Monday, January 30, 2012


Determining the Takeover Value of a Company

If you frequently read financial magazines, newspapers, and annual reports, you have no doubt come across something called enterprise value. You may have wondered what it is, how it’s calculated, and why it’s so important.
What is Enterprise Value?
Enterprise value is a figure that, in theory, represents the entire cost of a company if someone were to acquire it. Enterprise value is a more accurate estimate of takeover cost than market capitalization because it takes includes a number of important factors such as preferred stockdebt, and cash reserves that are excluded from the latter metric.
How is Enterprise Value Calculated?
Enterprise value is calculated by adding a corporation’s market capitalization, preferred stock, and outstanding debt together and then subtracting out the cash and cash equivalents found on the balance sheet. (In other words, enterprise value is what it would cost you to buy every single share of a company’s common stock, preferred stock, and outstanding debt. The reason the cash is subtracted is simple: once you have acquired complete ownership of the company, the cash becomes yours). Let’s examine each of these components individually, as well as the reasons they are included in the calculation of enterprise value:
Market Capitalization: Frequently called “market cap”, market capitalization is calculated by taking the number of outstanding shares of common stock multiplied by the current price-per-share. If, for example, Billy Bob’s Tire Company had 1 million shares of stock outstanding and the current stock price was $50 per share, the company’s market capitalization would be $50 million (1 million shares x $50 per share = $50 million market cap).
Preferred Stock: Although it is technically equity, preferred stock can actually act as either equity or debt, depending upon the nature of the individual issue. A preferred issue that must be redeemed at a certain date at a certain price is, for all intents and purposes, debt. In other cases, preferred stock may have the right to receive a fixed dividend plus share in a portion of the profits (this type is known as “participating”). Regardless, the existence represents a claim on the business that must be factored into enterprise value.
Debt: Once you’ve acquired a business, you’ve also acquired its debt. If you purchased all of the outstanding shares of a chain of ice cream stores for $10 million (the market capitalization), yet the business had $5 million in debt, you would actually have expended $15 million; $10 million may have come out of your pocket today, but you are now responsible for repaying the $5 million debt out of the cash flow of the business – cash flow that otherwise could have gone to other things.
Cash and Cash Equivalents: Once you’ve purchased a business, you own the cash that is sitting in the bank. After acquiring complete ownership, you can simply take this cash and put it in your pocket, replacing some of the money you expended to buy the business. In effect, it serves to reduce your acquisition price; for that reason, it is subtracted from the other components when calculating enterprise value.
Why Is Enterprise Value Important?
Some investors, particularly those that follow a value philosophy, will look for companies that are generating a lot of cash flow in relation to enterprise value. Businesses that tend to fall into this category are more likely to require little additional reinvestment; instead, the owners can take the profit out of the business and spend it or put it into other investments.

Friday, January 27, 2012

Eight Reasons to Move Albania to the Top of Your Travel List

Tell someone you’re traveling to Albania, and you’re likely to get asked a couple of questions. “Where is Albania?” “Is it dangerous?” “What are you going to do there?” and most common of all, “Why?”
The tiny, often misunderstood Balkan state is located across the Adriatic Sea from Italy, directly above Greece. The mountainous country is filled with pristine rivers and sparkling mountain springs, bustling cities and charming towns, and its rocky coastline stretches hundreds of kilometers along both the Adriatic and Ionian Seas, providing stunning beaches that rival those of its better-known neighbors like Greece, Italy, and Croatia. But Albania’s status as one of Europe’s poorest countries and its slightly checkered past mean that mention of its name is more likely to elicit thoughts of riots and communist dictatorships than beautiful beaches and the vibrant café culture of Tirana, the country’s capital.
But Albania is changing. Today the country is being built up fast by a people eager to recover from almost 50 years of an oppressive communist dictatorship and the unrest that accompanied its transition to democracy. Today’s Albania offers young, lively cities, incredibly beautiful natural scenery, and an extremely open and friendly people eager to show off their country, all at a price that can’t be found elsewhere on the continent. What’s more, Albania remains one of the few undiscovered paradises in Europe. But like Croatia before it, it’s only a matter of time before the wandering masses start to pour in. Here are eight reasons why you should buy your ticket, pack your bags, and beat the crowds to this remarkable Balkan nation.

