Critical Shock Analysis

Vive la difference. This is not a reference to Frances supposed cultural exception, but rather a critical reflection on the state of shock analysis in macro economic theory. It is simple but it is true: each shock is different. This is why all those macro provisions have such a hard time of it, and why it is a brave forecaster who would offer a 2004 projection with any degree of confidence right now (still, as the saying goes, fools do rush in......). And this week, there reminding us of the truth which proves so hard to swallow is Stephen Roach, who points out that in his book shock analysis has two critical dimensions — the magnitude and duration of the shock itself, and the pre-shock condition of the affected economy. The first dimension is totally unknown at present (for the innocent abroad, we are taking about oil here, how high can it go and how long can it stay there?), the second one , as he keeps reminding us (and well, you already knew this part), looks none to healthy.

There are times when it pays to be overly-simplistic on the global macro call. This is one of those times. Three key points are most obvious to me insofar as the cyclical prognosis for the world economy is concerned: First, in a US-centric world, the global call is basically a call on the US economy. Second, the US is in the midst of a classic oil shock. And, third, that shock has occurred at a point of maximum vulnerability — when a US-centric industrial world had slowed to a virtual standstill. The conclusion is inescapable: The recession warning model that I have long advocated is now flashing a serious alert for the US and for the US-centric global economy. A stalling economy lacks the cyclical immunities that cushion it from an unexpected blow. A stalling economy that has been hit by a shock is a recipe for recession. Unfortunately, it’s that simple.

It’s educated guesswork as to where oil prices are headed. It’s a painful reality check to see where they have come from. Crude oil (WTI spot) prices have now pierced the $37 threshold — fully 89% above the level prevailing in January 2002. Moreover, as of the close of February 27, oil prices have now equaled the highs of $37.20 hit on September 20, 2000, that played an important role in triggering the recession of 2001. With oil inventories low, disruptions in Venezuela lingering, and war looming, the risk is that oil prices will move higher before they begin their fairly typical post-shock mean reversion. But those risks lie in a murky and uncertain future. At this point in time, the facts speak for themselves — an oil shock has already occurred.
Source: Morgan Stanley Global Economic Forum
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3G Hits Europes Streets

So 3G is finally going to hit the streets here in Europe. Only one question, will it be with a roar, or a loud crash. The Economist, as per usual, is hedging its bets.

FORGET the euro100 billion ($108 billion) shelled out by Europe's mobile network operators for third-generation (3G) licences. Disregard the huge debts, the languishing share prices and the endless wrangling over the licence terms. Never mind that several would-be 3G operators have folded their tents and given up. None of that matters to the shoppers who can now see 3G phones available for sale on the high streets of London, Birmingham, Rome and Milan. Admittedly, these whizzy new phones—which can send and receive live video—are only being demonstrated and will not be delivered until mid-March. But now that 3G has finally arrived in Europe, will anyone buy it? Nobody knows, which is why the industry is avidly watching what happens in Britain and Italy, where Europe’s first commercial 3G networks are being launched by 3, a new operator backed by Hutchison Whampoa of Hong Kong. 3 has signed up 140,000 customers in Italy, and a comparable number in Britain. Unsurprisingly, the company is emphasising the unique video capability of its 3G handsets.

But whether videotelephony will be enough to get 3G off the ground remains uncertain.A more cautious approach is being taken by the established operators who, unlike 3, currently have millions of customers using 2G networks. Rather than make a song and dance about 3G, these operators—notably Vodafone and T-Mobile—are instead promoting mobile data services, under the brands “Vodafone live!” and “t-zones” respectively. At the moment, these services, including the ability to send still photos (but not video) from one handset to another, are delivered using enhanced 2G, or 2.5G, networks. But the capacity of 2.5G networks is limited, so as more subscribers sign up for such services, the operators will quietly switch new customers over to 3G networks over the next few years. “People will be using 3G without being aware of it,” says Ben Wood of Gartner.

