Category Archives: Economics

Bob Farrell’s Market Rules Are Good For Supply Managers Too

An article this summer in Canadian Business by Jeff Sanford on the “Burden of Truth” referenced Bob Farell’s top ten market rules which have a a lot of bearing on supply management. Bob Farrell was the Chief Stock Market Analyst at Merrill Lynch for 25 years and knows a thing or two about the market.

  1. Markets tend to return to the mean over time.
    So if you beat up your supplier when times are tough for them, don’t be surprised if they do the same when times get tough for you, which they eventually will.
  2. Excesses in one direction will lead to an opposite excess in the other direction.
    Thus, a market surge for your product will likely be followed by a rapid market contraction. Make sure you’re not stock-piling inventory, because early warning signals may only come weeks in advance in today’s fast moving markets.
  3. There are no new eras — excesses are never permanent.
    A rapid market expansion will always be followed by a rapid market contraction, and the longer the excess goes on, the worse the contraction will likely be.
  4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
    A miracle will not happen. You have to be ready to ride it out.
  5. The public buys the most at the top and the least at the bottom.
    No matter how many price cuts you make, you won’t create a surge in demand or increase market size. So while you will have to be competitive to maintain your relative market share, don’t bankrupt yourself trying to serve a market that isn’t there.
  6. Fear and greed are stronger than long-term resolve.
    If they weren’t, we wouldn’t be in this mess!
  7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.
    So don’t believe all the hogwash the big vendors are spewing about how good “consolidation” is as they buy up all the little guys and end support for the new, innovative, offerings the little guys were offering.
  8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend.
    This says odds of a quick turnaround are not in your favour — so don’t bank on one.
  9. When all the experts and forecasts agree — something else is going to happen.
    If markets were predictable, we’d all make money in the stock market all the time. But they’re not — and they’re least predictable when everyone seems to agree. So if everyone says gold is going up $50 an oz tomorrow, don’t bank on it.
  10. Bull markets are more fun than bear markets.
    ‘Nuff said.

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Is Dubai in for a Downfall? And will it take the Middle East Economy With It?

A recent article over on Knowledge @ Wharton last month asked if “Dubai World’s Debt Default Could Spark a Crisis in the Middle East and Beyond” after Dubai World announced in late November that it wanted a six month delay on payments on 26 Billion in debt. In other words, it’s asking for a delay on a loan amount that is greater than the annual GDP of over 110 countries! And, according to the article, that’s just the debt it attributed to it’s overly ambitious real estate subsidiary, Nakheel, which, not satisfied with the construction of Islands in the shape of Palm Trees (Jumeirah, Jebel Ali, and Deira) had to go and construct a massive Waterfront, The World (Wikipedia), and, now, The Universe (Wikipedia).

Needless to say, the announcement threw the markets for a loop. As per the article, the Dow Jones Industrial Average quickly fell 1.5% (155 points), European stocks plunged, and oil prices plummeted. Between the end of November 25 (when it hit Bloomberg) and December 9th when the K@W article appeared, a flurry of news articles hit the wire trying to understand what it all meant, which so far has been very little beyond the initial shock. But given that negotiations are still ongoing and nothing has been finalized, a bigger shock could be coming, especially since Dubai World as a whole has debts totalling 59 Billion, which is an amount greater than the annual GDP of over 130 countries! The detailed analysis from the K@W article was that Dubai World’s lenders will work out a restructuring and will supply funds needed to complete the real estate projects that have stalled, because the buildings will be more valuable finished, quoting the burst real estate bubble that Florida suffered in 1926 (and how the excess building eventually drew people to Florida from around the US), but nothing is set in stone. There’s no guarantee that, in this economy, the lenders can even afford to wait six months for their structured payments, yet invest even more money in very expensive (and egotistical) projects that will take quite some time to sell. After all, how many people left can afford to pay 15 Million to 50 Million for their own island? With the major studios shelving scripts left and right, even “A” list actors are having trouble getting steady work at their usual pay rates! (And if the doctor had 15 Million to invest, he’d be launching new companies offering useful software and services [as they’d have revenue potential], not buying an over-priced man-made piece of real estate that really wasn’t needed in the first place.)

Now, while it’s likely that Wharton Finance Professor N. Bulent Gultekin is right in that problems arising from Dubai World will for the most part be contained in Dubai rather than affecting the region, largely because Dubai is the most highly leveraged country in the area, it’s important to note that if Dubai World did fail, it would be the largest government default since the approximately 100 Billion Argentine debt crisis of 2001 and that could spark a chain reaction (like there was during the Russian default crisis of 1998) as there has been a very big jump in government debts around the world as of late. And if a country like Greece, which has a lot of debt mostly held by lenders outside the country, fell, we could be saying goodbye to a quick recovery and hello to a nice, long depression. I just hope the financial decision makers think about this before they raise national debt limits again and risk plunging the world markets into turmoil.

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It’s the Year of the Tiger … and China is Going to ROAR!

In 2008, according to the World Bank, China had a GDP of approximately 4.326 Trillion. Given that China projected growth of 8% in 2009, that puts them at about 4.672 Trillion for 2009. Continuing this trend, as China is projecting similar growth for 2010, that puts them at a GDP of about 5.046 Trillion this year. Meanwhile, Japan, which clocked in at 4.909 Trillion in 2008, just downgraded its projected growth to 1.3% for 2009, putting it at 4.973 Trillion for the year. As its economic outlook is not looking up, holding steady, this puts Japan at an estimated GDP of 5.023 Trillion for 2010. What does this mean? This will likely be the year that the Tiger ROARS and China becomes the 2nd largest producer of GDP in the world.

