MBS Blog

The many causes of the ongoing global financial crisis will no doubt be discussed, dissected and argued about long after the crisis recedes. One significant factor has been the lack of transparency in investment vehicles such as Mortgage Backed Securities, derivatives, corporate financial statements and ultimately the markets.

A result of the crisis will be a revised perspective on the part of investors….to say the least. They will be less trusting of current modes of analysis, as well as more demanding for information. Again: transparency will be key as the ability to measure value and risk may have been obscured as much by the lack of financial regulations and standards, as well as the imposition of regulations.

The article below from www.pajamasmedia.com by the CEO of Cypress Semiconductor Corporation, refers to accounting regulations in the United States. While it relates to conditions there, it is instructive of how well intentioned government actions can cause further harm to businesses and markets.  This is especially instructive for emerging markets where the lack of transparency is an even greater challenge, and continues to hinder investment and economic growth.

 

December 3rd, 2008 2:00 am

T.J. Rodgers: My Financial Statements Are a Mystery, Even to Me

Why are the Pharisees of Accounting in the U.S. trying so hard to destroy American business?  Having crippled high tech entrepreneurship and made it nearly impossible for any U.S. company to ‘go public’, the people who set the rules of financial disclosure are now making corporate financials so obscure that investors literally have no way of knowing the financial condition of their companies.

In 2002, in reaction to Enron and other perceived corporate excesses of the Dot.com Boom Congress passed the Sarbanes-Oxley Act.  The Financial Accounting Standards Board (FASB) followed suit be revising its Generally Accepted Accounting Principles to make corporate accounting more transparent.

 

But in my experience, all that these new laws and regulation have done is make corporate finances more opaque - and is killing off the creation of new public companies in the United States.

 

The first step in the wrong direction came when FASB mandated that companies list “intangibles” such as “goodwill”, as corporate assets, artificially inflating balance sheets. After that, FASB meddled with the revenue recognition rules, in some cases not allowing companies to report revenue from cash payments received from a customer for a delivered product. Finally, and worst by far, FASB mandated punitive and nonsensical rules for so-called expensing of stock options.

 

These accounting burdens, combined with the onerous yet ineffective mandates of the Sarbanes-Oxley Act, are starting to take a real toll on American businesses and markets. In 2007, only $8.5 billion or 7.7 percent of the total $109 billion in issuances of Initial Public Offerings were launched on U.S. stock exchanges, down from 60.8 percent a decade ago.

 

This isn’t merely the law of unforeseen conseqences, but as time passes, evidence of willful blindness in the face of facts. It would be one thing if, after six years, you could point to a greater transparency for investors and the general public regarding corporate financial transactions - but not is that not the case, but I can tell you from personal experience that Sarbanes-Oxley and the new FASB regulations actually make a company’s financials less transparent to the people who run the company. Let me give you an example from my own career.

 

Indecipherable Financial Statements Harm Business, Markets

 

I first noticed the misleading nature of Generally Accepted Accounting Principles a few years ago when an investor called to complain about the small amount of cash on our balance sheet. Since we had plenty of cash, I decided to quickly quote the correct figures from our latest financial report. But to my surprise, I could not tell how much cash we had either. With its usual-and almost always incorrect-claim of making financial reporting “more transparent,” the Financial Accounting Standards Board had made it difficult for a CEO to read his own financial report.

 

FASB is a group of seven theoretical accountants based in Norwalk, Connecticut. Its website shows that no FASB member ever started or ran a successful business and that only one member has even held a senior position in a prominent public company other than an accounting firm. Yet, FASB mandates the Generally Accepted Accounting Principles that corporations must use to report to their shareholders. The Securities and Exchange Commission enforces FASB mandates with the threat of criminal prosecution.

 

Although GAAP reports became more complex and less transparent during the 1990s, by 2001 GAAP accounting was good enough to enable companies to report accurately, both internally for control purposes and externally to shareholders. Unfortunately, since then - thanks to the new rules — the FASB-mandated GAAP reports have become nearly useless. I no longer bother to read the financial reports of companies I follow because I would literally need an analyst to decipher them for me.

 

One big step in the wrong direction came when FASB mandated that after an acquisition, companies list “intangibles” such as “goodwill” as corporate assets, artificially inflating balance sheets. After that, FASB meddled with the revenue recognition rules, in some cases not allowing companies to report revenue from cash payments received from a customer for a delivered product. Finally, and worse by far, FASB mandated punitive and nonsensical rules for so-called expensing of stock options.

 

As I’ve already noted, these new rules are having a devastating effect upon America’s companies and markets. And it’s getting worse. Duncan Niederauer, the CEO of the New York Stock Exchange, reports that as of July 1, 2008, “only four sponsor-backed deals (those with either venture capital or private equity investors) raised a mere U.S. $1.7 billon,” down 90 percent from the 2007 figures. Unfortunately for the rest of us, FASB doesn’t care about consequences; it rarely considers the bureaucratic burdens it imposes on companies

 

This increased regulation burden makes it less attractive for venture capitalists to fund small startup companies-an economic disaster for Silicon Valley, the most prolific producer of America’s technology successes (and, by extension, new job creation in this country). On July 7, the president of the National Venture Capital Association, Mark Heesen, addressed the current IPO drought by stating, “We need to put regulators, legislators, presidential candidates and the private sector on notice that this situation represents a serious problem that will have long-reaching economic implications if not addressed. We view this quarter as the canary in the coalmine.”

