7 million for a start-up hi-tech watch company. The new JOBS Act expands funding for equity. NowStreetJournal has been chronicling this rise in crowdsourced funding. Perhaps the middle will support the middle after years of the top taking care of themselves.

* Note: BLS employment figures are in thousands (left axis)

The Diplomat Article: The Rise of Global Feudalism

The Diplomat Article: The Rise of Global Feudalism

In April 2007, New Century Financial Corporation filed for what was then a little noticed bankruptcy protection. Their mortgage-backed securities had become worthless and by summer Bear Stearns began liquidating hedge funds. Come autumn, Britain’s fifth largest mortgage lender Northern Rock was on the ropes propped up by the Bank of England. The rest is well known history.

Five years on, after bank failures and bailouts, foreclosures, and rising unemployment, the crisis that started as an obscure financial scheme has led to an unusual triple failure in all three of the world’s traditional growth engines, the United States, Europe and Japan. Though boom-bust cycles are nothing new, they tended to peak and trough at different times. Germany’s early 20th century malaise was paired with America’s roaring twenties. Japan’s first lost decade of the 1990’s coincided with a western tech-driven high.

Now, industrialized nations are facing their greatest economic threat in nearly a century – a troubled middle class losing its purchasing power to drive world growth. If current trends aren’t reversed, and soon, 2012 may be the year the middle fails and a century of economic modernization grinds to a halt.

Full article on The Diplomat website.

 
Photo credit: The-Diplomat

Decline of the West, Rise of the Rest? Think Again

We’re four years past the 2008 financial crisis when Lehman Brothers failed, millions of home owners went under and economic recovery was but a doe-eyed dream. Meanwhile all three of the world’s main engines of growth, the U.S., Europe and Japan are still mired in tepid recovery, if not reversing course altogether.

Remember when the much vaunted BRIC economies (Brazil, Russia, India and China) were going to pick up where the mighty U.S. left off? And still there’s been no flight of capital half a world away to Sao Paulo, Mumbai, Moscow or Shanghai. Their consumers aren’t driving demand and powering a global recovery. To the contrary they’re also experiencing slowing growth. China and India have revised downward to sub-8% targets.

For the first time in a century the modern age of opportunity that raised standards of living around the world risks returning to a decidedly low-tech feudalistic past.

Why has there been no dramatic re-balancing? Because much of the fast-growth economies of the last decade have relied on unsustainable models to fuel expansion – heavy on investment, light on consumers. To truly build a consumer-driven economy there needs to be access to capital, social safety nets, better healthcare and rising education.

Time to re-think global growth, focus on the middle class and get back to the more important metric, increased opportunity and rising standards of living. The most likely place for that to occur is right back here in the U.S. where the consumer of first resort was born. Mass market appeal drove adoption of every major invention of the twentieth century from electricity and the automobile to the Internet and medical technology. Without the all important middle innovation slows to a crawl.

The U.S. will only regain its critical role in driving growth if the middle class in general, and entrepreneurs in particular, returns to its place at the focal point of economic policy and business development. The role of banks is to facilitate business, not become the main business itself. Better to learn quick that the race has never been to the top, but to the middle, and that’s where the future lies.

 
Photo credit: Brian P. Klein, 2011, view of Pudong, China

Klein/Cukier Foreign Affairs article mentioned in the Financial Times

Financial Times columinst David Pillig discusses Asia’s over reliance on exports and my co-authored Foreign Affairs article with Kenn Cukier.

Asia will struggle to escape its export trap, David Pilling, June 25 2009

“As a forthcoming article by Brian Klein and Kenneth Cukier in the journal Foreign Affairs points out, Asia’s export-dependent economies – with the important exception of China – have fared even worse than the western economies where the lightning of the financial crisis struck. Taiwan’s exports shrank in the last quarter of 2008 by 42 per cent, while production dropped at a faster rate than the US experienced during the Great Depression. Similarly sharp contractions have happened all over Asia.”

Foreign Affairs article summary.