h1

my $.02 on Rio2016

Monday 22 August, 2016

Now that the Rio2016 Olympics are done & the Olympians & fans are heading home, it’s time to reflect on how it worked out for Rio de Janeiro. When I arrived in Rio a year ago, the prognostications were not good. The Globo newspaper media empire spelled out 5 Grand (large) Obstacles:

  1. Metro/subway-the new subway line which was being built to provide transportation to & from the Olympic park was planned for completion only a month before the games were to begin, a small window to correct problems, if required. Then a few months ago, that window was further reduced to just 5 days before the Olympics start, making any last minute changes of any consequence impossible. Remarkably, the subway opened, took passengers to the events, & was little problem @ all.
  2. H2O-much has been made of the quality of the water in the lagoon and Guanabarra Bay where the rowing & sailing events were held, respectively. The goal was to clean 80% of the water by the time the games begin, but sanitation only advanced to clean 50% of the waste being dumped into the water supply. That’s much more than was in the past, but short of the goal of 80%. I only read of 1 Belgian Olympic sailor who became ill after falling in & possibly ingesting some water, hardly an epidemic, & arguably within statistical norms. While the water quality is still @ an unacceptable level, it didn’t result in any calamities @ the Olympics.
  3. 4, & 5 Stadia for cycling, rowing, & track & field: were behind schedule, but completed on time without incident.

Since that article was published, a few other issues arose which impacted Rio2016 significantly:

  • zika virus: despite not rising to the levels of recent past epidemics & being out-of-season by the time the Olympics arrived, zika was deemed a threat to the health of all who dared to come to Brazil to watch the games live. There was no outbreak & zika seemed to be a non-issue during the games.
  • political crisis: President Dilma Rousseff was impeached, which created lots of political stability & the threat of uprisings, etc. during the Olympics. While Brazil will continue to be in a holding pattern until a new president is elected in 2018, there have been no major repercussions from this calamity.
  • economic crisis: as a result of the political crisis, Brazil’s economy has taken a nose dive, as indicated by a fall in the currency, the Real, of 30% in 6 months, from R$3.2/US$ to R$4.1/$US. investment has fallen, & unemployment has spiked. This made financing the completion of the projects for the games questionable, but again, all venues were completed on time.

True to form, the Brazilians pulled it off, by cramming @ the last minute, but they got it done.  The question is “What will be the long-term outcome of the Rio2016 Olympic games?”  Will Rio become another economic success propelled by the Olympics, like Barcelona & Seoul, or create a lot of white elephants, as in Beijing or Montreal, or even worse, lead to an economic downfall, as has been hypothesized about Athens, Greece.  London took the Olympic opportunity to rehabilitate an underdeveloped part of town to rejuvenate it & make that area a desirable place to live.  When I lived in Munich, they left the Olympic housing as residences for college students.  Rio will leave a different legacy.  While the subway extension & rejuvenation of the Praca Maua port area will benefit all of the population, the Olympic village is being converted into luxury condominiums for sale to the highest bidder.  Many of the venues were temporary structures, probably being deconstructed already as we speak.  The economic development organization of the Rio city government, Rio Negocios, held a series of events highlighting different industries in & around Rio, but I think they were probably disappointed with the international level of interest in their events.  The aftermath of the 2014 World Cup does not bode well.  New stadia now stand empty & a number of infrastructure projects were never completed, in some cases creating risks with what does remain.

I enjoyed being in Rio while the games were taking place: see pix:

…& I hope that Rio recognizes many positive benefits as a result of hosting the games.  I’m just skeptical that enough change will have taken place for the rest of the world to appreciate what a beautiful place this can be.

h1

Where is the global market heading?

Monday 17 November, 2014

Nouriel Roubini, a professor @ the NYU Stern School of Business presided over Keiko Tashiro, the Chairperson/CEO of Daiwa Capital Markets America Holdings, Inc. to discuss this topic @ the Japan Society in New York.

It’s been an anemic recovery, & the only change has been the decelerating growth in the emerging markets.  The question is how strong & resilient will they be?  The recovery has been so anemic because the crisis was brought on by extreme leverage.  The fiscal stimulus that was implemented to combat it has led to an accumulation of debt that will take 5-10 years to de-leverage.  Emerging markets need robust growth of 5% , not 1-2 1/2 % less their debt.