In short, where 3 is pushing 3G as revolutionary, to lure subscribers away from other networks, the incumbent operators prefer to see it as evolutionary, as they attempt to hold on to them. The 3G hype of a couple of years ago has evaporated, and a new pragmatism is abroad in the industry.But there is, of course, another possibility: consumers may decide that voice calls and text messages are enough, and shun the other new services on which 3G is predicated, in both its revolutionary and evolutionary forms. In that case, operators will have to fall back on 3G’s ability to carry voice calls in higher volumes, and at lower cost, than 2G networks. “Voice is not a market to be sniffed at,” says Mr Lee. Even ten years from now, he says, mobile voice revenues will exceed revenues from sending data. The mobile operators will then set about cannibalising the fixed-line voice business with their 3G networks. It will be quite a come-down for a technology that was once expected to change the world. The vast licence fees will probably never be recouped.
Source: The Economist
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Asian Stock Markets in Review

That Japans economic problems have produced a generalised collapse in the stock market there, with values tied down back at early 1980s levels, is common knowledge. What few seem to be prepared to think through are the long term consequences of a continuation of this state of affairs. The vote for a traditionalist at the top of the BoJ means that the dripfeed deflation is set to continue into an indefinite future. This reality is also reflected in the level of long term interest rates, with a yield curve which is now virtually flat over ten years, and aspiring towards the horizontal even up to 30. So as one economy shrinks slowly into the sunset, others continue to grow. With time relative valuations will change significantly. Of course what is happening now in S Korea and Taiwan is comparatively small beer compared to what could happen if and when China's financial architecture comes of age.

Tokyo, traditionally the home to Asia's biggest and most profitable companies, has long been the starting point for most investors looking at the region. But now, the biggest, most heavily traded companies in Asia are often found outside of Japan. In electronics, Sony Corp. lost its top spot in the sector, in U.S. dollar market-capitalization terms, to Samsung Electronics of South Korea late last year, according to Thomson Datastream. Japan's biggest microchip maker, NEC, has trailed Taiwan Semiconductor Manufacturing Co. since mid-2000. In the property sector, Mitsubishi Estate fell behind Hong Kong companies Cheung Kong Holdings and Sun Hung Kai in the early 1990s.

Japan is still the world's second-largest economy behind the U.S., and its stock market is still bigger than the rest of the region's combined. But as the country seems ever less likely to throw off its economic malaise -- the latest disappointment was last week's appointment of a new central banker unlikely to make the radical changes Japan needs -- investors are speaking out. In a January report that sent Tokyo financial circles abuzz, Nikko Salomon Smith Barney strategist Alexander Kinmont put forth the view that "Japan is of no general importance except as a laboratory experiment concerning deflation." As Asia's and Japan's valuations draw closer together, he wrote, the region would increasingly be thought of as one block. Partly, it is a story of Japan's weak economy, and debt-laden corporations involved in too many disparate businesses. But just as important, a few companies elsewhere in Asia -- despite setbacks including a weak global economy and falling stock markets -- are gaining market share and building up bigger brands than their Japanese counterparts. Eventually, logic dictates, they will attract more investment dollars, and smaller companies will follow in their footsteps.

Many of these big companies beat out their Japanese counterparts on a number of investing criteria. Samsung, for example, trades at about seven times next year's estimated earnings, according to Thomson, compared with 23 for Sony. Often, Asian companies outside Japan are far more profitable. Samsung recently reported record net profits of 7.05 trillion won ($5.9 billion) for 2002. Its profit amounted to 17% of total revenue, up from 9% in 2001. Sony's net profit for the year ended in March 2002 was $115 million, or just 2% of total revenue. Stocks outside Japan are also frequently easier to trade than their Japanese counterparts. "While Japan's market capitalization looks large relative to the rest of developed Asia, it is an essentially illiquid market," wrote Mr. Kinmont in his report. Because they have some significant advantages such as greater liquidity and profitability, why aren't Asian companies outside Japan trading at higher values? Some reasons are out of their control. One key factor: Global pension-fund and other institutional money, which tends to have a big influence on markets, is generally invested according to guidelines that often restrict the funds to developed markets only. Most of Asia, including South Korea and Taiwan, is considered an emerging market, which rules them out for many big pension funds. If these countries were to win developed-market status from index-setter Morgan Stanley Capital International, which would require meeting standards on factors including the size of the economy and the securities-regulatory environment, it would automatically mean a large influx of funds that would drive up stock prices, money managers say.

