GDP and economic statistics

his morning, the BEA released the preliminary estimates of 3rd quarter Gross Domestic Product. Last month’s advanced estimate was a paltry 1.6%, a number low enough to make many economists worry about a slowdown. But today, we find that the real number is 2.2%. A big difference. The revision was due to fewer imports than expected and a greater accumulation of inventories (neither of which good news in and of themselves but are positive in that they increase the total GDP).
The size of the revision should prompt a moment of reflection about our economic statistics. We often complain that our current statistics don’t give us an accurate picture of the I-Cubed Economy. But even long-accepted statistics are not infallible — as is shown by this revision to a number which we all feel is a pretty good indicator. As we move forward with revamping our economic statistics, let us keep in mind the fallibility of the numbers. As the old saying goes, there are lies, damned lies and statistics.

Thriving by not winning

The mantra of the new economy has been “be first” — first-mover advantages, be first in market share, be first-to-market. But that isn’t how the I-Cubed Economy necessarily works. Servicing customer needs, rather than beating the brains out of the competition, is the real key to success — as James Surowiecki points out in his latest New Yorker column, In Praise of Third Place:

Fifteen years ago, the video-game industry was ruled by one player, Nintendo. The company had machines in a third of American homes, and it was Japan’s most profitable electronics company. The title of a 1993 book summed up the situation: “Game Over: How Nintendo Conquered the World.” Then the Sony PlayStation arrived, and everything changed. Today, Sony is the dominant force, and its chief rival is not Nintendo but Microsoft, which makes the Xbox. Two weeks ago, the début of Sony’s PlayStation 3 was greeted by crowds of hysterical consumers anxious to get their hands on the new console, billed as the most powerful gaming machine ever. When Nintendo’s new console, the oddly named Wii, appeared, a few days later, there were excellent reviews and expectations of good sales, but no more talk about world conquest. If Sony and Microsoft are the major-party nominees, Nintendo is more like a cool third-party candidate.

As Sony and Microsoft battle over who will own the home entertainment market (“control the living room”), Nintendo took a different tack.

Nintendo has dropped out of this race. The Wii has few bells and whistles and much less processing power than its “competitors,” and it features less impressive graphics. It’s really well suited for just one thing: playing games. But this turns out to be an asset. The Wii’s simplicity means that Nintendo can make money selling consoles, while Sony is reportedly losing more than two hundred and forty dollars on each PlayStation 3 it sells—even though they are selling for almost six hundred dollars. Similarly, because Nintendo is not trying to rule the entire industry, it’s been able to focus on its core competence, which is making entertaining, innovative games. For instance, the Wii features a motion sensor that allows you to, say, hit a tennis ball onscreen by swinging the controller like a tennis racquet. Nintendo’s handheld device, the DS, became astoundingly popular because of simple but brilliant games like Nintendogs, in which users raise virtual puppies. And because Nintendo sells many more of its own games than Sony and Microsoft do, its profit margins are higher, too. Arguably, Nintendo has thrived not despite its fall from the top but because of it.

Strategy is all about thinking through what you are doing – not necessarily following the latest management fad. The same is true for national or local economic strategies. I would venture to say that there are a lot of Nintendo’s out there – national and regions how are doing very well by following an older management fad of “sticking to your knitting.” That is not to say that they aren’t innovative. Today’s knitting is nothing like yesterday’s. But building on your strengths and shoring up your weaknesses has always a good strategy. And while others fight over who has a larger market share, making sure that you are providing value to your customer will always be a winning strategy.