 

The case of my company’s confusing cash report was explained by a GAAP accounting rule that mandated spreading the liquid assets on our balance sheet into three categories: cash and cash equivalents; short-term investments; and “other assets,” a category containing both liquid investments, like Intel stock, and illiquid investments, like the stock of a startup company. My company’s actual cash position is inferable from our official 172-page 10-K report, but only by those willing to dig into the 74 pages of footnotes. Few investors would have the time to do that exercise for just one stock, let alone a portfolio.

 

Let me say this one more time: It is only going to get worse. And fixing this mess can only occur at the highest levels of government - which means that rescue isn’t coming any time soon.

 

In the meantime, we are going to have to survive on our own, navigating our way through useless, confusing, and often downright wrong financial reporting to find those tiny pearls of truth that we need to compete and survive in a volatile economy. And since the official guardians of our financial integrity, are not only unhelpful, but actively working against us, I have compiled the following nine rules on the unfortunate realities of GAAP financial reports.

 

Rule 1: GAAP reports do not allow the average investor to know how much cash a company has.

 

My most recent encounter with inaccurate AAP reporting came as I prepared to write the President’s Letter for Cypress’s 2007 annual report by reading our SEC-mandated Proxy Statement, which said that I had earned $11.3 million in 2007-a number that seemed not only wrong to me, but wrong by a factor of two. That night, my wife (and domestic CFO) reported to me that I had taken home $4.7 million in 2007: $1.5 million in salary and bonus; a $1.2 million special stock bonus awarded for the success of our solar energy company, SunPower; and a $2.0 million gain from exercising a decade-old 1997 stock option grant that was about to expire.

 

With those two figures so wildly different, I decided as a tiebreaker to the Cypress tax department the next day to find out how much they thought I earned. Both they and the IRS said I earned $4.7 million in 2007-in direct contradiction to our Proxy Statement.

 

How did GAAP accounting distort my reported 2007 income? One error comes from the accounting for my retirement account, which contains tax-deferred income I earned and saved over my career. The account grew by $1.7 million in 2007 because it held stock that appreciated during the year. I neither own nor can borrow against that retirement account, but GAAP and SEC rules required that the $1.7 million gain in it be reported as my 2007 personal income.

 

Rule 2: Old income can be reported two times-or more.

 

My apparent 2007 income was also inflated by the phantom income I did not receive that is attributable to my company’s having to “expense” stock options that vested during the year. I neither bought any options at a discount nor sold any for a gain. I simply received the right to buy some options. If I died or my company performed poorly, the potential value in those unexercised options would never be realized, yet my company was forced to declare them as actual 2007 income for me and a “loss” for the company.

 

According to FASB, I “earned” an extra $4.9 million in 2007 — without putting a penny in the bank — because at option granting, the GAAP rules simply mandated that my unvested shares had a built-in gain of at least 60 percent of their face value, which I received as the options vested. The GAAP rules further required that one-fifth of that unpaid “gain” be reported as income each year. This constitutes another supposedly transparent FASB accounting rule: Hypothetical income is calculated on a stock option that an employee does not own and is counted against corporate earnings. Moreover, that one-time calculation of CEO pay (and corporate loss) is locked in for five years-even if the stock goes down and the options are never even exercised.

 

Of course, the IRS would never dare tax me on the phantom income - not without losing the case in tax court.

 

The errors and misrepresentations can get extreme. Ian Cockwell, CEO of Brookfield Homes, was reported as “earning” a negative $2.3 million in 2007 in his company’s proxy statement. It seems that some of the “income” from prior years, which he never took home, did not materialize according to FASB’s one-size-fits-all formula and had to be subtracted from his 2007 reported income.

 

Rule 3: Due to the faulty logic embedded in GAAP stock option expensing rules, companies over report their CEOs’ earnings and, worse yet, underreport corporate earnings.

 

In many cases, the errors are large. In 2001, presumably to prevent a few companies from generating the appearance of growth through serial acquisitions, FASB decided to make acquisitions less financially appealing by implementing the deeply flawed concept of forcing acquiring companies to put intangible assets-assets that do not exist and have no value-on their balance sheets. Here is an example of the theory behind this nonsense: When one company acquires another, say for $2 billion, the acquiring company puts the value, say $1 billion, of the acquired company’s real assets on its books. In this example, the acquiring company would then be required to put the remainder of the $2 billion acquisition price on its books as a $1 billion intangible asset. With this FASB edict, the real assets of U.S. corporations-cash, buildings, trucks and the like-were mixed deceptively with intangible assets on balance sheets.

 

Rule 4: A company can be broke but still appear to have big assets.

 

In the original version of this hallucinogenic accounting rule, the intangible assets were “amortized,” taken as quarterly losses in equal amounts over a period such as five years. Thus, in the example above, the “amortization of intangibles” created a phony loss for the acquirer of $200 million per year for five years. What do you get when you merge two identical companies, each like the one described above-valued at $2 billion, with $1 billion in real assets and $100 million per year in profit? Don’t say the resulting company is valued at $4 billion with $2 billion in real assets and $200 million in profit. That would be too rational.

