Economic Recovery Gathers Steam
Private-sector employment increased by 217,000 from January to February on a seasonally adjusted basis, according to the latest ADP National Employment Report released today. The estimated change of employment from December 2010 to January 2011 was revised up to 189,000 from the previously reported increase of 187,000. This month’s ADP National Employment Report suggests continued solid growth of nonfarm private employment early in 2011. The recent pattern of rising employment gains since the middle of last year was reinforced by today’s report, as the average gain from December through February (217,000) is well above the average gain over the prior six months (63,000).
The fears of a jobless recovery may be receding but the US economy has a long way to go before pre-recession employment levels are achieved. As we stated previously the economy needs to create over 200,000 jobs per month for 48 consecutive months to achieve pre-recession employment levels. The six month average of 63,000 is still well below the required rate of job creation for a robust recovery to occur. The Unemployment Rate still exceeds 9%.
The February report is encouraging because it points to an accelerating pace of job creation. The post Christmas season employment surge represents a 30,000 job gain over January’s strong report that triples the six month moving average. The service sector accounted for over 200,000 of the job gains. The manufacturing and goods producing sector combined to create 35,000 jobs. Construction continues to mirror the moribund housing market shedding an additional 9,000 jobs during the month. The construction industry has lost over 2.1 million jobs since its peak in 2008.
The robust recovery in the service sector is welcomed but sustainable economic growth can only be achieved by a robust turn around in the goods producing and manufacturing sectors. Service sector jobs offer lower wages, tend to be highly correlated to retail consumer spending and positions are often transient in nature. Small and Mid-Sized Enterprises (SME) is where the highest concentration of service jobs are created and the employment figures bear that out with SMEs accounting for over 204,000 jobs created during the month of February.
Large businesses added 13,000 jobs during the month of February. The balance sheets of large corporations are strong. The great recession provided large corporates an opportunity to rationalize their business franchise with layoffs, consolidations and prudent cost management. Benign inflation, global presence, outsourcing, low cost of capital and strong equity markets created ideal conditions for profitability and an improved capital structure. The balance sheets of large corporations are flush with $1 trillion in cash and it appears that the large corporates are deploying this capital resource into non-job creating initiatives.
The restructuring of the economy continues. The Federal stimulus program directed massive funds to support fiscally troubled state and local government budgets. The Federal Stimulus Program was a critical factor that help to stabilize local government workforce levels. The expiration of the Federal stimulus program is forcing state and local governments into draconian measures to balance budgets. Government employment levels are being dramatically pared back to maintain fiscal stability. Public service workers unions are under severe pressure to defend employment, compensation and benefits of workers in an increasingly conservative political climate that insists on fiscal conservatism and is highly adverse to any tax increase.
The elimination of government jobs, the expiration of unemployment funds coupled with rising interest rates, energy and commodity prices will drain significant buying power from the economy and create additional headwinds for the recovery.
Macroeconomic Factors
The principal macroeconomic factors confronting the economy are the continued high unemployment rate, weakness in the housing market, tax policy and deepening fiscal crisis of state, local and federal governments. The Tea Party tax rebellion has returned congress to Republican control and will encourage the federal government to pursue fiscally conservative policies that will dramatically cut federal spending and taxes for the small businesses and the middle class. In the short term, spending cuts in federal programs will result in layoffs, and cuts in entitlement programs will remove purchasing power from the demand side of the market. It is believed that the tax cuts to businesses will provide the necessary incentive for SME’s to invest capital surpluses back into the company to stimulate job creation.
The growing uncertainty in the Middle East and North Africa is a significant political risk factor. The expansion of political instability in the Gulf Region particularly Iran, Egypt and Saudi Arabia; a protracted civil war in Libya or a reignited regional conflict involving Israel would have a dramatic impact on oil markets; sparking a rise in commodity prices and interest rates placing additional stress on economic recovery.
Political uncertainty tends to heighten risk aversion in credit markets. The financial rescue of banks with generous capital infusions and accommodating monetary policies from sovereign governments has buttressed the profitability and capital position of banks. Regulatory uncertainty of Basel III, Dodd-Frank, and the continued rationalization of the commercial banking system and continued concern about the quality of credit portfolios continue to curtail availability of credit for SME lending. Governments are encouraging banks to lend more aggressively but banks continue to exercise extreme caution in making loans to financially stressed and capital starved SMEs.
Highlights of the ADP Report for February include:
Private sector employment increased by 217,000
Employment in the service-providing sector rose 202,000
Employment in the goods-producing sector declined 15,000
Employment in the manufacturing sector declined 20,000
Construction employment declined 9,000
Large businesses with 500 or more workers declined 2,000
Medium-size businesses, defined as those with between 50 and 499 workers increased 24,000
Employment among small-size businesses with fewer than 50 workers, increased 21,000
Overview of Numbers
The 202,000 jobs created by the SME sectors represents over 90% of new job creation. Large businesses comprise approximately 20% of the private sector employment and continues to underperform SMEs in post recession job creation. The strong growth of service sector though welcomed continues to mask the under performance of the manufacturing sector. The 11 million manufacturing jobs comprise approximately 10% of the private sector US workforce. The 20 thousand jobs created during February accounted for 10% of new jobs. Considering the severely distressed condition and capacity utilization of the sector and the favorable conditions for export markets and cost of capital the job growth of the sector appears extremely weak. The US economy is still in search of a driver. The automotive manufacturers have returned to profitability due to global sales in Latin America and China with a large portion of the manufacturing done in local oversea markets.