1. The lek

Albania joined NATO in 2009 and has its eye on EU membership as well, but it will be at least a few more years before it’s accepted into the Euro zone. The official currency there today is the lek, and the exchange rate between it and other major world currencies alone should be enough to draw hoards of international tourists to Albania.
At first glance, the prices in Albania may not seem so amazing. Three hundred lek for a pizza or 2,000 lek for a night in a hotel room might seem a little steep to the uninitiated. Consider the exchange rate and you’ll begin to understand: at the time of writing, one Albanian lek (sometimes also written as leke) was equivalent to just under a cent, or 0.009 dollars. So that 80 lek ice cream cone? That will set you back about 75 cents. That 1,800 lek double occupancy ensuite hotel room with a view of the beach in Vlora? It’s a bargain at just under $17. And that dinner of steamed mussels and a bottle of Albanian white wine for two on the beach in Ksamili? At about 600 lek, you’ll be spending approximately six dollars total.
Beer and coffee can often serve as budgetary gauges for international travelers, and you’ll be happy to hear that it’s rare to pay over a dollar for either (usually closer to 45 cents for the coffee), provided that you go for the typical Albanian bottled beer or a shot of the strong, thick espresso that the locals drink.

2. The beaches

The beaches in Albania rival anything that can be found in Europe, and with 362km of coastline stretching through both the Adriatic and Ionian Seas, beachgoers have plenty of sandy spots to pick from.
Dhermi, Himara, and Ksamili are some of the names that one might uncover with an online search or a peek into a guidebook, and they are all beautiful. A lot of the bigger coastal cities like Saranda and Vlora also have beaches accessible on foot from the city center, though I’d recommend skipping the city beaches as they are usually a bit dirty, very developed, and quite busy. Traveling a bit outside of the cities (particularly heading south out of town) is a surefire way to find some beautiful beaches that are less crowded and cleaner, but still easy to reach by taxi or bus.
Many of the country’s very best beaches are further afield, away from the newly constructed hotels and restaurants springing up around the coastal cities and bigger towns. There are literally hundreds of coves, caves, and sandy stretches where you can laze away a day, or more if you bring a tent and supplies. Private paradises like the little cove pictured above (a personal favorite, known as Aquarium) are just waiting to be discovered, and intrepid travelers are sure to have their curiosity rewarded if they choose to hop off the bus or wander down a dusty goat path in search of something a bit different.
But if isolation and a lack of amenities aren’t your idea of a good time, you’ll still have plenty of options throughout the region. The beach at Dhermi is just as clear and sparkling as Aquarium, though they offer a completely different experience. With a slew of hotels packed tightly into the hills above the water, there is no lack of places to stay, and a number of restaurants, including the excellent Luçiano (of the Hotel Luçiano), offer fresh fish, a variety of pizzas and other Italian-style dishes at extremely reasonable prices. Visitors in June and early July will be pleasantly surprised by the lack of other visitors on the beach, though the area heats up a bit in late July and August, with concerts at the nightclub Havana, right on the sand, bringing in plenty of visitors from throughout Albania and abroad.
Though the available resources are far from comprehensive, it is easy to find great beaches in Albania with the help of Google or a guidebook, and wherever you end up, you probably won’t be disappointed. An excellent research tool is a online wikimap that shows the locations of a lot of beaches you won’t find described elsewhere on the internet, including Aquarium. Many of these locations won’t be reachable by public transit, and some of them might even require a bit of hiking to get to, but knowing where they are and having an idea of which stretches of coastline are the most promising will increase your chances of visiting one of the country’s most spectacular beaches.