 

The answer, according to FASB, is a company valued at $4 billion with $3 billion in assets-one-third of them intangible-and zero profit. Fortunately, the mystery losses caused by amortized intangibles led to the rise of reporting non-GAAP earnings, in which the GAAP phantom-asset distortions were excluded from otherwise nominal GAAP reporting for acquisitions. Today, my company and many other publicly-traded American companies are judged by analysts and investors according to these non-GAAP earnings (approximating pre-2001 GAAP earnings).

 

The final saga in the Alice in Wonderland “intangibles” accounting tale occurred in 2001, when I testified at a hearing of the Senate committee, which was forced to deal with the uproar over the evaporating GAAP earnings of acquisitive companies. Since no one was sworn in at that strange hearing, no one had to bear responsibility for the outcome, a compromise that kept intangible “assets” on the books. However, the amortization of intangibles was dropped in favor of an annual evaluation. Now, once a year, all companies are required to review their goodwill assets-to review the accounting residuals of acquired companies that ceased to exist years before-and debate whether the evanescent assets have gone down in value, and thus creating a phantom loss in GAAP earnings.

 

Institutional investors and analysts have always ignored this folly, but FASB still mandates the foolish and expensive yearly exercise of valuing things that don’t exist. And, as is true with most government mandates, there is now a camp following of firms which, for a bargain price of tens of thousands of dollars, will provide an opinion on the value of-nothing.

 

Rule 5: Beware of the balance sheet; it contains things that do not exist.

 

Companies can fund themselves by borrowing money or by selling stock. The cost of selling stock is dilution, the loss of earnings per share (EPS) due to a rising share count. The cost of borrowing money is an interest expense that lowers EPS.

 

One preferred form of financing for technology companies is the convertible debenture, a hybrid of debt and stock option, in which investors lend money to companies. At the end of a typical five-year convertible debenture, the borrowing company must pay back the loan in cash with interest-or, alternatively, if the company’s share price is above a “conversion price,” pay off the debt with stock at that price. If the share price at settlement is well above the conversion price, the investor has the option to take stock and make a significant capital gain.

 

The accounting rule used to compute the cost of a typical convertible debenture on its issuer’s financial statements is conservative, but reasonable. Companies calculate their quarterly earnings — both for the case of paying back the convertible debenture in stock and the case of paying it back in cash-and report the less favorable outcome.

 

By contrast, FASB’s treatment of employee stock options is outright punitive. It requires companies to report employee options in an unrealizable worst-case scenario-both as EPS dilution and as an expense that reduces EPS further. It is as if FASB has gone out of its way to make employee stock options unaffordable by double counting their cost. Most unfortunately, this change has caused many Silicon Valley companies to reduce or eliminate stock options given to rank-and-file engineers. In the long-run, that will concentrate wealth in the hands of the ‘haves’ at the expense of the ‘have-nots’, absolutely the opposite of the spirit on which the Valley was founded.

 

Rule 6: The profits of companies that grant employee options are often grossly understated by GAAP rules because of the double counting of stock option losses.

 

Without a deep dive into complicated GAAP reports, investors can no longer know what a technology company’s true (cash) profits are.

 

In a recent review of potential acquisition candidates, I noted an obvious error in the financial analysis of one very good target company. Its financial statements showed the company nearly breaking even, when I knew that it consistently produced 20 percent pretax profit. The disconnect came from the fact that the young MBA doing the analysis used GAAP financial statements that included all the accounting distortions described above. We adjourned the meeting until a useful analysis could be completed.

 

Rule 7: If a long-tenured CEO of a New York Stock Exchange-listed technology company -me - cannot decide whether to buy a company based on its GAAP financials, neither can investors.

 

GAAP accounting even misrepresents the revenue that some companies report.

 

One would think that if a company receives a cash payment for delivering a product, it would recognize revenue and profit, and pay taxes. Not so. As a board member reviewing financial statements of a startup Silicon Valley data communications company, I became very confused by the company’s reported revenue, in which were factors below the company’s actual shipments.

 

The GAAP accounting theory behind this problem is explained in the following example: If a company ships a product for $1 million and warranties the product for five years, there is a possibility that the product will have to be repaired or replaced. Under GAAP accounting, the result might be stated by reporting $700,000 in revenue immediately and $300,000 in revenue over time as the product warranty period winds down; for example, $60,000 in revenue per year for five years. Thus, the last $60,000 in revenue for a system shipped in 2008 might not be reported until 2013.

 

Unless returns and warranty expenses are significant relative to revenue, the previous and time-tested method for revenue recognition is to record revenue when a system is shipped and to handle returns as they occur. This method gives much more realistic picture of a company’s performance to investors-and to management. Under FASB’s “improved” system, companies must keep two revenue records to know what is actually going on internally. While the splitting of revenue may make sense to theoretical accountants, consider the practical burden it puts on companies.

 

Think about shipping hundreds of different products with different warranty terms to thousands of customers with many different contracts. In that environment, just calculating “revenue” can take weeks for a large group of accountants. Furthermore, once a company has built up a large reservoir of deferred revenue, it can have a real revenue problem that is obscured by the fact that it is still reporting revenue from products shipped years before.