Wall Street Journal on patent cases

FYI – this insight from the Wall Street Journal – As Patents Grow More Contentious, Battleground Shifts to High Court:

With the economy increasingly dependent on technological innovation, the Supreme Court is scrutinizing more patent rulings made by a special court that critics say has tilted too far in favor of intellectual-property rights and could be stifling competition.
The high court, which today hears arguments in one of three patent cases on this term’s docket, has ruled in recent cases on the side of more flexibility in enforcing such rights. If that trend continues, it could translate into weaker protections for patent holders and promote greater access to inventions.
The Supreme Court’s newfound assertiveness on core issues of patent law — after hearing only a handful of cases in the field over 20-plus years — comes amid a sharp debate over how to maintain American industry’s competitive edge while upholding the protections that reward the risk-taking behind cutting-edge inventions.
In today’s economy, for instance, many innovations — such as software programs, drugs or advanced electronics — are built on myriad smaller inventions. That has led to disputes between owners of component patents and those who incorporate those pieces into more complex products, leaving federal courts to delineate who owns what.

There are three major patent cases that the Supreme Court will decide before the end of this term in June 2007. These three will go along way to reshaping patent law. But ultimately the Congress needs to step up and pass patent reform legislation. Let us hope the new Congress is up to that task.

Collateralizing intangibles

Ford Motor Company wants to borrow money. Lots of money. $18 billion to be exact.
Normally, that would not be big news. It would be some news for the corporate bond market. But this is generally routine news.
What is newsworthy about this borrowing is how Ford plans to do it. Rather than sell normal corporate bonds (with a rating at junk bond levels), Ford is selling bonds backed by some of their assets. As the Wall Street Journal reported:

In arranging to borrow as much as $18 billion, Ford Motor Co. is making a massive bet that by pledging its assets as collateral, it can take advantage of buoyant debt markets to help pay for a difficult and costly restructuring.

This is not completely unusual. As the Journal goes on to say:

Ford isn’t alone in being forced to back its borrowing with hard assets. Earlier this month, General Motors Corp. pledged some equipment assets as collateral for a $1.5 billion loan and arranged earlier in the year for a $4.6 billion secured credit line, which, like a credit card, can be tapped when needed.

What is noteworthy is the mix of assets Ford is using. Its not just hard assets. According to the Washington Post:

Among the other assets Ford was using as collateral are its intellectual property, such as patents or significant trademarks; real estate; and its automotive financing unit, Ford Motor Credit.

It also apparently includes the Volvo brand, which Ford owns.
A few years ago, bankers would not touch intangibles as collateral. Now I hear from financial advisors and valuation specialist that they are getting more calls about using intangibles as part of a larger loan package (as Ford is doing). I suspect we will see more of the deals in the future. And as the market becomes more familiar and comfortable using intangibles as part of a package, we are likely to see stand-alone type of deals – where the intangible assets are the only collateral used. This is already happening in the securitization arena. Look for this type of financing to spread.


From Forbes and the Reputation Institute comes a listing of one of the most intangible of intangibles:The World’s Most Respected Companies.

“Reputation” has become a watchword in the corporate world, and safeguarding a company’s image is now a top priority for many CEOs. That’s one reason why the Reputation Institute, a New York consulting firm, decided to rate the reputations of the biggest companies in the world. The results may surprise you; only one American company, for example, made it into the top ten worldwide.

The only US company in the top worldwide 10 was Kraft. Other top US companies include Johnson & Johnson, Pepsi, Disney, Home Depot, 3M, Kroger, Target, P&G and Deere.

Proliferating VIOP patents

Patents, patents and even more patents. I came across the following in Business Week a couple of weeks ago – VoIP Patents: Innovation—and Lawsuits:

The Patent & Trademark Office is approving patents aplenty for Internet-based calling. On Nov. 14 alone, it handed out a patent on what IBM calls a “conversations computing system,” and granted chipmaker Intel a patent for a computer-based phone “eliminating the need for a telephone set.”
Those were among dozens of patents granted on two separate days in November to companies including Texas Instruments, Motorola, and Nokia. In October, the PTO gave an additional 76 patents to the likes of Qualcomm, Nortel, Broadcom, Time Warner’s AOL, and NTT DoCoMo of Japan.
In all, the U.S. has to date issued 2,049 patents related to Voice over Internet Protocol (VoIP), a technology that enables low-cost or free calling using the same method that zips e-mail around the Internet.