The stock market continues to perform well. The Fed is optimistic that the QE2 initiative will allay bankers credit risk concerns and ease lending restrictions to SMEs. A projected GDP growth rate of 3% appears to be an achievable goal. The danger of a double dip recession is receding but severe geopolitical risk factors continue to keep the possibility alive.
Interest rates have been at historic lows for two years and will begin to notch upward as central bankers continue to manage growth with a mix of inflation and higher costs of capital. The stability of the euro and the EU’s sovereign debt crisis will remain a concern and put upward pressure on interest rates and the dollar.
As the price of commodities and food spikes higher the potential of civil unrest and political instability in emerging markets of Southeast Asia, Africa and Latin America grows. Some even suggest this instability may touch China.
The balance sheets of large corporate entities remain flush with cash. The availability of distressed assets and volatile markets will encourage corporate treasurers to put that capital to work to capitalize on emerging opportunities. The day of the lazy corporate balance sheet is over.
Solutions from Sum2
Credit Redi offers SMEs tools to manage financial health and improve corporate credit rating to attract and minimize the cost of capital. Credit Redi helps SMEs improve credit standing and demonstrate to bankers that you are a good credit risk.
For information on the construction and use of the ADP Report, please visit the methodology section of the ADP National Employment Report website.
You Tube Video: John Handy, Hard Work
Risk: unemployment, recession, recovery, SME, political
Two Americas
Bill Maher recently did a bit on the Eco-friendly packaging of Sun Chips. In its desire to get down with the Go Green marketing trend, Frito-Lay developed a biodegradable bag. It was hoped the new package would alleviate some of the toxic burden traditional polyethylene packaging places on landfills. It was a great idea and a small sign of forward progress in developing environmentally friendly waste management solutions for our conspicuously consumer centric throw away society. Seemed like a good idea until Frito-Lay started to get negative feedback from its customers on its packaging. The crescendo of noise the crackling bags made was too much for the sensitive ears of Sun Chips consumers. In deference to their clients wishes Frito-Lay scrapped the Eco-friendly packaging and returned to the old polyethylene bags.
Its amazing how a small inconvenience compels us to to cede the pursuit of the better path. The paths that affirms our better nature and sustains life is abandoned because it is burdensome or makes too much noise. It pesters our ears, it hectors our comforts. We prefer to down our cholesterol in the silence of compliant bags rather then suffer the annoyance of a deafening crinkle to protect the environment and save the planet. We take the easier path that confirms the adage “have it your way”. In America the personal “my way” is the only way. After all this is America and that is what freedom is all about. My way or the highway. Can I get an Amen?
During the holiday season the big stink was about the Transportation Security Authority (TSA). The news was flush with reports of travelers outraged by how TSA personal were overly intrusive and overstepped the bounds of decency and deportment as they screened exasperated airline passengers trying to board planes. Travelers became angry and ornery complaining about the violation of their person and screamed violent threats at TSA personnel if they “touched their junk”.
I find it a bit curious that the response to this egregious violation of personal liberty fails to call for the repeal of laws that codify the erosion of our freedoms. In its stead we learn states are busy passing privilege and immunity laws that confer special rights to certain classes of citizens. The Arizona Immigration law that was enacted earlier in the year burdens Latinos with proving they belong to be living amongst us. Its a pathway to a softer kinder Apartheid that codifies a bifurcation of citizenship and the value and validity of a persons humanness. In its wake the value of liberty and our humanity both plummet.
The notion of Two Americas is not new. Its just that the glaring injustice threatening our society is becoming too stark to ignore. This pernicious sedition is the gravest threat undermining our democracy. It is a greater threat then any attack Al Qaeda could ever mount on America. In 1962 Michael Harrington wrote “The Other America”. It was instrumental in publicizing the pervasive poverty that existed in America. In response to the growing threat poverty and the cultural and economic fissure it created between the of “haves and have nots,” the Johnson Administration initiated a war on poverty. The Great Society legislation was enacted to insure that all citizens are enfranchised with the vote and that a social safety net would catch any citizen from being swallowed by the great divide. Today such notions are condemned as socialistic and unAmerican.
While the richest 1% of American’s continue to amass great fortunes for themselves gobbling up a disproportionate amount of income the much greater proportion of our countrymen sees its standard of living erode as the Two Americas drift further apart. The well off cash their fat dividend checks from a roaring stock market that has less to do with the economic development of America then the self enrichment of capitalist speculators. The greatest irony is that as they sit atop their piles of cash they remain convinced that their riches confirm the greatness of America and that their wealth is why America remains great.
When President Obama took office the country was in a terrible state. Two wars were raging, unemployment was spiraling upward, foreclosures were throwing millions of Americans out of their homes and an epidemic of small business bankruptcies was a plague ravishing Main Street USA. During times like these you would think patriotic minded citizens would come together to aid the country in its dire hour of need; but the GOP led a virulent opposition whose single goal was Obama’s failure. Their obstructionism added distance to the divide and America suffers for it. The ugliness of the debates concerning Health Care Reform spurred the creation of a political dialog that delegitimatized governing institutions. It made the ability to reach consensus impossible and prompted threats that Second Amendment solutions would be considered to remedy ill considered legislation.