 

 

 

Rule 8: The investor often cannot decipher the true revenue of high-tech systems companies by reading their GAAP profit-and-loss statement.

 

GAAP accounting rules and the Sarbanes-Oxley mandates are no longer just a source of colorful stories; they are starting to cause tangible harm to American businesses and markets. With the IPO revenue hurdle rising because of bureaucratic costs, venture capitalists are now focusing on mega-startups that can better bear the costs of government-mandated bureaucracy.

 

Unfortunately, small startups are a crucial component of the Silicon Valley economic model-one that has consistently prevailed over old-line companies in Japan and Europe. Silicon Valley always creates “too many” innovative companies in each new technology field-and later consolidates the intellectual property and people of those companies into dominant companies, such as Cisco Systems, the world’s leading data communications systems company. The Valley’s winning formula is to develop new technologies in many competing startups, rather than the less effective practice of developing technology in the form of a few big projects in one or two big companies.

 

Rule 9: Despite its theater of public hearings, FASB rarely considers the bureaucratic burdens it imposes on companies and seems incapable of understanding the impact its utopian accounting schemes have on markets.

 

The Wall Street of Silicon Valley is Sand Hill Road in Menlo Park, where one can drive by tens of billions of venture capital dollars on the way to Stanford University, the epicenter of Silicon Valley. The premier venture firms on Sand Hill Road always have all the money they need. Indeed, in recent years, many of them have returned funds to investors because they felt there were not enough good investment opportunities. Thus, the GAAP rules that discourage the venture funding of smaller companies directly harm Silicon Valley’s economy.

 

Our company’s 215 accountants and I live daily with indecipherable GAAP financial reports and draconian Sarbanes-Oxley mandates. I have become firmly convinced that we have given too much power to a board of seven accountants who have a tendency to regulate to death the wealth-creating companies that they themselves are incapable of creating-or even understanding.

 

When Wall Street is no longer the center of the financial world and Sand Hill Road no longer rules venture capital, all Americans will be harmed-and we will wish we had demanded simple common sense from the counterproductive bureaucrats who control our financial system. Silicon Valley changes continuously. Over time it became Test & Measurement Valley, Semiconductor Valley, Minicomputer Valley, Personal Computer Valley, WorkstationValley, BiotechValley, Communications Valley, Search Engine Valley and, most recently, Web 2.0 Valley. We are now becoming Renewable Energy Valley. This place runs on free markets, abundant venture capital, and the unbridled entrepreneurial spirit of smart, hard-working, well educated people.

 

The underlying mechanism of our success is a new economic social contract, under which the economic pie is broadly distributed to rank-and-file engineers, who can earn life-changing wealth from their stock options. The CEOs of Silicon Valley successes like Google often brag about the dozens, or even hundreds, of millionaires created by their companies. This spreading of wealth drives a different work ethic in Silicon Valley. A job in a startup company is a personal mission, not a paycheck. Computers turn the lights off in our buildings at 7:00 p.m. to remind our employees that it’s time to go home. It deeply angers me that government lawyers and naive theoretical accountants have been allowed to impair the economic miracle that democratized the silicon chip, the personal computer and the Internet.

 

In attempting to make business more ‘fair’, Sarbanes-Oxley and FASB have made the U.S economy less accurate, less efficient, and most of all, less fair.

 

T. J. Rodgers is a founder, president, CEO, and a director of Cypress Semiconductor Corporation. He is a former chairman of the Semiconductor Industry Association and sits on the board of directors of several high-technology companies and of Dartmouth College.

Technorati Tags: investors, transparency, Wall Street, Japan, Europe, Cisco Systems, Institutional Investors, IRS, Ian Cockwell, Brookfield Homes, SEC, Silicon Valley, National Venture Capital Association, Mark Heesen, New York Stock Exxchange, Duncan Niederauer, Securities and Exchange Commission, Generally Accepted Accounting Principles, Sarbanes-Oxley Act, Initial Public Offerings, U.S. stock exchanges, United States, balance sheets, corporate assets, Anton Olff, U.S. Congress, Enron, Financial Accounting Standards Board, FASB, T.J. Rodgers, Semiconductor Industry Association, Dartmouth College, www.pajamasmedia.com, Cypress Semiconductor Corporation, accounting regulations, emerging markets, global financial crisis, Mortgage Backed Securities, derivatives, corporate financial statements, regulations,

The “dismal scientists” are at it again.  The National Bureau of Economic Research (NBER) recently released a statement saying that the United States is in the midst of a recession that begun one year ago.

Now, it doesn’t take a rocket scientist or even an economist reading tea leaves to tell us what is obvious to most people-the World, not just the USA, is in deep economic trouble. The question remains: how do we…the collective we…define economic conditions?

For most of us, recessions and depressions are measured from a personal perspective. Recession is when someone you know loses their job or your business has slowed down. Depression is when YOU lose YOUR job or your business has gone bankrupt. This is a very simple, transparent and easily definable standard for economic cycles.

Of course, anecdotal  forms for measuring national or global economic cycles would never be considered “scientific,” accurate or informative beyond the personal. They do however point to something the article from www.americanthinker.com illustrates:

·         What are the standards for measuring economic cycles?

·         What specific data and formulas are used?

·         Are there personal or political factors that affect the determination?

