Looking For The Next Big Thing?

My son asked me the other day how does one become rich. Obviously, being 14, what he really wants to know is how to become rich without lifting a finger ... except to play Call of Duty. I told him that if I had bought him a few thousand shares of Apple when it was a few dollars a share less than a decade ago, he would have done well by any kid standards. Unfortunately, I only bought him a hundred share at $ 50. Not bad. But not enough to make him rich. I told him that if he had enough insights to identify the next big thing, he could probably make a killing but not to count on it to make a living.

If you are yourself looking for the net big thing, listen to this video recently found on TED.com. Right out of a Super Hero movie, Tan Le explains how a new form of remote control developed by Emotiv Systems uses brainwaves to control digital devices and digital media.It's not only the technology which seems unreal. Tan Le herself conveys the image that she is a science fiction character. She is not a representative of the organisation chosen for her ability to deliver a clear and concise presentation on a complex matter in flawless English. She actually is the co-founder and President of Emotiv Systems. A glimpse of the future? Young, Asian, Female and in total command of the English Language. You have to admit that she defies the stereotypical image of today's CFO. I was truly impressed.

Gems like this one are the reason why, even though I have been very pessimistic about the short-term outlook and the probability of a U.S. recovery in 201o, I am rather optimistic about the long term prospects of the human race.

This blog was originally posted on THE SCEPTICAL MARKET OBSERVER

Follow up On Housing

Guest Post by Keith Porter

I got several follow ups on my piece about Housing the other day.

Sheryl Owen kindly sent me the ABC's of Home Ownership, which I enjoyed, thank you.

Luc forwarded on this from an other LinkedIn member, John Weatherby: Comment on "The Sceptical Market Observer: Is home ownership the problem?"

"From the other side of the pond, I would have to say that there is a sentimentality to this. It may be similar in the UK. The US considers its roots as a farming nation. We still have not left the medieval mentality that power is tied to land. Therefore the more evenly land is distributed the more even power is distributed is still the thinking here. The United States still puts a higher social status on land ownership even in an economy that has been long removed from being driven from land rents.

"I really do not see an economical nor political reason in today's world for preferring land ownership over renting. We are far removed from the fief system. However, the fief mentality that land equates to power and status still exists. In the US those losing houses due to mortgage crisis are being billed as homeless. Politicians and citizens seem to think it is somehow horrible that these people might rent a home instead of own one. More renting might actually increase the ability of workers to move from job to job and decrease the natural rate of unemployment because fewer people are tied to a region because they have a house there that they presently can not sell.

"One thing that may be showing in the data, and I will note this is pure speculation, is a difference in attitudes possibly driving a difference in investment. In cultures that see less power in land it is possible investment is driven more toward productivity. In the US, there is a lot of financial investment in real estate. Much of that investment is not really productive. It is mostly a transfer of land and perhaps some wealth. Less social emphasis on land might allow more financial capital to flow to real capital and perhaps better growth rather than land speculation or the mere transfer of assets. The US government's emphasis in tax codes and encouragement of home ownership has no doubt distorted production and investment from some sectors into single family home production and financial investment."

And finally, This week's Economist also talks about the subject in the article.

This blog was originally posted on the Sceptical Market Observer.

Chinese Yuan and flexibility

Nwakego Eyisi

Chinese Yuan and flexibility

Chinese authorities announced plans on Saturday to make the exchange rate more flexible, while ruling out a large, one-off move in the Yuan’s value. China’s central bank says it plans to keep the Chinese Yuan “stable” and there will be no immediate revaluation of the currency says the BBC.

Stock markets from New York to London to Hong Kong reacted positively to the announcement.

Currencies were also up, with the Korean won and Malaysian ringgit both rising over 2% against the US dollar.

Background

China does not allow its currency to float but rather pegs the Yuan to the dollar which depreciates its value so that Chinese goods are cheaper and knocks out competitors on the international market. This has worked well for China’s export driven economy. China saves a lot so that the investment from savings primarily goes to support manufacturing and export while the remainder (savings) is exported to the US.

The US has consistently accused the Chinese of cheating and exacerbating the imbalances that has fed the global credit crunch. The US economy is driven by the consumption component of gross domestic product (GDP) while the Chinese economy is driven by the export component. High consumption in the US has fed Chinese exports and savings

Every country needs to consume, save/invest, export and import according to her resources as dictated by markets. China has not been consuming enough and the US has not been saving. This imbalance has fed the global recession.

The demise of the US consumer will hurt China in the short run. While the US, UK amongst others need to save more so they can be more productive and increase exports. Greater export is crucial for the US and Western Europe to escape their debt trap.