Second, while Asia has made progress since the 1997-1998 financial crisis in restructuring its industries and cleaning up its bad debt, it is still tarnished in the eyes of some investors. "I still think there's an overhang," says Ayaz Ebrahim, regional chief investment officer for HSBC Asset Management. "Not all investors have bought back into the program." Third, broad economic factors are creating changes that will make it hard for stocks in certain sectors, whether in Japan or elsewhere, to make further gains for the time being. Take chip stocks, which have started trading more like cyclical stocks, meaning they should see big gains only when the global economy starts turning up. Many analysts say that if that cyclicality holds, most chip foundries deserve lower valuations. Fourth, Japanese stocks are still expensive -- despite a drop of 40% in the Nikkei 225 since the start of 2001 -- because local Japanese investors continue to hold them. Much retail money has left the market along with the Tokyo Stock Exchange's long slide, but banks, finance companies and conglomerates are supporting stock prices through their complex web of cross-shareholding.
Source: WSJ
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Indian Design on the Up and Up

Ajit Balakrishnan, chairman of the Indian internet outfit Rediff.com, has some interesting things to say about Indian Design. I think people in Europe really are missing how rapidly the Indian scene is changing. After all, all those call centres are bound to lead somewhere, in part because more people in Indian already speak fluent English than in the whole ex-UK EU, and the more they use it the better they'll get. This obviously goes for a lot of other things too.

I quote next from a report Design for Development written by Ashok Chatterjee the former head of NID “…the consumer market established the importance and ability of the design profession…[but] …not a few design institutions are troubled by the take-over by market forces of a professional once linked to concepts of ‘dignity, service and love.’” Here it is again, the brahmanical distaste for the market, the condescending concession to the consumer market as a distasteful barrier one must leap so that the designer could then go back to his true calling- ‘designing for development’. Here is my submission - by designing products of mass consumption , that save users time and money and effort and drudgery, you will do more for the cause of India’s development than any so called design for development . Let me take you back to the origins of design to see what its true mission is.

The place is England and the time is the late 1700’s. England is agog with recent inventions like the steam engine and the spinning jenny. It is a time of Empire – the sun, at that time, truly never set on the British Empire. At that time a young man saw that the rising new middle class in England were taking to drinking tea recently made available at very cheap prices from India. He saw that money could be made by making tea sets that had the look and finish of expensive Chinese items. His first great success was the perfection of cream-colored crockery which had been produced in Staffordshire from the early 18th century onwards. The chemical composition was actually that of stoneware clay, but it was fired to an earthenware temperature and lead-glazed, giving it it's characteristic creamy yellow color. He was able to eliminate the problem of crazing (he appearance of small cracks in the glaze) which had been a great problem in English pottery up to that time.- this simple 'cream-colored' ware became wildly popular, especially it was conferred royal patronage by Queen Charlotte of England, in merit of this ware, which was from then on called 'Queen's Ware'. This 'Queen's Ware' became so popular and well-known that in 1767 he wrote: "The demand for this cream color, alias Queen's Ware, alias Ivory still increases. It is really amazing how rapidly the use of it has spread almost over the whole globe and how universally it is liked." This was Josiah Wedgwood. Wedgwood was perhaps the first designer in the currently accepted sense of the term. And you can see his mission was to provide the middle classes of Industrial Revolution England ceramic cups and plates to replace the pewter and wood of that time.

I recently polled a few design professionals and academicians about the three India-designed products that they greatly respected. Here is the list in no particular order:
The Titan Watch including its presentation in showrooms and advertisements. The TVS Victor bike And, the Electronic Voting Machine from Bharat Electronics.
The Titan watch case has been inspirational because it taught all of us that design is a great driver in differentiating brands where the underlying technology has got commoditized. HMT, the pioneer paid a heavy price for persisting with the notion that consumers bought watches just to tell time. The TVS people are harbingers of the time when foreign collaborations will be seen to be just short-term engagements to learn things; and that in a joint venture with a foreign company you can let your partner nominate the Finance Director and control the money or the Marketing Director to drive marketing, but you must always control technology. The Electronic Voting Machine has shown us how rugged, well-thought electronic design can reduce the cost of elections, declare results instantly and make irrelevant those staples of Indian elections- rigging and booth capturing. Your list of the best three may be different- but I am happy if the list is made up of useful products that make life a little easier to live and which have been sold in large quantities to middle-class India.
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