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Tag Archives: Unemployment

Below is the link to the 3Q12 Economic Report I wrote for a Colorado Bank’s Board of Directors and  (reproduced with permission):

http://www.QuantumRisk.com/PDF_Files/4Q12EconomicUpdates(2013-01-09)-Public.pdf

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Attached is the presentation I gave to about 35 business executives at TiE Rockies’ Business for Breakfast, yesterday morning Nov 30 2012. It was very well received. http://www.QuantumRisk.com/PDF_Files/AreWeGoodStewards(2012-11-30)TiERockies.pdf

Below is the link to the 3Q12 Economic Report I wrote for a Colorado Bank’s Board of Directors and  (reproduced with permission):

http://www.QuantumRisk.com/PDF_Files/3Q12EconomicUpdates(2012-10-12)-Public.pdf

I’ve temporarily had to put aside QuantumRisk, since the data pricing was raised to $800,000 p.a., and now work for a bank. The link below provides the 2Q12 Economic Report I wrote for the  bank’s Board of Directors (reproduced with permission):

http://www.QuantumRisk.com/PDF_Files/2Q12EconomicUpdates(2012-07-18)-Public.pdf

This blog is in response to many readers comments about jobs moving overseas.

Example 1: A friend losing his job.
We have a friend here in Colorado who works for a services company. He has been asked by his American management to train his replacement in the Philippines and when that is completed he will be laid off. The conventional perspective is that many jobs are moving to India & China, but in this example my friend’s job is moving to the Philippines.

Lesson 1: The problem is with us. This example illustrates that the real problem is not the BRIC or other countries. It is that many American managers have found it easier to remain profitable by procuring cheaper overseas talent than expensive local talent.

Example 2: ICL in the 1970s.
Let me give another example. In the 70s, ICL was a very big computer company in the UK. They were losing money and brought in someone from Texas Instruments to turnaround the company. I forget his name. He did a good job and increased the profitability of the company, but in doing so he dropped ICL’s internally developed chip and replaced it with a Fujitsu chip.

After completion of the turnaround ICL shareholders wanted to sell the company. They found that even though the company was very profitable nobody but Fujitsu would consider buying the company. Why? Because ICL was dependent on Fujitsu chips, and from the perspective of value creation it was no long an independent company but an extension of Fujitsu.

Lesson 2: We are handicapping the value of our business: So all this outsourcing of talent is in reality working against the long term advantage of the shareholders, because who wants to buy a company with many expensive senior managers, many technology boxes and most of the talent 6,000 miles away? This in my opinion is short sightedness. But people have the right to make mistakes. Unfortunately these mistakes can be very expensive for other people, their employees.

Lesson 3: We cannot legislate good business decisions.

Example 3: Texas Instruments (TI) Daily Factory Starts (DFS) team in the 1990s.
I was the architect of Texas Instruments’ Daily Factory Starts (DFS) factory scheduling system. This program was TI’s worldwide top ranked project for 1991 and 1992. This system, built from scratch on a theoretical basis not found in other ERP systems, revolutionized capacity allocation in a 3,000 SKU factory capable of producing up to 6,000 SKUs. It reduced work-in-progress from 5 day to 3 days or a savings of $8.2 million for TI Malaysia and TI Philippines.

What happened? The only three people who designed, developed and implemented this project left within 12 months of completion. Imagine that! All 3 of us left. Needless to say even TI made some mistakes. TI did not sufficiently recognize any of us for the ingenuity & work we had put in. And because we reported to a third country management team, corporate had little say in the matter. I am told that the project was folded in 1994.

Lesson 4: Program discontinuity risk: One very substantially increases the risk of program discontinuity when talent is procured from third party companies, and even more so when procured from overseas. Unless you are a big company like Microsoft, GE, or IBM who can have multiple teams concurrently working on similar programs, procuring talent from outside the company is something you have to think through very carefully.

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.