I think this illustrates the problems of patent thickets, especially in IT: over 2000 VoIP patents and counting. As the article goes on to say:

Chances are, many patent battles will be fought outside the courtroom. Patent holders are likely to use their intellectual property portfolio to extract concessions on cross-licensing deals, where one company may share its VoIP expertise in exchange for use of another company’s patented technology, says VoIP expert Jeff Pulver. “It’s certainly going to be something somebody could use against somebody.”

This also illustrates the differences in technologies. A new drug has a patent (or a few patents) on the chemical composition and on the process. IT has literally thousands of patents on one technology. How to deal with that difference is the major stumbling point for patent reform.
It is also the reason why we need patent reform. Does anyone really think that everyone in the VoIP business (equipment supplier to service supplier) has carefully researched all 2049 patents to make sure they aren’t infringing? And that there aren’t a bunch more patents out there that may not be called VoIP related, but really are?
It’s the Wild West out there — it really is folks. Time for the Congress to finally step up and deal with the problem.

More on financial competitiveness

The man whom some on Wall Street blame for their competitiveness woes is speaking out on financial regulation and competitiveness – Spitzer slams threat to corporate reforms:

In an interview with the Financial Times, the outgoing state attorney-general, who won fame for tackling corruption in the financial services industry, said diluting such reforms would be “counterproductive” and would fail to tackle the reasons US businesses are falling behind.
“The argument that we are failing in competitiveness because of regulations is incomplete,” Mr. Spitzer said. “We’re failing in competitiveness because of failed business models and the lack of smart investment in technology. General Motors is not failing because of regulations but because it hasn’t produced good products.
. . .
Mr. Spitzer said critics who warned that aggressive enforcement hurts competitiveness were ignoring recent history. “The sectors that bore the brunt of my cases are performing extremely well,” he said. “They are more competitive because they understand the importance of ethics.”
Many of the top investment banks and the insurance companies that settled with Mr. Spitzer over allegations of biased stock research, accounting fraud and bid-rigging are having extremely profitable years.

Spitzer’s remarks in the Financial Times come on the heels of Secretary Paulson’s remarks (see earlier posting) and a special report (and cover story) in the Economist. That report, America’s capital markets: Down on the street, gives a précis of the “roll-it-back reformers” objections:

The advocates of reform see plenty of scope for improvement. The problem is not only Sarbanes-Oxley, they argue. Aggressive investigations by Eliot Spitzer forced the financial industry into settlements that curbed innovation as well as sharp practice. Federal regulators, desperate to keep up with the New York attorney-general (and now governor-elect), ran amok. Class-action lawyers have been allowed to wield too much power, and shareholders too little. on

From the tone of the article (and the accompanying opinion piece What’s wrong with Wall Street), the Economist isn’t buying this as the sole problem:

The bad news for America is in part the result of good news elsewhere. Thanks to financial liberalisation (which America encouraged), New York faces a lot more competition than it used to. Developing countries are getting richer, and their companies and financial markets better governed. Firms that might once have rushed to American exchanges to privatise themselves are instead doing so at home, or at least nearby. London is seen as a natural home for companies from Russia. Chinese firms are turning more to Hong Kong, which is gaining a reputation for capital-raising as well as trading: witness the gargantuan offering by ICBC, a bank, last month. As Asian markets mature, more of the capital there will surely never leave the region: there is little point in Asian companies going to New York to raise cash from Asian savers. Other markets are growing up, making Wall Street less exceptional.

This echoes their earlier comments on how London became a financial center (the subject of an earlier posting). A large part of the story is flow of funds and financial innovation.
Yet, almost everyone (including Governor-elect Spitzer) that some regulatory overhaul is needed. Steps are already being taken to fine-tune Sarbanes-Oxley. As the Economist says:

With regulators soon expected to announce rule changes that will lighten the burden, the battle against Sarbanes-Oxley’s excesses looks well on the way to being won. This should mean efforts can be directed elsewhere.