To get 1-2% stronger growth in the industrialized countries, we need:

  • fiscal consolidation, except in Japan
  • advance de-leveraging to create better balance sheets with lower debt ratios
  • lower risk probabilities by keeping the Euro together, not falling off any fiscal cliffs, avoiding conflicts, etc.
  • keep low inflation, as the velocity of money has collapsed as stocks are in search of markets.  There is still slack in the employment market, so there is no wage inflation.  Central banks can be less conventional.  The Fed won’t start tapering until 3-4 years from now.
  • Japan needs to create a virtuous cycle with structural reforms, which should be a gradual process.  There is a risk with monetary easing in asset inflation creating a bubble.  The central bank has been able to keep bubbles @ bay by keeping inflation & interest rates low for now.

Emerging markets are devaluing their currencies to spur growth.  Internally, macroeconomic policies are granting excessive credit.  State capitalism causes them to move away from free markets.  The most fragile are China, India, South Africa, & Turkey.  With elections, growth falls.  Now the risks are much lower because of less currency mismatches, debt ratios are better, & Argentina, Venezuela, & Ukraine are now the problems.  China’s hard or soft landing is fragile.  Fixed investment is too low as is consumption.  Banks have made too many bad loans.  They’re lowering risks, but it’s open to question as to whether they can implement changes quickly enough.  Growth is decelerating from 7% to 6 %.

h1

European economic update

Tuesday 30 September, 2014

The European American Chamber of Commerce organized an economic update which featured James Bullard, CEO/President of the St. Louis Federal Reserve Bank, Nicolas Veron, Visiting Fellow @ the Peterson Institute for International Economics & Co-founder/Senior Fellow @ Bruegel. The panel was moderated by Sassan Ghahramani, President/Ceo of SGH Macro Advisors.

Bullard stated 3% growth should be achievable for the US in 2014.  Unemployment of 6.6% is still too high, but the Fed won’t start raising interest rates until unemployment falls below 6.5% or inflation rises above 2%.  Normal unemployment will drive a more normal interest rate policy.

Veron maintained that the issue today is not what the central banks do, rather it’s which countries have the most dysfunctional political processes.  The EU crisis continues to test financial systems & architectures.  The tests for EU institutions need to be redefined.  Watch for EU parliamentary elections to see if citizens are dissatisfied & how the European Central Bank (ECB) is transforming EU banking, which will hopefully create an opportunity for trust to return to the system.

Panel Q&A

Because we work with seasonally-adjusted data, the weather does not affect risk, but we have no model to evaluate this past year’s weather, so it’s OK to be suspicious.  This hasn’t received enough attention.

The reduction to 6.6% unemployment is a dramatic reduction unexpectedly soon, so now we must adjust our thinking.  Labor force participation is a long standing trend of long-term structural decline.  The drop in unemployment is a good sign & was faster than anticipated, & is remarkable in an economy that’s only growing @ 2% per year.  It’s a result of state decisions, not data conditions.  Interest rates won’t move until unemployment has moved well beyond the threshold of 6%.  Normalization of policy dictates that qualitative policy & judgement shouldn’t be tied to a particular number.

The 2012 contagion was a result of a combination of factors.  Banking union is becoming more important.  Political evolution in Germany is key, not to allow any country exit the Euro.  If there is deterioration, the ECB will act.  There are no immediate legal developments, but the relationship between Germany & Europe counts. Germany’s jurisdiction over the German Bundesbank affects the ECB’s ability to work.  The Bundesbank has been clumsy in attacking the ECB’s autonomy, & thus the ECB won, while the Bundesbank lost.  The constitutional court was smarter in trying to avoid frontal conflict.

The Fed pursued the policies of the 7 faces of  peril & was the biggest advocate for flow.  It worked well with more analysis of interest rate policy.  Quantitative easing is a powerful tool & moved markets, so now we can taper back to normal.  We won’t see a normal economy until we raise interest rates.  The committee doesn’t address specific issues of quantitative easing.  The Fed will raise interest rates fairly quickly.  The alternative is to stay @ 0% longer & lift faster.  Global interest rates are still low & this is expected to continue.  Inflation is still a puzzle & wildcard, & could force the ECB’s hand.

There is still much disenchantment in the non-German Eurozones.  Germany imposes it’s decisions on others, but Germany is still pro-Euro & pro-integration.  Other countries have different foci (focuses?).  Spain is not all skeptical, but separatism sentiments continue in Catalonia.