Contact: Ben Solomon, Managing Principal, QuantumRisk

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The New York Times reported Goldman Earns $3.19 Billion, Beating Estimates and this on a Tier-1 capital ratio of 14.5%. Goldman has the second highest Tier-1 capital ratio after State Street. Most banks are now in the 10%-12% range with US Government assistance. This is a far cry from the original Basel II requirement of 4%, and Tier-1 capital ratios of 14.5% would have been considered insane in the pre-2007 days.

Goldman Sachs is sending important market signals:

1. Well managed banks can make good profits in spite of “insane” Tier-1 ratios.

2. My guess is that Goldman Sachs is expecting a second asset value collapse soon as this firm has been steadily increasing its Tier-1 ratio and its risk adjusted capital since 2008. See my post  Quant Error! Goldman Sachs Success.

What does all this mean? Well lets look at all the facts.

1. A total of 106 regional banks failed in the United States this year, a figure not seen since 1992.

2. 15.1 million people are unemployed and counting coupled with a jobless recovery. That means prime mortgages are defaulting at unprecedented rates.

3. Many banks are in denial about their current viability and are resorting  to giving incorrect information to their customers. In particular:
3.1 These banks’  credit card operations are telling their customers that they are not part of the banking business and therefore did not receive TARP, when the banks did receive TARP.
3.2 Some banks are telling their customers to take out loans on the other collateral they have and use it to pay off their existing loans.
3.3 Other banks are telling their customer that they have no access to TARP funds or any government assistance and therefore have to foreclose on their customers’ properties.

Points 1, 2 & 3 by themselves just show that the mortgage mess is pretty bad. But add that to what Goldman Sachs is doing – Tier-1 of 14.5% – then that, in my opinion, suggests that Goldman Sachs does not have much confidence in the economy. I hope I’m wrong but it is better to be aware of the downside risk then to walk around in rose tinted glasses.

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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The New York Times Economic Adviser Predicts 10% Jobless Rate reported yesterday that,

“Unemployment is likely to remain at its severely elevated level” through the end of next year, predicted Christina Romer, chairwoman of the White House Council of Economic Advisers, at a hearing of the Joint Economic Committee of Congress

…And she warned that the rebound in jobs could actually be even slower than what White House officials and private forecasters had been predicting.

Well, in my October 2, 2009 post (3 weeks earlier than anyone else) 14.5 million Jobless and Counting I stated exactly that. The situation is so bad that Obama Administration should start thinking whether they will make it to a second term.

Why is it so bad? Well, if the Obama Administration does not do something radically different from the previous Administrations of the last 50 years, unemployment will only reduce at the time tested average rate of 0.06% per month after it stops increasing. Or 0.72% per year and 5 years to get 6.1%.

The unemployment will be around 7.6% on re-election day assuming unemployment peaked last month. This is not good news for the Obama Administration. These numbers are optimistic as they assume that the prime mortgage foreclosures do not accelerate bank closures and subsequent credit tightening and financial services layoffs. That is unemployment will most likely be at or above 8% on re-election day. My guess is that the financial services industry will lay off another 30,000 people in the next 18 months.

Quoting the New York Times, “the rebound in jobs could actually be even slower than what White House officials and private forecasters had been predicting“. Economist and private forecasters have been consistently too optimistic and that has eroded our ability to recognize the seriousness of this unemployment problem.

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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The Department of Labor statistics shows that the long term (1970-2008) annual unemployment is about 6.1%. Not good. 

USEconomicStatistics

Figure 1: Annual Unemployment & Annual GDP Growth. 

 

When Will Unemployment Return To Normal?
Using 6.1% as a bench mark this data show that the unemployment recovery rate after a peak, averages at 0.06%/month. From a May 2009 of 9.4% unemployment, it will take until November 2013 for unemployment to come down to 6.1%. Today’s (10/02/09) news Jobless Report Is Worse Than Expected; Rate Rises to 9.8% or 15.1 million jobless, suggest that it is more likely to be June 2014. Not good. Definitely not good.