They suggest two areas of reform. The first is shareholder rights:

On the one hand, they have too few rights in their dealings with company boards; they have less power than their British equivalents when it comes to electing directors, for instance. On the other, American shareholders (or rather the lawyers who purport to represent them) wield too much power in securities litigation. Lawsuits brought because of falling share prices make a mockery of both the principle of caveat emptor and the honourable New York tradition of never giving a sucker an even break.

The second is the regulatory structure:

Regulators could also do with an overhaul. Here there are two problems, both serious. First, the Securities and Exchange Commission (SEC) is good at the tough stuff, bringing plenty of “enforcement actions”. But in its zeal to keep pace with crusading state attorneys, who exploit high-profile campaigns to win votes, it has lost sight of its other supposed goal—ensuring that markets run smoothly and efficiently. One way to address this imbalance would be to replace some of the SEC’s vast army of lawyers with economists. That would also lead to better cost-benefit analysis of new regulations—an area where the SEC trails behind Britain’s Financial Services Authority.
Second, the regulatory structure is too atomised. Too many agencies monitor the markets. There are four separate banking regulators. State and federal regulators tread on each other’s toes. The SEC’s duties overlap with those of the Federal Reserve, the Commodity Futures Trading Commission (CFTC) and others. Since it no longer makes sense for the increasingly entwined cash and derivatives markets to be policed by separate regulators, a sensible first step towards streamlining would be to merge the CFTC and the SEC.

These sound to me to be good starting points. As Mayor Bloomberg and Senator Schumer have said, To Save New York, Learn From London.
Let’s see if the financial community can rally behind these lessons from London. It will be a good test of their newly merged lobbying association – Securities Industry and Financial Markets Association.

After geographical indicators

Earlier postings on this blog have talking about intellectual property protections for products from a specific region, such as Parma ham, Champagne, etc – called geographical indicators. Now, the Japanese are taking it one step further, according to a story in this morning’s Washington Post – Putting the Bite On Pseudo Sushi And Other Insults:

With restaurants around the globe describing themselves as Japanese while actually serving food that is Asian fusion, or just plain bad, the government here announced a plan this month to offer official seals of approval to overseas eateries deemed to be “pure Japanese.”

Apparently, they are not the only ones:

the mentality in Japan also echoes a similar movement by several nations — including Italy and Thailand — now offering guidelines and reward programs to restaurants abroad to regain a measure of control over their increasingly internationalized cuisines.

The target of these campaigns is the already-established, not-so-cutting-edge-anymore trend toward fusion. Fusion is the long standing practice of combining foods from different places, raised to the level of haute-cuisine. Not everyone is crazy about these combination. Thus, the Japanese government’s attempt to protect the purity of the Japanese cuisine from such barbarities as serving sushi and Korean bulgogi (barbequed beef) on the same menu.
However, the story points out that Japanese cuisine may not be so pure:

But some here have expressed caution about the launch of the government approval system, arguing that Japan is a country also notorious for adapting foreign foods to local tastes. Indeed, that rare talent gave birth to Japanese seafood and mayonnaise pizza.
In addition, many so-called Japanese foods have foreign influences or roots. Batter-coated and fried food known as tempura, for instance, was introduced to the Japanese by Portuguese missionaries during the 16th century.
“The question is, what can we really call ‘Japanese food’?” said Masuhiro Yamamoto, the Tokyo-based food guru. “Here in Japan, we believe that tonkatsu [fried pork cutlet] is essentially Japanese, but try and tell the French that isn’t porc paner.”

For now, the tools being used in this quest for purity are guideline and seals-of-approval. That is fine and probably useful to anyone who wants a “pure” experience. However, I think they would do us all a favor if they stuck to “good” rather than “pure.” There is enough bad sushi out there to police without worrying about whether it is correct or not.
And “correct” is in the eye of the beholder. After, all if we attempt to enforce strict tradition in all our intangibles, such as cuisine, there would be no innovation what so ever. So, for me, fusion beats purity – at least when it come to sushi.