In the aftermath of the Tucson Massacre, we dusted off the old debate about gun control and wheeled it on to center stage again. Many believe that the mentally ill murderer should have not been allowed to purchase a semi-automatic Glock and the 30 round clip that served to enlarge the scope of Jared Loughner’s terrible carnage.
All are thankful for Gabrielle Gifford’s miraculous recovery from her head wound. All hope for a speedy and full recovery of the thirteen wounded and offer condolences to the six citizens whose lives were senselessly ended. But all don’t believe the availability of guns should be restricted. In fact many believe that had more citizens been armed the death toll of innocents would not have been as great because it would have included Jared Loughner before he could finish his grim work. I’m not so sure. I believe it more likely that a widely armed citizenry encourages wanton barbarity then the well considered promotion of dispassionate civic discourse.
Differences of opinion are critical to a healthy society. The ability to have dialog and assimilate differences in a shared consensus in service to country is what makes democracies the best form of government.
If we are a people who prize freedom we cannot be complicit accomplishes in ceding our liberties. We must be vigilant missionaries seeking to enlarge the pallet of liberty for all people. Martin Luther King Jr. said it best, “All men are caught in an inescapable network of mutuality” Affirming a respect for our shared humanity, equal rights of citizenship and sense of duty to one another in service to our country and democratic way of life is how we breech the walls that divide us and bridge the fissures that separate. These are the characteristics of a great nation and protecting them serves to maintain the greatness of its people. It is how out of many becomes one. It may require that you put up with the annoying noise of a loud obnoxious windbag but the savory delight of the bread of freedom is well worth it.
You Tube Music Video: Max Roach, Abby Lincoln, Freedom Now Suite, We Insist
Risk: democracy, civil liberties, culture, consensus
Sense of Gratitude
For this years Thanksgiving, I have decided to focus on developing a sense of gratitude. The world is full of real bad stuff happening to too many people and its easy to let the darkness of our times cast long shadows of resentment, anger and ill will over our outlook on life. So today as I travel to a relatives home to gather for our national day of thankfulness I choose to leave resentments at home and cultivate a sense of gratitude.
I’m grateful for my eyes. My sight allows me to perceive the million graces The Almighty abundantly confers upon the inhabitants of the good earth each and every day. My eyes help me to discover the pressing needs of others and respond to it. My eyes help me to discern light from darkness, distinguish the forest from the trees and eschew pedestrian views to behold a beautiful vista. My eyes are a pathway to my soul moving me to contemplate the good, forsake the bad and move against evil in service to truth.
I’m grateful for my ears. The grace of hearing permits me to listen. My ears alert me to the cries of my brothers and sisters and enables me to understand our shared human condition. My ears tune my spirit to the chords of exquisite music and the natural symphonies of Mother Earth’s angelic chorus of singing birds, heaving oceans, the majestic pause of silent mountains and the fleeting rush of the swelling wind are all divine voices singing the joyful hymns of life.
I’m thankful for my sense of smell. Graciously my nose breathes in the inviting aroma of a lovingly prepared home cooked meal, the wholesome scent of baking bread wafting from the door of the corner bakery, a briny snort from the boundless sea, the rich compost of the deep woods after a soft summer rain, the bouquet of an infants hair and the perfume of a lovers embrace.
I give thanks for my ability to touch. Hands engaged in productive work and gainful employment is a blessing absent from too many Thanksgiving Day tables this year. We yearn to connect and the sense of touch invites our ability to feel. Feeling is the father of empathy and the mother of compassion. Caring for our animal friends we live in communion with all sentient beings. As we touch one another and allow others to touch us; the hardest of hearts is softened, the most grievous wounds are healed to liberate the sensual yearnings dwelling in the deepest recesses of ourselves. Feeling allows us to become fully present, fully aware and fully alive in the celebration of what it means to be fully human.
I’m thankful for my sense of taste. As Sinatra croons “from the brim to the dregs” the wine of our lives may not all taste good but it all flows clear and true. Sample, savor and learn. Taste and see the glories of the Lord’s banquet so abundantly placed before us. The bitter herbs, the sweet cakes, the leisure repast, the fortifying meal and unrequited hunger is the daily bread of being human. Pause to consider those that are lining up for the tenth Thanksgiving Day meal in Afghanistan and Iraq and pray that the awful rations of war fed to our young soldiers be supplanted with the good manna of peace.
Perhaps we loose our sense of gratitude because expectations of ourselves and others always seems to come up short of the mark. Imperfection is our most endearing quality. It informs our ability to forgive transgressions, form bonds of friendship and unconditionally love each other. I remain grateful for the sense of my imperfection as I overlook your imperfections and remain ever hopeful that you will extend your hand to help me over come mine.
Happy Thanksgiving.