3. The cities

Albania is also home to a surprising number of vibrant cities that offer an urban travel experience completely different from what can be found elsewhere in Europe. In Tirana, uninspired blocks of austere communist-era apartments sprawl outwards from the center of the city, sprinkled here and there with an ornate old mosque or bustling outdoor market. Amidst the old, however, newer structures are going up at an alarming rate, filling in the cities’ formerly empty spaces with a shocking number of sleek new bars and modern restaurants. In the capital especially, visitors will find a bustling nighttime scene, and in the summer dozens of cafes and bars along tree-lined streets like Ismail Qemali spill out into the largely pedestrianized roads, offering comfortable outdoor lounge areas that all seem brand new and impeccably clean, contrasting starkly with the city’s more run-down neighborhoods and crowded main roads. Even in the flashier establishments, drink prices remain reasonable and the crowds laid back.
Other destinations, such as the “museum cities” of Berat and Gjirokastra, provide a peek into the finer moments of Albania’s history through their winding cobblestone streets and well-preserved Ottoman architecture.
Even if the lively nightlife and lovely historical charm of Albania’s cities isn’t enough to draw you in, you’ll have a hard time avoiding them if you’re traveling by bus or furgon. The flexibility and frequency of departures and arrivals makes quick visits to the different cities possible, so it’s easy to stop in Saranda for lunch, or spend a few hours checking out Berat’s charming cobblestone backroads before getting back on the road.

4. Transportation

Albania’s public transportation system is mind-boggling at fist, but once you get a hang of it, you’ll realize that the spontaneous, slightly unorganized nature of it all makes it extremely favorable for impromptu travels and unplanned side trips.
Backpackers basically have three options for getting around: bus, furgon (also known as mini-bus), and taxi (a fourth, rarely used option is the excruciatingly slow train system). Buses are the safest and most reliable way to get around, though their schedules tend to be more limited than the furgons, which are basically large vans that start their routes earlier and end later than the buses do. Furgon drivers have a reputation for going very fast and not always following the rules of the road, but if you’re looking to get somewhere quick, hop on a furgon (and hope it has seatbelts).
If you’re taking either of these options, the important thing to know is where the driver is headed. The destination city will usually be posted on the windshield, though occasionally there’s nothing at all. In those cases, looking a bit lost and a bit foreign usually cues a barrage of helpful drivers, all yelling out their destination city, which makes finding the right bus pretty easy.
It’s also good to know that you can get on and get off where you like, so if you see the bus or van you want driving by, flag it down! They’ll stop if there’s room for you. And if you’re on the bus and you spot a pretty beach or nice little town, just shout and they’ll let you off. This makes it easy to be spontaneous while traveling in Albania, but keep an eye on the clock, because it gets harder to grab a ride as the day goes on and you might find yourself stranded if you wait until early evening to look for a furgon. This unofficial schedule provides a loose idea of when buses leave from the major cities.
When there’s no bus or furgon to be found, taxis offer a surprisingly affordable mode of transportation. As an example, the going rate for the hour and a half trip from Vlora to Dhermi was about 40 dollars, and getting to any of the nice beaches outside of Saranda, Vlora, or Himara would likely cost little more than a couple of bucks. Scheduling a pick-up gets more complicated, so keep that in mind when visiting destinations off the main roads. Hitchhiking is very common for locals as well as tourists, so in more remote areas, including the road leading to the Blue Eye, don’t be surprised if you’re offered a ride, even if you’re not holding up your thumb.

5. The people

After many years of isolation under communist rule, Albanians were finally allowed to travel internationally in 1990. Those restrictions, as well as the lack of international visitors to the country in recent decades, have limited the exposure that many Albanians have had to different cultures, languages, and people. Many of the people who I met on our trip were genuinely interested in why I was visiting their country and where I came from, which is a welcome change from the reception that many travelers receive in the more heavily visited tourist destinations of the world.
Within minutes of boarding my first bus in Albania, I was sharing water and Skittles with the driver and several passengers, helping a few young girls practice their English skills, and saying hi to a relative of an elderly passenger who had called her family on her cell phone to tell them that she had met two Californians on the bus. It was an experience that I had never had on my travels before and haven’t had since, and it certainly helped to take my mind off the five hours I spent on a rickety old bus between Tirana and Vlora.
English is spoken by many young Albanians, but it’s surprisingly easy to find Italian-speakers of all ages throughout the country, and much of my communication during my travels was a curious mix of botched Italian sprinkled with Spanish, an English word here or there, falëminderit (which means thank you in Albanian), and a lot of gesturing and the occasional drawing. In general, people were patient and extremely helpful with my attempts to communicate, and putting the extra effort into talking with locals provided me with some of the more memorable moments of my trip, though brushing up on a few key Albanian words would be helpful, if you can manage the tricky pronunciation.