Global Expectations

What a flexible Chinese currency is expected to achieve is alter this export driven model. A flexible currency is expected to push up the value of the Yuan which will increase the price of Chinese goods abroad and reduce exports. This also means that the Chinese will have to save less and consume more. The expectation of the US and Europe is that a flexible Yuan will increase the price for Chinese goods – If China sells less the US sells more!

Short run implications

Allowing some flexibility for the Yuan might not cause it to appreciate but depreciate. This is because Chinese exports markets in Europe and the US is in a recession. Lack of demand will reduce investment in China and eventually exports. A reduction in exports will hurt the Chinese economy because it is primarily export driven so that the eventual outcome is a depreciation of the Yuan. A depreciation for the Yuan means that China will continue to out sell the US and other competitors (they are more productive anyways) even in this downturn

Long run implications

In the long run as China consumes more and saves less their economy will benefit from increased productivity and Beijing will allow the Yuan to appreciate a lot more as a result. Market forces will reallocate excess savings into more production to serve growing demand in China and elsewhere. This is a more efficient use of Chinese savings and will grow the Chinese and global economy, instead of the inefficient way (buying US debt) it has been utilized which has had a negative effect on the global economy.

Conclusion

In the short run, its more bad news for Washington and Brussels - a flexible Yuan will not boost US exports but hurt it.

Pressuring the Chinese to allow flexibility for the Yuan will only help China become the biggest economy in the world sooner than later

A Long Term View on Job Creation in America

By Luc Valllée


Looking at the dismal number of jobs created during the last few quarters in an economy that grew quite rapidly - thanks to the stimulus - is rather discouraging. Moreover, almost everybody now expects that the effects of the stimulus will start to fade and that growth will slow down at least until the end of the year. Going forward what this means is that job creation will also likely be even more sluggish. Some pundits even predict that unemployment will worsen again and peak toward the end of this year.

In Jobless Numbers Are Worse Than You Think, Paul Godek, an economist at Compass Lexecon in Washington D.C., takes a long term perspectives and looks at job growth since the early sixties (look at graph above) to illustrate the extent of the shortfall in jobs today. His conclusion is that "the economy has generated about 12 million fewer jobs than expected", something that never happened on this magnitude in the past. This gives you an idea of how long it is going to take to come back to full employment even if job creation was proceeding at a normal pace. Paul Godek's article was published in the Wall Street Journal last Friday. I only reproduced below the relevant excerpts.

In terms of employment, how bad is this recession? Last month's unemployment rate was 9.5%, according to the Bureau of Labor Statistics (BLS). But the jobs picture is even worse than that rate suggests.

The BLS defines the jobless rate as the number of unemployed as a fraction of the labor force. If one person in a labor force of 10 people is unemployed, the unemployment rate is 10%.

The problem is how the BLS counts the jobless. It defines the unemployed as those who are "out of work but have been seeking and are available for work." Those out of work but not "seeking work" are not considered to be unemployed—and are thus not counted in the labor force.

As one might imagine, the definition of "seeking work" is less than precise. According to the BLS, you are seeking work if you "have actively looked for work in the prior 4 weeks" (See the BLS Web site for the definition of "actively looking" for work.) Those without jobs and not seeking work—the people not considered to be in the labor force—are often referred to as "discouraged workers."

If people without jobs become discouraged and stop seeking work, the unemployment rate will decline (other things being equal). On the other hand, if people become hopeful about future employment, job seeking will go up—as will the unemployment rate.

This way of measuring job availability is clearly flawed. One simple alternative would be to measure the labor force as the number of people with jobs. Unemployment would be determined based on increases or decreases in the number of people employed relative to historic job growth.

The number of nonfarm private jobs has been growing steadily since the 1950s. That number reached a peak at the end of 2007. Between 1958 and 2007, the number of U.S. jobs grew to 115.4 million from 43.5 million—about 2% per year on average. The steady upward trend reflects the long-run growth of the economy and increased participation in the labor force.

The nearby chart compares employment and that trend. It shows the percentage difference between employment and the trend line generated from monthly employment figures over the past 50 years (July 1960 through June 2010).

What we see is astounding. For almost 25 years—between 1984 and late 2008—the level of employment never fell to more than 3% below the trend line. Over that period, total employment grew by more than 36 million.

Employment fell briefly to about 6% below the trend during two previous recessions: in 1975 and again in 1982-1983. During those periods, the unemployment-rate peaks were 9% (in 1974) and 10.8% (in 1982). The unemployment rate in 2009 peaked at 10.1%.

By 2010, however, employment had fallen to about 10% below the trend, far below any previous level in the last half-century. These figures indicate that as of the first half of 2010, the economy has generated about 12 million fewer jobs than expected. In other words, things are not as bad now as they were in the early 1980s; they are much worse. Recall as well that the unemployment rate of the early 1980s was the result of the ultimately successful battle against inflation.