You Tube Video: Jean Ritchie, Shady Grove
risk: resentment, gratitude, peace, metal health,
Regulation and Social Democracy
Last year during the height of the banking crisis I remember Larry Kudlow stating that the US market has a choice. It could pursue the EU model of high regulated markets producing low consistent returns or the American model of less regulation and volatile cycles of high risk and potentially higher returns. If the sole focus of government was the peace of mind and well being of investors Mr. Kudlow’s observation would be valid. Government however must consider a larger community of stakeholders in its scope of concern. Regulatory oversight, the harmony of capital and labor and the incubation of an economic culture that is favorable to and supportive of SMEs are the critical questions confronting all governments particularly those in developed economies.
The EU’s social democratic economic models embody the best and worst aspects of these issues. The social democratic state attempt to combine entrepreneurial impulses of capitalism with the management and administration of social welfare for all its citizens. Democratically “elected administrators” use the apparatus of the state to facilitate and manage the competing interests of capital and labor, free markets and regulation while seeking to balance an entrepreneurship friendly culture with long term sustainability.
Yesterday a toxic tsunami of aluminum sludge coated 16 square miles of pristine Hungarian countryside. It is a telling example of a severe risk event that confronts modern life. A lassiaz-faire approach to the event is not viable and offers no solace to those harmed by this assault. Communities cannot be asked to suffer a market response that promises to correct the problem of the next instance of this event. The construction of better berms and the implementation redundant protection devises to safeguard against this risk for the future is little compensation to those who were killed, injured and lost property or livelihoods as a result of MAL Zrt poor risk management practices.
Better to suffer a regulatory initiative that is based on an understanding of an economic ecosystem as complex and inhabited by competing interests of diverse stakeholders. The ecosystem including the shareholders of MAL Zrt, residents of the surrounding communities, plant workers (also community residents), small businesses (SME) and down stream farmers making a living on arable land and access to clean water all have a stake, albeit competing, in the safe operation of the plant. The possibility that the toxic sludge may find its way into the Danube poses a threat to the water supply of other eastern European nations. This elevates this catastrophic event to other EU jurisdictions. The inter-dependencies and interconnectedness of the pan-regional and larger global economy requires vigorous regulatory safeguards, mitigation initiatives and enforcement response.
The true cost of this event is potentially staggering. It supersedes the narrow interest and economic value of shareholders rights and capital invested in MAL Zrt. Bad economic behavior exemplified by BP’s Horizon Deepwater failure to install redundant protective devises to keep production costs to a minimum, ended up costing BP shareholders and Gulf Coast stakeholders dearly.
State intervention in markets and the reemergence of managed economies is a reality of the global economy. The “managed economy” of the Peoples Republic of China places western style “free market” economies at a disadvantage. The managers of the PRC efficiently deploy and manage capital, effect trade and market protections and scrupulously manage currency valuation. It has created enormous social wealth for China and has contributed to its rapid rise as a preeminent world power. China’s rise requires better coordination of private capital and government to marshal a competitive market response to the challenges posed by managed economies to free and open markets of western democracies. The massive pools of capital deployed by sovereign wealth funds of oil producing regencies and the growing insurgency and power of underground economic activity also pose significant challenges to the viability of unregulated markets.
America’s free market model that eschewed regulation since the 1980’s evolved into a mercantile economy with a weakened economic base. The outsourcing of manufacturing infrastructure loosened free market impulses that left in its place a debtor nation whose warped economy depended on housing/commercial real estate construction (collateral creation/securitization), credit marketing, retailing and a service sector that was designed to support the new economic paradigm. It is a model that has proven itself to be wasteful, costly and unsustainable.
Deregulation has led to the dislocation of the capital markets from the real economy. It has contributed to the massive disparities in social wealth and a crumbling infrastructure. Milton Friedman’s mistaken belief that free market impulses would preserve infrastructure investment has been proven incorrect. Ironically this has added to the government’s burden to provide social assistance to segments of the population disenfranchised from economic participation. Some believe that the basis for the prosecution of the wars in Iraq and Afghanistan are economic stimulus programs designed to keep the economy going due to the vacuum created by the loss of manufacturing.
China’s example nor the resurrection of the soviet socialist model is not a desirable alternative for western democratic capitalist societies. Centralized control and state economic planning is rife with inefficiencies. State run economies threatens liberty, stifles innovation and encumbers economic dynamism. The virtues of capitalism (innovation, dynamism, liberty) needs to be encouraged and blended into the new economic reality of a highly dependent and interconnected world that requires cooperation, coexistence, sustainability, fair asset valuation, and the equitable sharing of resource and responsibility. SME’s are at the forefront of innovation, value creation and dynamism and will play a leading role in the creation of new social-political values as sources of sustainable growth and wealth in the emerging economic paradigm.
You Tube Music Video: Franz Liszt, Hungarian Rhapsody No.2 Orchestra
Risk: regulatory, capitalism, sustainability
Convergence and Innovation Inhibitors: 011110
As we start the second decade of the new millennium, innovation is understood as a critical driver to overcome the economic malaise plaguing the global economy. Economic stasis and political factionalism has made it increasingly evident that faltering economic and social institutions cry out for sweeping reform. These reforms can only be achieved with innovative approaches in policy and practice. Innovation is realized by giving flight to uninhibited thought and the clear application of ideas with decisive action. Though most agree that we badly need reform, we remain at painful odds as to what those reforms should be and how to implement them. The destructive legislative debates on health care and the ugly political theater of town meetings that occurred in the United States over the summer accomplished little in regards to meaningful reform. The exercises only served to drive a deepening wedge into the ability of a democratic culture to form a transformative consensus.