Politically, although there are more anti-system parties as mainstream parties decline, not all Europeans are anti-EU & anti-Euro.  Not everything can be seen through the Euro lens.  Cooperation is changing as policy makers are getting more defensive.

h1

Venezuelan update

Wednesday 24 September, 2014

I attended this event @ the Council of the Americas awhile ago on Venezuela’s economy. The panel consisted of Alehjandro Arreaza, economist @ Barclays, Aaron Freedman, VP/Sr. Credit Office @ Moody’s, & Francisco Rodriguez, Director & Sr. Economist @ Bank of America/Merrill Lynch, & moderator Christopher Sabatini, Sr. Director @ Americas Society/Council of the Americas.

Generally, inflation is leading to devaluation of the currency, which leads to inconsistent fiscal policy. The exchange rate is unsustainable. They need to change course, but can’t devalue. The exchange rate subsidy doesn’t help their constituents-it just gives fiscal rents to importers. Inflation is up because they are just printing money instead of devaluing the currency. There are arbitrage opportunities with devaluation while the politicians get richer. The problem is as import prices go up, demand goes down, to there is no politically expedient solution.

The government also doesn’t recognize the magnitude of the level of debt. Declining oil prices make things difficult for Venezuela. They must address these imbalances.

It’s tough to get money out of Venezuela these days. There is a black market, but that’s dicey. Auto makers there have fallen off a cliff. Unfortunately companies can no longer repatriate profits & pay for imports. Strategic & essential industries can get preferential access to currency.

Another problem is with an overvalued currency, you can’t tell which are bad imports. The system is impossible to administer. The exchange rate is limited to maintain control, like in Cuba.

There is a difference between a low income economy like Cuba’s, & Venezuela. Macroeconomic distortion has simply led to financial disintermediation. They must address all imbalances-devaluation is not enough. Venezuela won’t necessarily default-that probability is only 10%, but they are suffering a death by 1000 cuts. If the price of oil destabilizes, watch out. Oil production has declined, but it’s unsure if they’ve reached the bottom. Consumption is up, but that’s distorted.

Q&A
Despite a devaluation a year ago, nothing happened. It’s not likely to get better. Capital flight is $20M/year. They need a more flexible exchange rate system.

Venezuela is rated 1 notch below Argentina in credit ratings. Both have balance of payments problems. Venezuela is more combustible.

How long this can go on is a political & economic question. Regulation is no good in a volatile economy. Argentina tried & failed. Another problem is you can’t increase spending after a devaluation.

h1

do big sporting events really help local economies?

Thursday 8 May, 2014

I checked out this event sponsored by NYU’s Sports & Society’s department @ the School for Continuing & Professional Studies “The Lasting Impact of Sports Greatest Events.” The panel contained a veritable who’s who: Lisa Baird, CMO of the US Olympic Committee; Greg Ballard, mayor of Indianapolis-“amateur capital of the US; Greg Carey, sports finance specialist @ Goldman Sachs; Richard Florida, author of “Who’s your City?”; Kevin Hallinan, SVP of security of Major League Baseball, Constantine Kontokosta, of the NYU Center for Urban Science & Progress; Mary Pilon, New York Times sports reporter; David Rousseau, who sits on the Salt River Project board in Arizona.  The panel was moderated by Arthur Miller, Chair of the Sports & Sociey department @ NYU.

Indianapolis used sports to build the city into the capital of amateur sports in America, in which the citizens have a great sense of pride.  Rockpoint analysis determined the General Fund Effect was $40M.  Phoenix feels it’s getting an amazing reward from similar investments. These things bring prestige, like luring a major symphony orchestra.

The motivations for these things have changed, to achieve global city status.  The 1984 Olympics in LA made it an economic development game, but now the temporary economic impact doesn’t justify the long-term investment any longer.  The question is the impact on infrastructure.  Sports have become an excuse to do what should already be done.  For example, after the Olympics, what are they going to do with the bobsled run in Sochi?  There is little talk of what happens afterwards.

The Olympics are all about the athletes.  Sebastian Coe left a legacy in London, having built up the west side & put the para-Olympics on the map.  He’s created social good, while the economic impact hasn’t been measured yet.

There is a lot of ego involved, & differences between who embraces sports & those who do not.  The downside can be displacement.  These projects have to be about more than the game because stadia (stadiums) now cost a lot more:  San Francisco’s cost $1.3B.  Now security is primary & drives up costs, as Atlanta’s Olympics proves.  Terrorism & gay rights could have been issues in Sochi.  The Dept. of State was assuming safety would prevail.