·         Are the standards applied equally?

 

As economist Randall Hoven indicates, the NBER may not have adhered to a strict scientific analysis. So…whom do we trust? Perhaps the personal definition of economic cycles is the one we should utilize after all…….

 

December 03, 2008

NBER’s Anomalous Recession Calls

By Randall Hoven

The National Bureau of Economic Research, the official caller of recessions, recently said we are now in a recession that started one year ago, in December 2007 .

The committee determined that a peak in economic activity occurred in the U.S. economy in December 2007. The peak marks the end of the expansion that began in November 2001 and the beginning of a recession. The expansion lasted 73 months; the previous expansion of the 1990s lasted 120 months.

 

This struck me as odd.  Not that I don’t believe we are in a recession now, but the starting date of December 2007 just seemed too early to me.  To see if this made sense, I looked at some underlying economic data and the NBER’s explanation, such as it is.  Why this might be important, I’ll explain later.

 

The rule of thumb for defining a recession is two consecutive quarters of negative real growth in GDP.  This is now the second recession called by the NBER in the two terms of President George W. Bush, yet in neither case were there two such consecutive quarters.  In fact, at no time in Bush’s Presidency were there two such quarters.

 

Of all 11 NBER-called recessions since 1947, only one other involved no two consecutive quarters of negative real growth.  That was the recession of April 1960 to February 1961.  However, that recession involved one quarter with significant negative growth, -5.1% annualized, and a cumulative -1.0% growth for a whole year

 

Compare that to Bush’s two “recessions.”  In 2001

 

• No two consecutive quarters of negative growth.
• Worst single quarter: -1.4% annualized.
• Year-to-year: +0.2% (positive real growth, 4Q2000 to 4Q2001).

 

In 2007

 

• No two consecutive quarters of negative growth.
• Last four quarters: -0.2%, +0.9%, +2.8%, -0.5%.
• Year-to-year: +0.7% (positive real growth, 3Q2007 to 3Q2008).

 

In all the other nine recessions since 1947, the NBER-called recession involved at least one quarter of year-over-year negative real growth.

 

President Bush deserves some sort of prize for getting two recessions assigned to him, yet never presiding over either (1) two consecutive quarters of negative real growth, or (2) year-over-year negative real growth.  I think that’s a first.  It certainly is in the last 60 years.

 

But the NBER does not use the “rule of thumb.”  Here is how the NBER explains its method.

 

The committee’s procedure for identifying turning points differs from the two-quarter rule in a number of ways. First, we do not identify economic activity solely with real GDP, but use a range of indicators. Second, we place considerable emphasis on monthly indicators in arriving at a monthly chronology. Third, we consider the depth of the decline in economic activity. Recall that our definition includes the phrase, “a significant decline in activity.”  Fourth, in examining the behavior of domestic production, we consider not only the conventional product-side GDP estimates, but also the conceptually equivalent income-side GDI estimates.  The differences between these two sets of estimates were particularly evident in 2007 and 2008.

 

Get it?  I don’t.  I mean I sort of understand it, but I could never duplicate the NBER’s results with that explanation.  No one could.  It lacks transparency.  If the NBER explains its method elsewhere, I could not find it and no such link was provided in its FAQ on the matter.

 

For example, in the 2001 “recession”, why does the NBER say it started in March, under Bush, and not in 2000, under Clinton?  The first quarter of negative real growth was actually the third quarter of 2000, under President Clinton.  It showed -0.5% growth contraction, annualized.  But the NBER said no recession.  When it again showed -0.5% growth six months later, under Bush, the NBER said recession.

 

In 2007, the final revision of the estimate of fourth quarter growth was slightly negative: -0.2%.  The NBER now says that was a recession.  One quarter of -0.5% under Clinton, not a recession.  One quarter of -0.2% under Bush, a recession.

 

Maybe unemployment was more of a factor in the NBER’s analysis.

 

When the NBER said the recession of 2001 started, the unemployment rate was 4.3%.  That’s pretty low.  In fact, the unemployment rate was 4.3% or higher in every single month of President Clinton’s first term, and every single month of his second term until March of 1999.  No recession that whole time.

 

What about in December 2007, the beginning of our current “recession”?  The unemployment rate was 5.0%.  Then it dropped below that for the next two months and still stood at 5.0% in April of 2008.  Again, the unemployment rate was at or above 5.0% in every single month of Clinton’s recession-free first term.  It did not go below 5.0% until May of 1997.

 

Well, neither real GDP nor the unemployment rate quite explains the NBER’s method.  The NBER said it looks at the “income side.”  So let’s try Disposable Personal Income in real dollars.

 

In three of the last four months of 2000, all under President Clinton, real DPI declined.  NBER said no recession.  In the next three months, or the first three months of 2001 and mostly under President Bush, real DPI increased in each month.  NBER said recession.  Decline in three of four months, no recession.  Increase in three of three months, recession.

 

Just for fun, I looked at quarterly GDP numbers since 1947 and all 11 NBER recessions called since that year.  Here are a couple of interesting observations.

 

(1) Every time there was at least one quarter of year-to-year negative real GDP growth, there was a recession associated with it.  There were no recessions without such negative year-to-year growth, with two exceptions.