Our society is a complex ecosystem comprised of many competing interests. The classic definition of politics, “the means to decide how limited resources are allocated to disparate interests” is clearly a truism that must be applied if we are to realize the reform that we desperately need. In a post scarcity society that definition may seem a bit crude or antiquated. America’s history is marked by a culture of innovation and the incubation of industry. Innovation and its commercial expression in entrepreneurialism is a national asset that tempers the hard edges of stringent allocation or resources and has been the source of our great social wealth. Democracies continually require citizens to arbitrate how competing interests are reconciled and converge. As a self professed democracy the United States must break down the barriers that inhibit innovation by confronting the challenges posed by convergence.
Convergence has been the watch word in the tech industry for the past few years. Convergence aggregates, joins and aligns discreet trends, competencies, technologies and missions to spawn innovation and progress. Masters of business innovation understand that a precondition of convergence is the ability to collaborate. Collaboration requires extended conversations and dialog to understand how competing interests can be reconciled and brought together so that innovation and progress can be achieved. Marketeers invent neologisms like coopetition to brand the idea and lend heft to its thrust. We believe that innovation borne from convergence is the path to rebuild our economy, heal cultural wounds and take a step toward political maturity the United States needs to sustain the great experiment of our democratic republic.
With that in mind we offer a list that outlines the inhibitors to innovation. It is hoped that our nations leaders and people can begin an earnest conversation to address these barriers to growth. Maybe I’m wrong with offering this modest list but I remain willing to discuss it, hopeful that people of good will with a different viewpoint will be open to correct my thinking and contribute to my enlightenment.
1. War: War is inherently wasteful. The current wars in Iraq and Afghanistan are grievous examples of waste and national distraction that hampers the United States economic recovery. At an Ecumenical Memorial Service held at Yankee Stadium following the 9/11 terror attacks a Buddhist Monk stated that he believed “it was wiser to drop refrigerators on Afghanistan then bombs”. Almost a decade later and two wars on I can’t help but to think what a meager $100 billion investment in Afghanistan would have returned to the United States tax payers. More importantly it would have shown the world that above all else America values the sanctity and preservation of life. It would have also minimized the rising toll of casualties of both citizens and soldiers. We developed some great bunker buster bombs but we can’t figure out a way to stop a suicide bomber with exploding underpants. We succeeded in stirring up a hornets nest of angry insurgents and failed to build innovative pathways to peace with steadfast bridges to secure allies and pacify combatants.
2. Politics: To be sure politics is omnipresent but the politicization of faith institutions and government functions is a great separator of people. When politics infects faith institutions their ability to breach the social divide and join people together is seriously compromised or downright destructive. The Catholic Church’s practice of denying the Eucharist to parishioners based on political biases of the communicant places politics at the center of the Lords alter. The recent occurrences of radical Islamists burning down Christian Churches in Malaysia is tragically ironic. The violence, a response to the Christians appropriation of the word Allah as a name for God; is a violent rejection of language convergence of two great faith traditions. It would seem that unity is a threat that God cannot abide and is a growing threat that must be abolished. In the secular world government agencies were instructed to withhold scientific climate change research of the National Science Foundation because it did not conform with the politics of the party in power. The extent of the politicization of the judicial branch of government under the Bush Administration was a seditious move worthy of dictatorships. Innovative application of constitutional law in defense of civil liberties is one of the greatest challenges the war on terror poses to this country. The creation of kangaroo courts to support the politics of the ruling party would undermine our system of justice. It would transform our judiciary into a repressive apparatus of the state, our laws into stale dogmas ill suited to meet the legal challenges of our time and a justice system that is indistinguishable from the justice offered by our opponents.
3. Ideology: Only good ideas need apply. Deng Xiaoping said it best “does it matter if its a communist or capitalist mouse trap. The question is, does it catch mice?” Seeing this as a threat, Mao Zedong unleashed the cultural revolution and routed the capitalist roaders as a threat to the Great Proletarian Revolution. After the death of Mao, Deng would be rehabilitated and play a key role in China’s adoption of a market economy and its current ascendancy as a world economic power. In my mind there is a striking resemblance to the debate about heath care. Socialized medicine is bad. Do you want to turn into France? Canadian health care is too expensive. UK heath care system is overloaded and can’t cope with demand. These problems would be solved however after the death panels had a chance to meet and decide who shall live and who must walk the plank.
4. Entrenched Commercial Interests: Though we are ardent believers in capitalism as an engine of innovation the dictatorship of ROI, entrenched concentrations of capital and an unwillingness or inability to adopt longer term investment horizons hamper innovation. The failure of the United States automobile industry to develop fuel efficient vehicles is a good example of market intransigence. The development of junk bonds by Michael Milken and Drexel Burnham Lambert dismantled the manufacturing base of the US economy accelerated the countries decline as a net exporter of products creating the foundation of a debtor nation. During the presidency of Jimmy Carter solar panels were installed on the roof of the White House. The succeeding administration had them removed. Imagine where the alternative energy industry would be today had it developed this leading edge idea and capitalized on this first mover advantage.