Goldman Sachs actually invests in sports infrastructure & is bullish about this business, but admits these are not always good investments for cities.  The key is whether the investments are in good or bad infrastructure & whether it’s public or private investment.  Rio is building lots of infrastructure for it’s Olympics, but it’s been disaffecting & the security challenges will be unbelievable.   Public safety & public works are the highest priorities.  Cities must look @ expanding their tax bases & the opportunity costs of making other comparable investments.  Indianapolis did it right.

Baseball’s world series is a nightmare for security because the sites aren’t known until a few days before the series starts.  When Pres. Bush attended a game, an extra umpire was actually a Secret Service man. At the 1st Mets game after 9/11, there was a line almost all the way to Manhattan to get in & all the fans said “Thanks for being safe.”  The Super Bowl in New York attracted lots of prostitution, which reflects the best/worst, good/bad these events bring out.  There is a distinct relationship between the Super Bowl & sex traffic.

The economic benefit of the Super Bowl being held in New York/New Jersey was estimated to be $600M, but is actually complete BS.  The hotels are normally only @ 50% capacity, but were full for that week, but there is also a crowding out effect of others who stay away, called displacement tourism.  Theatre attendance is down 20%.  The merchants on Super Bowl Blvd. were dying.  Super Bowls are better held in warm climates, although Minnesota is getting 1.

There is a developmental economics aspect to all this.  Rio is building infrastructure which is building capacity.  The downside is the IOC requires moral obligations, but the city may be stuck with the bill.  Athens is still paying the debt for their Olympics.  Montreal just paid off their debt for the 1976 Olympics.

Sponsors get involved for different reasons, such as branding, ROI, relationships developed as long-term investments, i.e. Coke has been an Olympics sponsor since 1928.  LA changed the model when it was the 1st Olympics to show a profit in 1984, but even it had very few high-priced sponsors.  To stage sustainable games is a tough task.

Different games have left different legacies.  Barcelona used the Olympics as a tool.  Seoul, Sydney, & Montreal had a plan, but the Athens Olympics may have started the crisis there.  It’s definitely not 1 size fits all.

Arizona had to pay the NFL $30M in obligations to get the Super Bowl, which was paid by local corporations.  They will sell their local competitive advantages; good weather & a positive business climate.  But there are unintended consequences too.  To magnify the legacy:

  • you must know who you are
  • focus on branding (London was the 1st games where every country had at least 1 woman on each team)
  • security partnerships help
  • share lessons learned
  • get away from gigantism

 

 

h1

doing business in South Africa

Friday 18 April, 2014

The Greater New York Chamber of Commerce in conjunction with the South African Consulate General hosted “Doing Business in South Africa” @ the South African consulate.

Consul General George Monyeymangene introduced Simon Barber, the US country manager for Brand South Africa, which promotes the country of South Africa as a brand. He works with stakeholders both inside & outside of government to craft a value proposition for South Africa.  South Africa is celebrating 20 years since it’s 1st open & free election.  The South African brand is embodied by Madiba, or Nelson Mandela, who exudes the essence of Ubuntu, among other things, looking out for the collective good.  In the last 20 years:

  • GDP has grown from $136B to $335B
  • inflation has fallen from 14% to 6%
  • employment has grown from 9M to 14M
  • reserves have risen from $4B to $50B
  • the LSM (Living Standard Measure) has increased from 13M to 23.5M
  • electricity has gone from serving 58% to 95% of the population
  • water grew from being available to 61% to 73% of South Africans.

Additionally, South Africa has:

  • politically stable democracy
  • free media
  • independent central bank
  • high tax compliance.

According to the World Enterprise Fund Global Competitiveness Index, South Africa ranks:

  • #1 in auditing standards
  • #1 in securities regulations
  • #2 in financial services
  • #3 in banking
  • #3 in minority shareholders

On the down side, it ranks

  • #120 as a favorite
  • #116 in terms of imposing a burden.

Former treasury minister Trevor Manuel agreed with & adopted a National Development Plan written by Goldman Sachs.