6. The nature

Even if the people weren’t so friendly, the beaches so beautiful, and the cities so unique, Albania would still have plenty to offer. Being one of Europe’s most mountainous countries means that a fantastic view is never far away, and traveling any of the country’s twisting-turning mountain roads practically guarantees spectacular scenery all along the way.  The drive from Vlora to Dhermi is particularly enjoyable, offering vistas of the wild Karaburun peninsula across the Bay of Vlorë, as well as lagoons, beaches, and the heavily wooded national park that lies just south of the city.
But while the great views and pretty scenery are basically unavoidable, other places will need to be sought out. One of those places is known as the Blue Eye. It’s called Syri i Kaltër in Albanian, but locals will recognize the name in English. Located just outside of Saranda on the way to Gjirokastra, the Blue Eye is a freezing cold underwater spring with an unbelievable sapphire color. The river that flows downward from the spring is some of the clearest, cleanest water you will ever see, and just laying eyes on the thousands of gallons of ice cold water gushing out of the center of the Eye is worth the trek it takes to get there.
The Eye is located outside of Saranda, just off the road to Gjirokastra. Ask the bus driver to drop you there, then follow the signs. It’s a good distance from the main road to the spring itself, so go early and keep your fingers crossed that a passing driver will pick you up, or plan to stay the night at the rustic hotel near the spring. The restaurant and bar located alongside the river serves excellent roasted lamb ribs and cold beer, so bring your appetite and prepare to take in some of the most incredible scenery you’ve ever seen while chowing down on a local specialty.

7. The food

Due to its largely Muslim population, lamb is often the meat of choice on Albanian menus, and the spit-roasted variety is a favorite in many Albanian cities. Other meats are frequently available, but the lamb is good and almost always locally raised, so it’s definitely worth a try.
Coastal cities offer a plethora of fresh, local seafood, often pulled right out of the water. If you can figure out how to ask or gesture, it’s a good idea to ask to see the catch of the day. It’s not unusual to get to pick your dinner out of a basket of freshly caught fish, and taking recommendations from the staff is sure to land you a tasty meal. A dinner of fresh fish will usually be the priciest option on the menu, but at a pretty consistent nine dollars per serving, it’s worth the splurge.
Vegans and vegetarians will appreciate the bounty of fresh fruits and vegetables that Albania’s farms produce, most of which is locally and organically grown, only because many small farmers can’t afford to buy pesticides and fertilizers. Greek salad is a staple on most menus, and the mix of fresh cucumbers, onions, peppers, and tomatoes, topped with olives and homemade feta will probably be one of the most flavorful salads you’ve ever had, wherever you end up ordering it.
If you’re not an adventurous eater, don’t worry. Albania’s proximity to Italy means that pizza and pasta make up a considerable portion of most restaurants’ offerings, and even in Albanian it’s easy to read the Italian items off the menu. Albanian food in general tends to resemble Greek cuisine, so even if you’ve never eaten at an Albanian restaurant, you’ll probably recognize many of the dishes. Most restaurants won’t have a foreign language menu, so familiarizing yourself with a few key items to order—or avoid, is probably a good idea. Era restaurant in Tirana is an exception, they have an English menu and a huge selection of Albanian specialties and Italian basics, so it’s a great way to get acquainted with what’s on offer throughout the rest of the country.
Albanian beers like Korça or Tirana are just as good as the international options, at a much lower price, and strong black coffee and the white wines of the country’s northern regions provide a good selection of local drinking options. The water is safe to drink, though more sensitive stomachs might want to be a little more careful and stick to the bottled stuff.
And the best part of all—the prices. Eating well in Albania is extremely easy when an entire pizza or plate of risotto costs about four dollars, and a full, fancy meal for two with drinks is easy to come by at under ten.