5. Unbridled free markets: The economic carnage of the banking meltdown is a startling example of the excesses the pursuit of profit will create. The boom in commercial and residential real estate construction created massive stocks of unused inventories that misdirected and wasted enormous resource. The energy and capital expended on these wasteful endeavors misdirected funds and created huge social hazards that requires massive amounts of capital to mitigate. Also worth mention is the development of video gaming. Lots of energy and creativity is being expended on the best techno music to use while your Mafia Avatar bashes open the head of your opponent with a baseball bat. We are not suggesting censorship or a prohibition of video games nor centralized economic planning. Its a compensation and social value issue. Perhaps a communicants denial of participation at the Lord’s Table lead them to leave the church and miss the message about social values.
6. Technology: It may seem odd to include technology as an inhibitor to innovation but technology for technology sake may inhibit the development of innovative applications solutions that are not technological in nature. The technorati of the world is transforming technology into a religion. Deprived of its human dimension it can become a dogma that grows in an antagonistic relationship with its human masters. The United States continues to trumpet its technological prowess as the deciding factors in its war in Afghanistan. But that paradigm was explored during the war in Viet Nam where pungi sticks ultimately trumped napalm bombs. The power of an idea and how it connects and motivates people is force that is mightier then the sword.
7. Fundamentalism: The Pharisees once asked Jesus, “is it lawful to heal on the sabbath?” Jesus answered that it was always the right time to heal those who are sick. The world recoils in horror at the capacity for destruction fundamentalism regularly visits upon the world. The denial of equal civil rights to LGBT people creates a bifurcated system of citizenship. It is an ugly stain on our democratic heritage. The gravest peril to democracy is the abridgment and denial of civil rights to any group of citizens. Democracy necessitates that all republicans enjoy equal access and rights in order for it to function. The denial of that right based on a fundamentalist reading of religious scriptures makes it particularly abhorrent because civil rights of citizens in a secular democracy is not an issue that is decided by theologians or the adherents to a particular theology.
Tolerance and consensus are both antithetical to the precepts of fundamentalism. Fundamentalism is not the sole province of religion. It has its secular and ideological adherents as well. Fundamentalism is a pillar of dictatorship; either of a political or theocratic nature both are enemies of secular democracy. Secular democracies require tolerance to respect the diverse ideas and competing viewpoints require in the democratic process. Secular democracies require the trust to converse and hash out the best ideas that serve the greatest good. This is only possible if consensus can be achieved. It is how “out of many becomes one”. It is the true genius of America. It is a worthy innovation of governance that every freedom loving citizen should jealously guard and consciously pursue.
8. Public Education: The public education system that the United States built is the true arsenal of democracy and the nations source of wealth and its many contributions it has made to the world. Without the vast network of learning institutions built and supported by successive generations of Americans the worlds great experiment in representative democracy would have long ago perished. The public schools sole charter is to create an enlightened citizenship with the skills to discuss, discern and decide in a civil and constructive manner the ever evolving dialectic of a democratic consensus placed at the service of the republic. It is one of the true geniuses of America and remains her enduring strength.
Today public schools are under attack by forces whose agendas are the pursuit of parochial goals that first and foremost seek their enrichment and interests at the expense of the greatest good of the republic. The charter school movement is a trend that threatens the public school system by privatizing some of the systems assets and draining away much needed resource and financial support. It forces public schools to dispense with curriculum offerings like music and arts, sports programs and civic excursions that will convey an understanding of how institutions interact and support the greater social good. This aspect of the educational experience is supplanted by an exacting examination regime that destroys the love of learning. Secular learning is also being threatened through the introduction of theological precepts like creationism into the science curriculum of public schools. Religion and faith are important precepts to offer in a public educational curriculum; however theology that masquerades as science is an ideological stricture that has no place in public schools. These trends are pose great challenges to the public schools mission to form enlightened citizens free to think and free to act in the sole service of liberty and participatory democracy. Innovation and progress is in danger of becoming a secular sin a disease of the soul that needs to be eradicated from the public schools as its threatens to infect the greater body politic.
You Tube Music Video: Louis Armstrong, I Get Ideas
Risk: innovation, convergence, progress, tolerance
The Profitability of Patriotism: SME Lending
What a difference a year makes. A year ago the banks came crawling to Washington begging for a massive capital infusion to avoid an Armageddon of the global financial system. They sent out an urgent SOS for a $750 billion life preserver of tax payers money to keep the banking system liquid. Our country’s chief bursar Hank Paulson, designed a craft that would help the banks remain afloat. Into the market maelstrom Mr. Paulson launched the USS TARP as the vehicle to save our distressed ship of state. The TARP would prove itself to be our arc of national economic salvation. The success of the TARP has allowed the banks to generate profits in one of the most prolific turnarounds since Rocky Balboa’s heartbreaking split decision loss to Apollo Creed. Some of the banks have repaid the TARP loans to the Fed. Now as Christmas approaches and this incredible year closes bankers have visions of sugar plum fairies dancing in their heads as they dream about how they will spend this years bonus payments based on record breaking profitability. President Obama wants the banks to show some love and return the favor by sharing more of their balance sheets by lending money to small and mid-size enterprises (SME).