 

(2) With simple rules based on real GDP numbers alone, a recession as well as its beginning and ending quarters could be called.  Every recession called by these rules was also called by the NBER.  Every recession called by the NBER was also called by these rules, with two exceptions.  For every recession these rules called that matched the NBER recessions (9 of the 11), the starting and ending quarters matched within one quarter, at worst.  What were these simple rules?

 

• A recession starts in a given quarter when that quarter-to-next-quarter’s growth is negative and the total growth over the two quarters combined is also negative.  (A somewhat weaker version of the “two quarters” rule.)
• A recession ends as many quarters after that beginning quarter as there remains cumulative negative growth.

 

That is, without trying really hard, using real GDP data easily available from the St. Louis Fed only, and programming simple rules in a spreadsheet, I was able to match 9 of the 11 NBER-called recessions, with no false alarms and with, at most, one quarter mis-match in timing.  The only two exceptions in any of this?  The two recessions under George W. Bush.

 

My simple rules said no recession in either case (yet called all other recessions, with no false alarms).

 

The year-to-year negative growth rule said no recession in either case (yet called all other recessions, with no false alarms).

 

The “two quarters” in a row rule said no recession in either case (yet called all but one other recession, with no false alarms).

 

(It’s still possible, by any of these rules, that we are in a recession now, but one that started in the third quarter of 2008, meaning July at the earliest.  But for any of these rules to kick into effect, we need the fourth quarter’s data.)

 

I’m sure the NBER has good reasons for calling and timing the two Bush recessions. But even it would have to admit that those two recessions are anomalous — oddballs among the 11 recessions in the last 60 years.

 

Why would this matter?  Why would it matter whether the US recession started in December of 2007 or July of 2008, for example?  After all, President Bush presided in either case.

 

Here is why.  Europe is now in recession, and it started in the second quarter measured the old-fashioned way: two consecutive quarters of negative real growth in 2008.  The US did not have its first quarter of negative growth until the third quarter of 2008.  The question is whether the recession spread from Europe to the US or vice versa.

 

If the US recession started in 2007, as the NBER states, Europe caught our cold.  If we go by the simple rule of two negative quarters in a row, we are catching Europe’s cold.  It’s all about who gets the blame, at least plausibly so.

 

In 2001, President Bush got the blame instead of President Clinton, per the NBER.

 

In both cases, blame Bush.  In this second case, blame Bush not only for a US recession, but a global recession.  If Iceland is bankrupt, it must be Bush’s fault.

 

Yet in both cases, we don’t know exactly how the NBER did it.

 

Here is what the NBER says about itself:

 

Committee members are: Robert Hall, Stanford University (chair); Martin Feldstein, Harvard University and NBER President Emeritus; Jeffrey Frankel, Harvard University; Robert Gordon, Northwestern University; James Poterba, MIT and NBER President; David Romer, University of California, Berkeley; and Victor Zarnowitz, the Conference Board. Christina Romer of the University of California, Berkeley, resigned from the committee on November 25, 2008, and did not participate in its deliberations of November 28.

 

Christina Romer (formerly on the committee) was just designated as the chair of Barack Obama’s economic advisors.  She is married to David Romer (on the committee).

 

Here’s how the NBER might help: tell us exactly the formula for calling and timing a recession and give us the input data so that we can reproduce its results.  If it can’t, or won’t, it should not be considered the “official” caller of recessions in my opinion.

 

In my opinion, there should be both transparency and clear objectivity in calling and timing recessions.  The method should be repeatable and based on publicly available data.  It should be more than simply the considered, consensus opinion of a panel of seven experts.  Otherwise we invite public doubt — public doubt in the area of cause and effect of economic downturns.  This is important stuff — or should be, in a democracy.

 

Data sources:

 

• St. Louis Federal Reserve Economic Data (http://research.stlouisfed.org/fred2/) for real GDP (GDPC96), real Disposable Personal Income (DSPIC96) and Civilian Unemployment Rate (UNRATE).
• NBER (http://wwwdev.nber.org/cycles/dec2008.html) for latest recession announcement, FAQs on recession definition, and official recession dates (http://www.nber.org/cycles.html).

Anton Olff

Technorati Tags: dismal scientists, Europe, GDP, Federal Reserve, Disposable Personal Income, unemployment, economic activity, Bill Clinton, George W. Bush, Civilian Unemployment Rate, Randall Hoven, americanthinker.com, Depression, business cycle, National Bureau of Economic Research, NBER, recession, rocket scientist, economist, the World, United States,

The Age of Anarchy has begun! No…I am not referring to modern terrorism, or the collapse of governments, riots in the streets, or the current “global financial crisis”-though many of these modern events reflect the changes that began in the 20^th century, and are rapidly evolving in the 21^st.  The Age of Anarchy is about the end of the systems and structures that we have known for centuries, if not thousands of years.  

Anarchy is a dirty word. It implies chaos, lack of order, and an uncertain future. As security seeking organisms, we crave a degree of predictability or what we could define as stability in our lives. The question is: when has there ever been a period-other than for short intervals-when this “stability” was the long term norm in any society or civilization? Has the world stayed the same in the last decade? How about in the last twenty years? How about during the lifespan of any individual?