So what should you do besides learn Mandarin, if you haven’t already? (You can even start for free at sites like Chinese-Tools.com.) Good Question! While I still adamantly believe that you should not be importing goods from China that you can produce closer to home — as there’s nothing lean about an 8,000 mile supply chain — that doesn’t mean that you shouldn’t be producing in China for the Chinese market. Or that you shouldn’t be tapping the collective knowledge of the almost two million geniuses that live in the country.

But where do you start with the world’s fastest-growing economy? I’m not sure, but a recent article from Knowledge@Wharton on “The Road to China” that interviewed Harbir Singh, Saikat Chaudhuri, and Lawton Burns on their recent trips to China provided some fresh insights that are worth a second thought.

The economy is barreling ahead in high gear in major cities like Shanghai and Beijing which have literally transformed over the last decade. They have a strong infrastructure, a very strong manufacturing-based economy (as they are the manufacturing hub of the world), and are investing a lot of money to set up firms and an ecosystem to foster innovation. They’re trying very hard to move up the global value chain very fast. Plus, a lot of overseas Chinese are now returning to China — junior people as well as senior people.

However, they’re still a big country with a huge population which collectively has many different types of people with varied interests. As a result, where China is concerned, it’s still about managing diversity. It’s about meeting the aspirations of those people and managing the differences, as much as its promoting some uniformity in a standard of living.

In other words, you probably have to start by diving in head first because there’s so much happening, so fast, that it’s hard to really wrap your head around it all unless you’re immersed in it. But check out the article. Although it’s five pages, it is quite interesting.

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There is NO New Normal … Just the Old Normal Coming Back

I have to be honest … I get sicker and sicker of “the new normal” each time I hear about it … even though I must admit that upon reflection I did find the recent article from McKinsey Quarterly’s Strategy Practice on “Navigating the New Normal” to be hilarious. For a while I couldn’t put my finger on why I couldn’t stand hearing about “the new normal”, but then it hit me. There’s no such thing as a new normal … just the old normal coming back after an extended 15 year hiatus. After all, if you think back to before 1995 and before the leading edge of the first tech boom, you see a slow, steady growth in the year-over year stock indices going back to 1975*1. And if you look at the annualized GDP data in the same time frame, you see that growth went up and down, usually between -7% and 7%, over time*2, but averaged out to slow, steady growth*3.

Not only does this mean, as the McKinsey Quarterly article pointed out, that (continual) market growth of 5% to 7% is a thing of the past, but that you have to go back to the good old days where your growth is going to be at the expense of your competitor’s loss. That means that you are going to have to buckle down and build better products, create better services, and offer them at a better price point than your competitors. In other words, the days of new markets and free growth are over.

And while I agree with the leading “strategists” that you are going to have to limit growth plans to “growth above market” and adapt to changing conditions on a quarterly basis, I am fed up about this bullshit about having to go to shorter and shorter planning cycles. That’s why the economy is in the gutter. No more long term thinking. No more research labs. No more support for long term research projects in academia (where it’s now “publish another paper, no matter how trivial, tomorrow or perish”). It’s one thing to be on short production cycles … as that lets you adapt to changing market conditions. But it’s another thing to not be planning beyond three years. It’s just crazy. We need to get back to the days where companies not only had five year plans, but ten year plans … and even longer term plans where innovation roadmaps were concerned. Until we do, I don’t see things getting much better. But in the meantime we’ll get lots of five page articles on discussions with “leading” Chief Strategy Officers who, in long winded diatribes, essentially tell us that they don’t know where things are going … which is exactly what you get when you stop planning for the future.

*1 Comparison of the Dow Jones Industrial Average, NASDAQ Composite, and S&P 500 after 1975

*2 Annualized US GDP Growth from 1947-Present

*3 US Gross Domestic Product 1947-Present

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Are Economics Going to Push Us Back to China?

Despite the disadvantages, which include

    • limited ability to respond to demand changes,
    • high logistics costs in boom economies, and
    • the potential for large currency-exchange losses

it looks like economics are going to push many multi-nationals back to China.

Consider the following advantages that the global recession has created, as pointed out in a recent article on “Sourcing Successfully in the New China” by Accenture’s Jonathan Wright:

  • Dips in the global economy have left China with lots of excess manufacturing capacity, which exceeds 50% in some industries.
  • Dramatic overcapacity exists in ocean freight, with hundreds of vessels floating fallow in Hong Kong’s harbours.
  • China’s domestic growth is as promising as any economy in the world.
  • Labor rates are still significantly lower than Western countries.
  • Most suppliers have dramatically improved their product/service quality by implementing control mechanisms and systems, renewing manufacturing lines, and increasing their available talent pool. They are also much more open to continuous improvement methodologies.

When you put all this together, those companies with good demand planning systems and dual sourcing strategies (to allow for unexpected demand increases to be handled near-shore) could lock in great deals now on both production and transportation and have a significant advantage during the forthcoming recovery while being in a great position to serve the emerging domestic market in China. While I normally don’t push the outsourcing bandwagon, it looks like those companies that climb aboard early could benefit greatly while those companies who wait until it becomes the “in-thing” will have totally missed the boat (as prices will rise as capacity diminishes).

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