Yesterday President Obama held a banking summit in Washington DC. Mr. Obama wanted to use the occasion to shame the “fat cat bankers” to expand their lending activities to SMEs. A few of the bigger cats were no shows. They got fogged in at Kennedy Airport. They called in to attend the summit by phone. Clearly shame was not the correct motivational devise to encourage the bankers to begin lending to SMEs. Perhaps the President should have appealed to the bankers sense of patriotism; because now is the time that all good bankers must come to the aid of their country. Failing that, perhaps Mr. Obama should make a business case that SME lending is good for profits. A vibrant SME sector is a powerful driver for wealth creation and economic recovery. A beneficial and perhaps unintended consequence of this endeavor is the economic security and political stability of the nation. These are the worthy concerns of all true patriots and form a common ground where bankers and government can engage the issues that undermine our national security.
The President had a full agenda to cover with the bank executives. Executive compensation, residential mortgage defaults, TARP repayment plans, bank capitalization and small business lending were some of the key topics. Mr. Obama was intent on chastising the reprobate bankers about their penny pinching credit policies toward small businesses. Mr. Obama conveyed to bankers that the country was still confronted with major economic problems. Now that the banks capital base has been stabilized with Treasury supplied funding they must get some skin into the game and belly up to the bar by making more loans to SMEs.
According to the FDIC, lending by U.S. banks fell by 2.8 percent in the third quarter. This is the largest drop since 1984 and the fifth consecutive quarter in which banks have reduced lending. The decline in lending is a serious barrier to economic recovery. Banks reduced the amount of money extended to their customers by $210.4 billion between July and September, cutting back in almost every category, from mortgage lending to funding for corporations. The TARP was intended to spur new lending and the FDIC observed that the largest recipients of aid were responsible for a disproportionate share of the decline in lending. FDIC Chairman Sheila C. Bair stated, “We need to see banks making more loans to their business customers.”
The withdrawal of $210 billion in credit from the market is a major impediment for economic growth. The trend to delever credit exposures is a consequence of the credit bubble and is a sign of prudent management of credit risk. But the reduction of lending activity impedes economic activity and poses barriers to SME capital formation. If the third quarter reduction in credit withdrawal were annualized the amount of capital removed from the credit markets is about 7% of GDP. This coupled with the declining business revenues due to recession creates a huge headwind for SMEs. It is believed that 14% of SMEs are in distress and without expanded access to credit, defaults and bankruptcies will continue to rise. Massive business failures by SMEs shrinks market opportunities for banks and threatens their financial health and long term sustainability.
The number one reason why financial institutions turn down a SME for business loans is due to risk assessment. A bank will look at a number of factors to determine how likely a business will or will not be able to return the money it has borrowed.
SME business managers must conduct a thorough risk assessment if it wishes to attract loan capital from banks. Uncovering the risks and opportunities associated with products and markets, business functions, macroeconomic risks and understanding the critical success factors and measurements that create competitive advantage are cornerstones of effective risk management. Bankers need assurances that managers understand the market dynamics and risk factors present in their business and how they will be managed to repay credit providers. Bankers need confidence that managers have identified the key initiatives that maintain profitability. Bankers will gladly extend credit to SMEs that can validate that credit capital is being deployed effectively by astute managers. Bankers will approve loans when they are confident that SME managers are making prudent capital allocation decisions that are based on a diligent risk/reward assessment.
Sum2 offers products that combine qualitative risk assessment applications with Z-Score quantitative metrics to assess the risk profile and financial health of SMEs. The Profit|Optimizer calibrates qualitative and quantitative risk scoring tools; placing a powerful business management tool into the hands of SME managers. SME managers can demonstrate to bankers that their requests for credit capital is based on a thorough risk assessment and opportunity discovery exercise and will be effective stewards of loan capital.
On a macro level SME managers must vastly improve their risk management and corporate governance cultures to attract the credit capital of banks. Using programs like the Profit|Optimizer, SME’s can position themselves to participate in credit markets with the full faith of friendly bankers. SME lending is a critical pillar to a sustained economic recovery and stability of our banking system. Now is the time for all bankers to come to the aid of their country by opening up credit channels to SMEs to restore economic growth and the wealth of our nation.
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Risk: banking, credit, SME
Goldman Sachs as Social Entrepreneur
Goldman Sachs’ CEO Lloyd Blankfein and his largest investor, The Wizard of Omaha, Warren Buffett , descended from the mystical heights of Valhalla with some startling news. They were bearing a new mythical golden ring. As they held the ring aloft they made a bold proclamation. They would embark on one of the grandest social entrepreneurial programs of all time by offering some of the rings precious power, about $500 million worth, to capital starved small and mid-size enterprises (SMEs). The 10,000 Small Businesses Initiative will distribute $100 million per year over the next five years to SMEs through Community Development Financial Institutions.
These lords of commerce have heard the cries from endangered SMEs. In their infinite wisdom Blankfein and Buffet understand that the real economy needs to resuscitate and incubate the critical SME segment as an absolute prerequisite to a vibrant economic recovery. The buzz about this news in the marketplace ranged from cynical suspicion at one extreme to puzzled bemusement and ecstatic aplomb at the other.