The Age of Anarchy is a measure of the changes that have already occurred, and those that are occurring as you read this. It is:

1.     A rational and self-motivated decoupling of individuals from the current framework-or the matrix of society-into new formations, groups, associations, alliances and relationships. It is not just about the destruction of the old, but rather the overlay of the new on top as new structures are reformed in its wake.  

2.    More creation and destruction of ideas and institutions, and in more rapid fashion.

3.    Flexible power structures that are constantly shifting. These can be governments, corporations, or other “centers” of power. Essentially, the center will never remain static.

4.    Benefits will be more narrowly defined. More importantly, they will be understood or at least available for analysis as transparency will be the byproduct.

5.     Alternative networks will co-exist and in some places, will dominate pre-existing established networks.

6.    The “chaos” will facilitate more ideas, energy, trade, and individual wealth. However, it will also cause greater envy and a backlash from those unable to participate or those on the sidelines…and there are always people who are shut out. This will cause countervailing power structures that will attempt to constrain ‘The Age of Anarchy” in the name of…stability and security.

This is no Francis Fukuyama, “The End of History” thesis . On the contrary-history is just moving on.  

The Age of Anarchy is the collapse of the Old World, its institutions, and the belief systems that were its foundations.

The Age of Anarchy is not some dystopian world full of bomb throwing dreamers…though they will no doubt play a role just as they have in every age…but rather a world where the individual is sovereign, with the power…aided by increasing knowledge and technological power to maintain that sovereignty not by laws, or rights or promises from governments, but by their own means. It is a world where people trade with each other directly, with little interference from intermediaries other than the facilitators who provide the platforms for this evolving trade.

Technology is the means.  The democratization and ever decreasing cost of it, are what is driving “The Age of Anarchy.”

 

This article from www.cafebabel.com, is an example of how this age is being ushered in, and old structures are rapidly being replaced:

 

In Europe internet is in, TV is out

 

 

Television audiences are diminishing, yet consumers have never been as interested in new content which is switching from one screen to another

TF1, the biggest commercial television channel in France, is having a crisis: the famous eight o’clock news, a veritable institution, has dipped below the symbolic bar of 30% of the market share. For decades, the televised evening news has been THE meeting-point for the large majority of French families. This drop in viewing could just be an anecdote that will be told in better times, but in reality it reveals a change in viewer habits which is well underway. It also hints at related, newer economic models (public revenue).

I watch what I want

Throughout Europe, viewers are faced with a plethora of TV channels. Audiences are diminishing because of the increased division of viewing. We have never before watched so much media, but the trend is now to watch à la carte: I-watch-what-I-want-when-I-want-and-not-what-and-when-it-is-imposed-on-me. So, all the big terrestrial channels are following this trend and proposing or plan to propose online ‘catch up TV’ to allow viewers to watch their favourite programme or series when they choose.

 

I watch what I want when I want and not what and when it is imposed on me

In the United States, the TiVo system has become very popular. It lets you record programmes and watch them later, even allowing you to flick past the ads. Along the same lines, Video On Demand (VOD) is taking off at great speed throughout Europe, and its catalogues are getting thicker each day. The European Audiovisual Observatory counted no fewer than 250 VOD services in Europe at the end of 2007, one hundred more than the previous year.

TF1 blames Youtube

For the first time in decades, young people are watching less and less television, in favour of the internet (chat, social networking, blogs) and mobile phones. 30% of young people aged eight to fourteen years use the computer at the same time as watching TV. Rather than putting on MTV, you only have to go on Youtube to find music videos. Video broadcast sites have become quite important in the last few years. Youtube, the French-based Dailymotion and co. represent more than a third of the global bandwidth on the web.

In a single year traditional channels have lost 10% of their audience in the 15 to 34 year old age range. Attempts to curb this phenomenon have resulted in the first complaint: TF1 has attacked Dailymotion and Youtube, claiming compensation to the value of 100 million euros. Others have tried to come to agreements, like Canal Plus and Dailymotion. The TF1 group has launched its own online TV service, called Wat TV, to compete with the giants of online video. Another method is Catch up TV: a web site on which the internet surfer can watch TV programmes at any time, in order to adapt to these new media viewing trends.

Tracking viewers

So is the internet the future for TV viewing? In any case, that is the bet that Janus Friis and Niklas Zennstrom are taking. They are famous on the net for having developed Skype and Kazaa, while creating their platform Joost. Joost is an application based on a ‘peer to peer’ system, which allows you to view audiovisual content. The interface allows a high level of interactivity, giving the user the choice of numerous TV programmes and also allowing them to create playlists or even to participate in the programmes by posting comments or voting.

 

The era of the washing powder company inundating our screens with messages has passed

Interestingly for users, the system allows advertisers to create targeted ads (using the viewing habits and surfing history of the user), and to closely track users (from the moment they see the ad until they go onto the site of the seller). The era of the washing powder company inundating our screens with messages has passed. In the future, they may only be targeting those who are likely to be interested in their product, which will reduce costs and increase the efficiency of their campaigns.

Endless personalisation

Joost merited a huge success since the moment of its launch in May 2007 to the release of its beta version in September 2007. But since then, audiences have not taken off and competitors have emerged: for example,Hulu in August 2007. News Corp and NBC’s Youtube rival (which of course benefits from the content of these shareholders), has targeted audiences which are beginning to strongly attract advertisers. One could also give the example of the combined initiative of Intel and Yahoo to offer new internet applications viewable on your living room TV screen in August 2008. The idea is to display superimposed, personalised widgets over the images on the screen (little windows which deliver information like weather, traffic conditions, TV programmes, and so on).

