In the middle — and a hiatus


Photo by Alby Oakshott

I think this beautiful photo sums up the current economic situation: caught in the middle. Financial markets and the “real” economy are in transition — and that transition will continue to be volatile. Just like that drop of water.
With that said, the Intangible Economy is taking a short break from all that volatility. We will return in April.

Reputational assets

And by the way, on the Bear Stearns deal — what does it say about reputation as an asset when a $150 per share company (which is what it was this time last year) can get bought for $2 a share. When the death spiral hits, reputation and other intangibles can vanish – just like the value of those supposedly more solid financial assets that Bear Stearns was holding.

Uncharted territory

I know it is a worn cliché, but the financial system really is in uncharted territory. The Fed’s actions over the weekend are unprecedented. First there is the degree of Fed involvement. According to the New York Times – Fed Acts to Rescue Financial Markets “In a highly unusual maneuver, Fed officials said they would secure the loan by effectively taking over the huge Bear Stearns portfolio and exercising control over all major decisions in order to minimize the central bank’s own risk.”
Second is the expansion of assets accepted as collateral. As the Wall Street Journal – Central Bank Offers Loans To Brokers, Cuts Key Rate points out, “The loans will be secured solely by difficult-to-value assets inherited from Bear Stearns.” This is similar to the new lending facility the Fed created earlier.
Tracking how well the Fed deals with these “hard-to-value” assets will be important as the financial situation stabilizes. If it goes well, we may see an increased in the comfort level of the financial system to deal with these valuation issues, with systems possibly put in place to reduce the risk created by these issues. That would bode well for the use of intangibles in the financial system – which face obstacles because of valuation issues.

Insurers outsourcing medical care

So called medical tourism is getting a big boost from health care insurance companies – according to Business Week – Outsourcing the Patients:

Yes, just like manufacturing facilities and call centers, health care is moving offshore. “All of the largest U.S. insurers are starting to educate themselves or are putting [offshore] programs in place,” says Jonathan Edelheit, president of the Medical Tourism Assn., an industry group formed just last year. Companies that self-insure are also bombarding Edelheit’s group with requests for information.
Getting covered employees to leave the U.S. won’t be that hard, says Edelheit. An insurance company could waive all deductibles and co-pays, offer to cover travel costs for the patient and family members, even throw in a cash incentive, and still save tens of thousands of dollars. After all, a heart procedure that costs $100,000 in the U.S. runs only $10,000 to $20,000 at some of the best private hospitals in Asia. And the quality of care? Foreign hospitals in such arrangements are typically approved by Joint Commission International, part of the same nonprofit organization that accredits American hospitals.
Blue Cross took the lead in medical offshoring when it formed its first partnership, with Bumrungrad Hospital, in February. Since then the insurer has signed similar pacts with the Parkway Group Healthcare, owner of three hospitals in Singapore, and hospitals in Turkey, Ireland, and Costa Rica. Three members of India’s Apollo Hospitals Group are also joining the network. And another large Indian chain, Wockhardt Hospitals, is talking with U.S. insurers as well. “Americans haven’t come to grips with having their heart surgery in Thailand,” says Curtis Schroeder, the American CEO of Bumrungrad. “But that will change.”

And what is that going to do to the service-based economic development strategy of places dependent on major medical facilities, like Cleveland and Rochester, MN (see earlier posting)?

Short takes

Here are some new reports and stories of interest on intangibles:
Creative Britain – New Talents for the New Economy:

Britain is a creative country and our creative industries1 are increasingly vital to the UK. Two million people are employed in creative jobs and the sector contributes £60 billion a year – 7.3 per cent – to the British economy. Over the past decade, the creative sector has grown at twice the rate of the economy as a whole and is well placed for continued growth as demand for creative content – particularly in English – grows.
This is a strong position. But there are major challenges ahead over the next decade. Global competition is growing as other countries recognise the economic value of creativity. To face this, our creative industries need the best possible business support structures in place and an abundant pool of talented people with the right skills to meet the needs of an expanding creative sector.