What motivated Goldman to announce this initiative is an interesting question. Was it guilt, greed or a sense of corporate social responsibility? Some suggest it is a master PR move to counter a growing public perception that Goldman Sachs, the poster child of government favoritism and bailout largess, has leveraged its unfair advantage to achieve historic levels of profitability. Thus enabling management to pay obscene bonuses to company employees. But capital has no psyche, and half a billion dollars is a tall bill to underwrite absolution for some phantom form of guilt. True to its nature, capital always seeks a place where it will find its greatest return. Goldman and Buffett are casting some major bread on the receding waters of a distressed economy. As its foretold in the Good Book , doing God’s work will produce a tenfold return. If the Bible’s math is correct, thats a lot of manna that will rain down from heaven for the shareholders of Goldman Sachs and Berkshire Hathaway. Looks like our modern day version of Moses and Aaron have done it again. Leading their investors across the dangerous waters of the global economy to live in the promised land of happy shareholders.
As one of the world’s preeminent investment banks and purveyor of capitalist virtues, company shareholders must be questioning how Goldman’s managers will realize a return on this investment? Has management examined the potential corporate and societal moral hazards surrounding the program? Surely shareholders have asked when they expect to be compensated for this significant outlay of capital. The desire to realize gain is a more plausible motivator and makes more sense for an enterprise like Goldman and the storied investment Wizard from Omaha.
Its wise to ascribe the best intentions and virtuous motivations to actions that we may not fully understand. This program should be viewed as a seminal event in the history of corporate social responsibility and social entrepreneurship. Its important to understand that institutions that practice corporate social responsibility do not engage it solely as a philanthropic endeavor. Indeed, the benefits of good corporate citizenship pays multidimensional dividends. All ultimately accrue to the benefit of company shareholders and the larger community of corporate stakeholders.
Goldman’s move to walk the point of a capital formation initiative for SMEs seeks to mitigate macroeconomic risk factors that are prolonging the recession and pressuring Goldman’s business. Goldman needs a vibrant US economy if it is to sustain its profitability, long term growth and global competitiveness. Goldman needs a strong regional and local banking sector to support its securitization, investment banking and corporate finance business units. Healthy SMEs are a critical component to a healthy commercial banking sector. Goldman recent chartering as an FDIC bank holding company may also be a factor to consider. This SME lending initiative will provide interesting insights into the dynamics of a market space and potential lines of business that are relatively new to Goldman Sachs. This initiative might presage a community banking acquisition program by Goldman. At the very least the community banking sector is plagued with over capacity is in dire need of rationalization. Goldman’s crack team of corporate finance and M&A professionals expertise would be put to good use here.
Goldman’s action to finance SMEs will also serve to incubate a new class of High Net Worth (HNW) investors. Flush with cash from successful entrepreneurial endeavors, the nouveau riche will be eager to deploy excess capital into equities and bonds, hedge funds and private equity partnerships. Healthy equity markets and a growing Alternative Investment Management market is key to a healthy Goldman business franchise.
Community banks, principal lenders to SMEs are still reeling from the credit crisis are concerned about troubled assets on their balance sheets. Bankers can’t afford more write downs on non-performing loans and remain highly risk adverse to credit default exposures. Local banks have responded by drastically reducing credit risk to SMEs by curtailing new lending activity. The strain of a two-year recession and limited credit access has taking its toll on SMEs. The recession has hurt sales growth across all market segments causing SMEs to layoff employees or shut down driving unemployment rates ever higher. Access to this sector would boost Goldman’s securitization and restructuring advisory businesses positioning it to deepen its participation in the PPIP and TALF programs.
The financial condition of commercial and regional banks are expected to remain stressed for the foreseeable future. Community banks have large credit exposures to SME and local commercial real estate. Consumer credit woes and high unemployment rates will generate continued losses from credit cards and auto loans. Losses from commercial real estate loans due to high vacancy rates are expected to create significant losses for the sector.
Reduced revenue, protracted softness in the business cycle and closed credit channels are creating perfect storm conditions for SME’s. Bank’s reluctance to lend and the high cost of capital from other alternative credit channels coupled with weak cash flows from declining sales are creating liquidity problems for many SMEs. Its a growing contagion of financial distress. This contagion could infect Goldman and would have a profound impact on the company’s financial health.
The 10,000 Businesses initiative will strengthen the free flow of investment capital to finance national economic development and empower SMEs. It strengthens free market capitalism and has the potential to pool, unleash and focus investment capital into a strategic market segment that has no access to public equity and curtailed lines of traditional bank credit. The 10,000 Businesses initiative will encourage wider participation by banking and private equity funds. In the aggregate, this will help to achieve strategic objectives, build wealth and realize broader goals to assure sustainable growth and global competitiveness. All to the benefit of Goldman Sachs’ shareholders and it global investment banking franchise.
Sum2 believes that corporate social responsibility is a key tenet of a sound practice program. Goldman Sach’s has always been a market leader. We salute Goldman Sachs’ initiative and welcome its success.
In September of 2008, Sum2 announced The Hamilton Plan calling for the founding of an SME Development Bank (SDB). The SDB would serve as an aggregator of capital from numerous stakeholders to focus capital investment for SME manufactures. More on the Hamilton Plan can be read here: SME Development Bank.
Risk: SME, bank, recession, unemployment, credit, private equity
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