So, TV as we know it is evolving into a mix of classic television and internet: the interface will resemble that of a traditional TV with more diverse windows of information coming from multiple sources, including a variety of communities which the spectator can join and which can be endlessly personalised.

Anton Olff

Technorati Tags: Age or Anarchy, riots, endless personalization, Hulu, News Corp, NBC, Yahoo, Intel, global financial crisis, terrorism, 20th century, 21st century, security, society, stability, civilization, individuals, relationships, power structures, centers of power, alternative networks, Frances Fukuyama, The End of History, Old World, sovereign individual, platforms, technology, democratization, cafebabe.com, new economic models, television, TF1, France, internet, United States, TiVo, Video on Demand, VOD, European Audiovisual Observatory, chat, social networking, blogs, MTV, Youtube, Dailymotion, bandwidth, Canal Plus, Wat TV, Skype, Kazaa, Joost, peer to peer,

Economics has often been called the “dismal science.”  Having known many economists in my past life working as a wage slave in the corporate world, I can say that it was not the “science” that was necessarily dismal, but the practitioners. This is especially true these days. The same economists that were saying “the fundamentals” of the Global Economy were sound 6 months ago, are now in the doom and gloom mode. In  other words, it is not going to just rain…but rain for 40 days and 40 nights!! 

A person of means and resources might want to start building an ark…or maybe just buy gold bullion and store it in a bank vault in Switzerland…but the rest of us will have to learn to swim in some very deep water (or in sewage) if the deluge comes.

The Nostradamuses of our age…Gerald Celente for example, is predicting Depression II, another American Revolution with widespread tax riots in the United States by 2012. Certainly, it is a possibilty given the recent riots in Iceland. However, those of us with a eye for opportunities (entrepreneurs, shameless exploiters and capitalists) know that would be an excellent time to own a factory making Ronald Reagan AND Che Guevara t-shirts. 

….and what is the current forecast? Well…it depends on whom you ask. Most of the data out there suggests that the economies of the developed world will not be growing at all…but NOT the emerging market economies. According to the European Bank of Reconstruction and Development (EBRD), Russia is projected to grow at over 3% versus the 7.3% it had been prior to the Global Meltdown (and declining oil prices).  Indeed, most of Eastern and Central Europe will see positive net growth. Whatever the forecast, there will be a lot of pain…but also a lot of long term opportunities.

Bring an umbrella. However, make sure to turn it upside down on occasion as it could be raining “pennies from heaven”

Anton Olff

Technorati Tags: Central Europe, Che Guevara, Depression, Eastern Europe, EBRD, Economics, European Bank of Reconstruction and Development, forecast, Gerald Celente, Global Economy, gold, Iceland, Ronald Reagan, Russia, Switzerland, United States

We have all heard the “war stories.”  Sit at any pub, club, bar or cafe in Ukraine where ex-pats congregate, and the topic of conversation will eventually turn to the difficulty in getting things done here.  The inevitable comparsions between how easy things are accomplished in the United States, the U.K. compared with Ukraine begets the question: “why are you here then?”

Of course, we know the reasons.  We are here to make  money, and lots of it.

Here is the attraction: excellent geographic location between Europe and Russia, a developing market with a population the size of France,  rising incomes, burgeoning consumer demand, and a seemingly less anti-business regulatory and tax environment than the mature economies of the United States and Western Europe.

That all sounds great. So why is so difficult? Why do businessmen, particularly foreign businessmen feel like they are pioneers or as one American real estate developer said to me, “like one of those characters in the HBO TV series Deadwood.”  Yes indeed!! Here are the top reasons, in no particular order.

1. Corruption- you always pay…and then pay some more…and everyone has their hand out.
2. The Government- or should we say, lack thereof. The rules change on a daily basis.
3. Business Culture- not exactly Western, not exactly Soviet. The customer is wrong!!!
4. Work Ethic- more for less…work that is. I get my salary whether I do a good job or bad job.
5. Bureaucracy- you always need one more paper or permit…but the office is closed today.
6. Transparency- you always find out afterwards. Information is seldom volunteered.
7. Punctuality- are you kidding? Ukrainians rarely show up on time for meetings.
8. Contract Negotiation- signed, sealed, delivered…and then undone. Just when you think you are ready to move forward, the contract needs to be renegotiated. Of course, you are the one who must “negotiate.”
9. Visibility- you want to be noticed. You want your product and services to be recognized …but you have to be discreet too.
10. Bias- not xenophobia on the part of Ukrainians which can certainly be a factor, but more importantly the bias of foreigners. Ukraine is not, and may never be an easy place to conduct business. Hard to accept. Even harder to deal with, but a fact unlikely to change.

Anton Olff

Technorati Tags: Asia, Bias, Bureaucracy, Business Culture, Contract Negotiation, corruption, Europe, France, mature economies, Punctuality, Russia, Soviet, tax environment, The Government, Transparency, U.K., ukraine, United States, Visibility, Western Europe, Work Ethic