European Innovation Scoreboard 2007:

Based on their innovation performance, the countries included in the EIS 2007 fall into the following country groups:
* The innovation leaders include Denmark, Finland, Germany, Israel, Japan, Sweden, Switzerland, the UK and the US. Sweden is the most innovative country, largely due to strong innovation inputs although it is less efficient than some other countries in transforming these into innovation outputs.
* The innovation followers include Austria, Belgium, Canada, France, Iceland, Ireland, Luxembourg, and the Netherlands.
* The moderate innovators include Australia, Cyprus, Czech Republic, Estonia, Italy, Norway, Slovenia and Spain.
* The catching-up countries include Bulgaria, Croatia, Greece, Hungary, Latvia, Lithuania, Malta, Poland, Portugal, Romania and Slovakia. Turkey currently performs below the other countries.

The State of Indian Design: For a designer or advertising creative, India is a pretty exciting place to be right now.
A Powerful New Tool for Patent Valuation: The small, Chicago-based Patent Board offers clients a way to estimate the potential worth of an idea.
Happy reading

Technology trade

The Center for American Progress has released a new report early this week — Our Nation’s Surprising Technology Trade Deficit:

A snapshot of global trade statistics in advanced technology products since 2002 reveals that U.S. economic competitiveness in innovation may be slipping away. Surprisingly, the United States has recorded a deficit in high-technology products over the past five years. By the end of 2007, our nation’s high-tech deficit reached new record highs, measured either in absolute terms or as a share of the overall trade deficit.

This isn’t new news to those who have been following trade. As I’ve noted in every posting on the intangibles trade, “The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.”
The report comes to the conclusion that we need an innovation policy:

A larger and more deep-seated problem, however, has been the dramatic difference between U.S. innovation policies and those of our global competitors. As other countries have been investing in innovation to create a skilled workforce and encourage more research and development, the United States has, by and large, neglected to make innovation a policy priority. The U.S. high-tech trade deficit finds its roots in the negligence of our innovation policy and requires a strong policy response.

I would second that recommendation.

An intangible pays off

This little tidbit from Vickie Elmer’s “Working” column in yesterday’s Washington Post — The Best Pay Less:

The members of Fortune magazine’s Most Admired Companies pay less for talent than less-admired companies in their industry, especially for workers outside the executive suite, according to management consultant Hay Group.
The companies pay about 5 percent less overall for talent because they have less need to hire expensive outsiders, according to Hay, which has worked with Fortune to identify and rank the most admired firms. The list includes Apple, General Electric, Google, Starbucks and Goldman Sachs.
“These companies achieve more with less because they tend to be better at giving people more rounded experiences and development, and do not have to rely so much on [salaries] . . . to persuade their people to perform,” said Hay’s Tom McMullen.
They give bonuses to staff members at all levels, including team bonuses for those “who deliver on strategy.” They pay higher salaries and bonuses to senior executives who inspire the troops.
“No doubt the cachet of working with one of the world’s top companies is a motivating factor, too,” McMullen said.

So, bottom line is that the intangible of a good reputation is good for the bottom line.

Lending on asset-backed securities

Early this morning, the Fed announced it would accept mortgage backed securities as collateral — Fed Statement on Expansion of Securities Lending:

The Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. As is the case with the current securities lending program, securities will be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008. The Federal Reserve will consult with primary dealers on technical design features of the TSLF.

As the Wall Street Journal explains:

By providing an outlet for those MBS, the program is meant to make dealers more comfortable buying and holding such securities which are now being dumped by investors facing margin calls and others nervous about the strength of Fannie Mae and Freddie Mac, the huge, privately-owned government-sponsored mortgage agencies that guarantee most MBS. The same logic prompted the Fed to vastly expand the size and term to maturity of its daily money market lending operations on Friday as well as its “Term auction facility” by which it lends directly to banks against a range of collateral.

As I noted in an earlier posting, the list of collateral the Fed will take as part of the standard discount window programs includes other asset-backed securities (ABS). But apparently the new TSLF is more limited. It will be interesting to see whether the TSLF gets expanding to include more ABS — including intangible asset-backed securities.