What is the Dems agenda

David Wessel wrote a thoughtful piece in his column “Capital” in yesterday’s Wall Street Journal about the economic challenge facing the Democrats in the attempt to address the problem of rising inequity. One of the things he pointed out was the complexity of the problem.

Today’s inequality reflects a confluence of forces. Technology is increasing employers’ appetite for some skilled workers, while diminishing it for assembly-line workers in auto and textile factories. Imports and outsourcing are doing the same. Schools aren’t graduating enough of the workers in short supply, such as engineers. Immigration is contributing to a glut of others, visible wherever day laborers gather hoping for work. Unions are atrophying. Corporate boards, hedge funds and sports teams are increasingly willing to write super-sized paychecks to a chosen few.

The list of ideas is impressive:
Dems list.gif
Unfortunately, the list of alternatives proposed — while helpful — doesn’t get us to where we want to go. Yes, I agree with almost all of these. I can quibble with the exact formulation of some of them and disagree with one (raising the capital gains and dividends tax – I have long supported a sliding scale that reduces the tax on long run investments while increasing it on short term).
But there is something missing: the recognition that the nature of the economy has fundamentally changed. Too many of these ideas are based on the industrial era which will be most effective in only a portion of the economy. Yes, many will be effective for the I-Cubed Economy (such as the educational-oriented ones). However, they don’t go to the heart of the issue.
Gene Sperling’s quote is accurate – we must raise the tide as well as all boats. Where are the programs to raise the tide? Granted that the article was focused on inequality not growth. But the two go hand in hand. There is an ingrained fallacy in other thinking that treats them as separate (and generally as conflicting).
Actions that increase jobs and economic opportunity for all will promote both equality and growth. For example, where are the programs for entrepreneurship and business start-up, especially in the communities-left-behind and communities-at-risk? Where are the programs for on-the-job training, workers can keep their jobs and improve their own market able skills — rather than wait until they are out on the street? Where are the programs to help small and medium size businesses re-orient their businesses to this new innovation led, design-focused competition.
Those should be a no-brainer for either political party. But the GOP calls them “industrial policy” and complains that they are interference with the mythical automatic workings of the market. Democrats call them “corporate social welfare”.
Until both sides stop living in the past – and simply pulling out the same old solution, we won’t be able to attack this problem.
The list of idea that the Dems are talking about is a good start (better than the previous do-nothing alternative). But it is only a start. Let’s begin talking about the rest of the agenda.

Patenting greenhouse gas exchanges

In a couple of earlier postings, I talked about greenhouse gas trading as a new financial innovation. Now, according to News:

Fannie Mae, the biggest U.S. mortgage finance company, won a patent for a system to trade greenhouse gas-reduction credits earned by homeowners, securing a foothold in a $22 billion market while raising concerns that the government-chartered company is overstepping its mission.
Ousted Chief Executive Franklin Raines is listed in the patent as an inventor of a system for verifying cuts in household emissions of carbon dioxide and other greenhouse gases. The patent, granted on Nov. 7 and held jointly with a subsidiary of New York-based Cantor Fitzgerald LP, gives Fannie Mae proprietary control over a method for pooling and selling credits to companies that can’t meet emission reduction targets.

However, because of the concern over mission-creep, it is unclear what will happen to the patent:

Corinne Russell, a spokeswoman for the Office of Federal Housing Enterprise Oversight that regulators Fannie Mae, said the agency is reviewing the patent and wouldn’t comment further.

It is also unclear what the immediate effect of this business process patent might have on ongoing greenhouse gas exchanges — especially overseas. Given that this trading market has existed for some time, it will be interesting to see exactly what technique Fannie Mae has patented, whether they will try to enforce their patent, and whether the regulators will let them even try.