The keynote address was offered by Frank Savage, Wall St. financier & CEO of Savage Holdings, who offered the perspective of an institutional investor.  He was early to enter South Africa in 1994 when he created a $125M fund there which earned 39.4% ROE.  He met Nelson Mandela with US Secretary of Commerce Ron Brown.  Although income inequality, education, & unemployment are problems, he remains optimistic.  The African National Congress has selected Ramiposa, a successful entrepreneur, which brings the party credibility & speaks volumes about their intentions.  The government has responded well to the Goldman Sachs report.  It’s well-balanced, but tough.  They must focus on difficult social problems.  Only15% participates in the formal economy, which leaves growth on the table.  All of Africa needs South Africa to reach it’s potential.  Civil unrest & instability can’t happen.  They need to rededicate themselves to their original principles & ideals.  He feels comfortable investing in South Africa.  Foreign Direct Investment magazine named South Africa the country of the future.

Q&A

  • South Africa will aim to protect it’s unique culture.
  • A free trade agreement is bringing together a market of 600M in Africa.
  • There is a plan to establish, promote, & implement Special Export Zones.
  • The ANC is not all powerful, as there are 3 tiers & power is shared among them.  It’s power is evolving & maturing as competitors are moving out of the ANC.
  • Infrastructure development is the driver of economic development.  The Infrastructure Coordinating Committee seeks to plot it’s future.
h1

US-China-Japan trilateral relations

Friday 4 April, 2014

I attended this event organized by the Japan Society;  The US-Japan-China triangle: building a path to trilateral cooperation which featured a panel discussion with Gerald Curtis of Columbia U., Jia Qingguo of Peking U., Alan Romberg of the Henry L. Stimson Center, & Yoshihide Soeya of the Woodrow Wilson International Center for Scholars & Keio U.  The panel was moderated by Donald Zagoria of the National Committee on American Foreign Policy.  I arrived late & missed Jia’s talk.

Soeya put today’s situation in historical context.  In 1971-2, China asserted itself while Japan avoided the issue.  During the 1980’s, Japan invested in China to modernize the country.  Deng Xiaoping then made courageous reforms.  Recently Japan’s Abe made an exception in visiting the Yaksun Islands.  In an interview in the  June-July issue of Foreign Affairs, he said it was not a big deal & that they were entitled to a right of self-defense, exerting a nationalistic tendency.  But he can’t carry out this policy with his current agenda.

Romberg called trilateral cooperation wildly unrealistic, & perhaps impossible.  There is no resolve to manage the dynamics.  China & the US have positive & negative effects which offset each other.  Their external behavior is erratic;  while they seek peace, they will also respond if challenged.  Aggression is in the eye of the beholder.  Japan is skeptical of China’s methods.  The US-China relationship is broader & deeper.  Their national interests differ.  For example, China sees the US & Japan as limiting the opportunities to bring China’s poor out of poverty.  There are no prospects for peace if these problems can’t be resolved.  Talks should lie ahead, but won’t.  Abe won’t visit the shrine again as PM.  The US seeks to lower the heat, but won’t mediate.  US/Japan alliances are alive & well.

Curtis addressed 4 issues:

  1. The islands are a dominant issue in Chinese/Japanese relations.  No 1 wants to go to war, but accidents do happen.  Japan must recognize the dispute & be willing to talk.  The Chinese must withdraw during such talks.  There seems to be no resolution because neither side expresses a willingness to compromise.
  2. China is conducting a nonsensical propaganda campaign against Abe, but that may be backfiring.  Both sides need to back off.
  3. Yaksuni is a sensitive issue.  Abe’s visit was not in the national interest.  Visiting the shrine resulted in sending a political message.  The hope is Abe will get this over with & foster better relations.
  4. After America’s pivot to Asia, we are stronger, but relatively smaller.  Obama is weak & doesn’t support Japan-the republicans do.  The world & the US have changed & we can’t go back to the way the world existed before.

Panel Q&A

If Japan acknowledges the Sekuka Isles, they can at least start negotiations.  Japan wants China to reduce it’s patrols in the area.  The solution could be the transfer of property rights by both of them.  The fishery agreement between the 2 is a recognized issue & related.  China will continue to assert itself until stopped.

Open Q&A

Japan is different from Germany after World War II in that the Japanese never apologized for the atrocities they inflicted on others, while the Germans did.

There is a poisoned atmosphere between China & Japan, which isn’t surprising.  They need to solve these problems to build trust.

Transferring property rights to the UN is not an option because that would be viewed as surrender, which is unacceptable.

Follow

Get every new post delivered to your Inbox.

Join 559 other followers