Changing credit scores – and new set of intangibles

One of the grand intangibles in the lending business is the credit score. Two things go into any lending decisions: what is the likelihood of the loan being paid back and if the lender can pay back the loan, what do I get in return. Intangibles come into these decision in both areas. The latter is covered by collateral–and intangible goods, such as intellectual property and song/movie rights (even donor lists) are sometimes used for collateral. The part about assessing the risk of default has always been much more intangible. Part of making that intangible quantifiable was the use of credit scores. As the Wall Street Journal (Credit Scorers Find New Ways To Judge You) explains, “For many years, loan approvals were determined largely by borrowers’ credit scores, which are based on proprietary formulas that include such things as debt levels and loan-payment histories.”
But, as the story goes on to say, that is changing, “Now, lenders increasingly are looking at other factors, such as rent and utility payments, to determine whether potential borrowers will make good on their loans.”
Incorporating this new set of intangibles will open up the housing market to potentially some 50 million new borrowers. But as the sub-prime meltdown illustrates, that come with some risk. The credit scoring industry will need to convince lenders that the new system is fair and accurate. How they make that pitch and how it is received will say a lot about the current market’s tolerance for new financial ideas right now. It will have to be accepted on “safety & soundness” grounds based on more and better information–rather than as a means of expanding the market. If the change is successful, it may bode well for others to try to also expand increased lending on intangible assets on the other part of that decision: the use of intangibles as collateral.

January trade in intangibles – and revised 2007

After a good month in December, the US trade deficit turned slightly in January, as the BEA trade data showed an increase of $300 million— to $58.2 billion in January from December’s revised $57.9 billion. Both imports and exports increased, but imports great faster than exports: exports were up $2.4 billion and imports were up $2.7 billion. The dollar amount of oil imports continued to grow as both the price and volume increased. On a politically sensitive note, the deficit with China also continued to grow. The number was expected to be worse. According to the Wall Street Journal, “Economists surveyed by Dow Jones Newswires had estimated a $59.75 billion shortfall.”
Our intangible trade balance in January grew by $226 million to $11.2 billion. Every category—imports and exports, royalties and business services—grew. In both royalties and business services, exports increased more than imports. The royalties’ surplus grew by $56 million and the business services surplus by $168 million.
Note: our intangibles surplus covers approximately 45% of our consumer goods deficit.
The deficit in Advanced Technology Products increase in January to $3.5 billion, as imports declined dramatically and exports grew. The big change was a decline in aerospace exports. The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.
The big news this month is the revisions for 2007, especially the second half of the year. BEA’s latest data on “other private services” (what I label “business services”) exports increased dramatically. In July, August and September, the data was revised upwards by $500 to $857 million. In October, November and December, the numbers were revised upward by over $1 billion. Likewise, imports were also revised upwards for those months—the biggest upward revision being a $720 million revision in December.
Royalty payments were also revised for the second half of the year, with royalty receipts (exports) revised upward by an average of $140 million per month and royalty payments (imports) revised downward by an average $13 million per month.
Consequently, our intangibles surplus for the second half of 2007 is on average $560 million per month greater than was previously reported. As a result of these revisions, I am updating the charts I published last month for annual growth in intangibles trade (see chart 2 below) and the percentage of intangible trade in our total international trade (see chart 3 below).
These revisions raise the obvious questions of the ability of our statistical system to cope with the I-Cubed Economy. For the months of November and December, this represents an increase in business services exports of over 7%. The BEA release states that the revisions are due to “the incorporation of more comprehensive and revised quarterly and monthly data.” BEA has made previous revisions to the business services data, as high as a change of $1.5 billion to December 2006 and March 2007 exports.
The Commerce Department recognizes the problem. Improving data on intangibles and services was one of the recommendations of the report of the Advisory Committee on Measuring Innovation in the 21st Century Economy (see also my earlier posting). BEA is undertaking a number of activities to improve the data on intangibles and the knowledge economy (see their strategic plan). In fact, last year, they instituted a new quarterly survey BE-125, Quarterly Survey of Transactions in Selected Services and Intangible Assets with Foreign Persons (see also the list of BEA survey’s on International Services Transactions). However, those surveys are quarterly—and the trade numbers are released monthly. So, for awhile, expect to see continued revisions in the intangible trade statistics.

Intangibles trade for Jan08
Intangibles trade – 2007 revised
Total trade in intangibles -2007 revised.gif

Note: we define trade in intangibles as the sum of “royalties and license fees” and “other private services”. The BEA/Census Bureau definitions of those categories are as follows:

Royalties and License Fees – Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term “royalties” generally refers to payments for the utilization of copyrights or trademarks, and the term “license fees” generally refers to payments for the use of patents or industrial processes.

Other Private Services – Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term “affiliated” refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise’s voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.