 

What Does This Mean?
The US economy is 70% dependent on consumer spending, so we can expect GDP growth to much lower when this recession is over. The recession is expected to be over possibly this quarter 4Q 2009 or next quarter 1Q 2010. Then the “real” economic growth i.e. the job growth (job growth is what really counts) becomes the main driver and indicator of this economy. Without the job growths, mortgages are hampered, and banks, are constrained  and . . .

 

How Can Your Company Help?
1. Don’t downsize your jobs: Downsize your pay & benefits (temporarily) starting from the top.

2. Pay down your debt: This helps banks with their recovery.

3. Don’t ship jobs overseas: This is probably the single most important lesson from history. Jobs follow markets and markets follow jobs. Of course there are some jobs where the domestic-foreign pay diffference is so great that companies have no choice but to out-source overseas.

4. Invest, invest, invest: Good investments lead to better run companies. A good approach to becoming competitive with overseas costs is to invest in technology or capex that substantially increases productivity.

 

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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Our GDP contracted very severely this recession. To understand the severity of this contraction the Federal Reserve of St. Louis data shows that the Annual Percentage Change in GDP has not been negative this last 50 years, until 2009, but the Quarter to Quarter Percentage Change in GDP has 4 times.

 

Economic Outlook
There is some good news though. It is not all bad. Figure 1 shows that the updated moving average of Home Price Growth will likely turn positive 4Q 2009, which is about 1Q earlier than my original forecast 2 months ago. That is Home Prices will bottom in 4Q 2009. Lets hope.

HomePricesNONREVNS

Figure 1: Home Price (Composite-10 CSXR) Growth & Total Non-Revolving Credit Outstanding

However, the Total Non Revolving Credit is still contracting, but the lag to Home Prices appears to be around 2-years, or we can expect Total Non Revolving Credit to bottom in 4Q 2011. This is much better news than my preivous forecast. But we are not out of the woods yet.

 

What to do?
The necessity for caution is reinforced by the lack of near term job recovery & non-revolving credit in my forecast. Here are several suggestions on how to reduce business risk:

1. Manage your cashflow: Cash flow is what pays the bills, not profits, so watch your cash flow.

2. Be careful: Cost cutting is temporary and will unravel the moment you stop wacthing and it can affect what little revenue you are generating.

3. Manage labor wisely: Reduce your man hours but not your manpower. Seek voluntary temporary pay cuts with the biggest cuts at the top and reducing amounts to the lower ranks. This will allow you to bounce back quickly when your sub-segment of the economy turns around because the human asset of your company is still intact. Remember it takes 3 years to bring a fresh graduate engineer up to par. Therefore though it looks cheaper, it will take that much longer to recoup any costs or savings.

4. Reduce dependence on debt: Non Revolving Credit Outstanding shows that banks will continue to have difficulty lending for at least until 4Q 2010 and more likely until 4Q 2011. Pay down your debt as much as you can because it reduces your costs and it gives banks more breathing room to lend to someone else and thereby hastening the turnaround of the Non Revolving Credit Outstanding and the unemployment situation.

5. Watch your A/R: A/R is how your customers borrow while you pay the interest on their credit. A/R is also reflective of your downstream customers, so take care. I have seen companies go under because they did not manage their A/R until it was too late.

6. The Goldman Sachs mini case study shows that we can change the how and why we do things to be more successful, and that we don’t have to wait for eveyone else before we make internal improvements. If we wait we still incur the cost but have lost the competitive advantage.

 7. Slope of the Pay Cuts: Biggest proportion at the top and smallest proportion at the bottom. Why? First, that is how risk-returns (or risk-reward) works there are no two ways about this. Second, large pay cuts at the top of the company have a bigger impact on saving the company but small impact on consumer spending. Pay cuts at the bottom of the company add up to real slow down in consumer spending, save the compnay in the short term but generally leads to negative future effects. There was a study done some time in the 70’s or 80’s (I forget the name and year) that showed that companies that retrench/layoff labor on a regular basis generally don’t last very long.  

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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