8. The history

When you’re all beached out and full of all the fine food and drink that the country has to offer, spend some time in Albania’s historical sites. Many of the castles and ruins throughout the country give visitors a much more up close and personal view of history than what’s available in other European countries. You won’t find any guard rails or roped-off areas in the fortresses at Porto Palermo or Gjirokastra, where visitors are more than welcome to climb over stone walls and crawl into dark little passages, and in Berat, there are over 200 people still living inside the walls of the city’s old fortress, many in beautifully maintained Ottoman-era homes that offer great views of the river valley below.
Ali Pasha’s fortresses are a must see for kids and adults alike, and the slightly overgrown, poorly lit interiors really makes it feel like you’re stepping back in time when you enter into the dark, musty halls. In Gjirokastra, the fortress is home to a collection of heavy artillery from WWII, as well as a U.S. Air Force plane rumored to have been brought down while spying on the country in the 1950s.
The city of Butrint, just outside of Saranda, is home to a spectacular array of ruins spanning a 2,500 year period that includes the Roman era and earlier. In the summer, theatre performances are occasionally held on a wooden stage in the old amphitheatre, which is partially filled with water, but Butrint is a pleasant place to visit any day of the year, and the combination of architectural styles are fascinating, especially if you luck out and get a working archaeologist as your tour guide.
A more recent historical relic that you won’t be able to avoid on your travels throughout the country is a reminder of some of the darker moments in Albania’s past. Hundreds of thousands of mushroom-shaped concrete bunkers, installed during communist rule, dot the countryside, a tactic that the government hoped would protect the country in case of an attack from the U.S. or Britain. The bunkers were never really used, but they certainly were well constructed, so the majority of them still stand, nestled into the hills above the main roads or clustered in groups on the beaches.

What to know before you go

If you plan on flying to Albania, you only have one option. Mother Teresa International Airport in Tirana is the country’s only one, and there are just a few airlines that fly there, including AlItalia and BelleAir. Prices out of a few European cities, especially larger Italian ones, tend to be significantly cheaper than the normal European points of departure like London or Frankfurt, so scheduling a cheap Ryanair flight to a city such as Milan and then continuing on to Tirana can often be the most cost effective option for long haul travelers.
Ferries from Italy are also a popular way to enter Albania, and there are overnight voyages that depart from Bari and Brindisi several times a week, depending on the time of year. Ferries are usually cheaper than flights at around seventy dollars each way, but the trip can take up to eleven hours, and adding the cost and time it takes to get to the Italian ports, in addition to the long boat ride, can often make flying seem a little more attractive. There is also a ferry from Corfu that sails to Saranda in about half an hour and costs about twenty-five dollars each way.

There are ATMs all over Tirana and in the other larger cities as well. Smaller destinations like Dhermi do not have ATMs or banks at all, and paying with a credit card will be nearly impossible almost anywhere in the country outside of the fanciest hotels in the capital. It’s a good idea to keep a significant amount of cash on you, and small bills are preferable. The first cash machine that most visitors will encounter is in the airport, and drawing lek from the machines with a foreign ATM or debit card isn’t any different than in other international destinations, and is probably the most economical and reliable way of changing your money.
Bargaining is common and acceptable when taxis and lodging are concerned, and it can often be quite productive. Be proactive and courteous when it comes to fixing a price, and you are likely to save a bit of your travel funds without offending anyone. Taxi drivers are especially likely to bargain because of the plethora of other inexpensive travel options available throughout the country.
In visiting the cities, a guidebook or some kind of map will come in handy, though the use of street names is inconsistent and many hotels will rely on landmarks for directions instead of actual street names and addresses. In some of the smaller cities, it is rare to ever see a street sign, but having an idea of the lay of the land will be helpful in your attempts to navigate.
Pre-departure planning for a trip to Albania can be a little frustrating due to the lack of resources available online, or anywhere for that matter. There are a few guidebooks available, and I made frequent use of the Bradt guide that I bought before my trip, though it was far from comprehensive. Having a general idea of what you want to do and see and an open mind are the best ways to prepare for your trip. I’d recommend that anyone entering the country through the capital spend their first night at the Tirana Backpackers Hostel. The first (and only) hostel in the city has a friendly English-speaking staff who are incredibly helpful and will gladly give you all the advice you need on what to see and where to go while you are in the country. They have other locations throughout Albania as well, and the 12-euro rate is a deal considering all the help they’ll be able to provide, plus free wi-fi and one euro beers at the little bar in the back.

Wednesday, January 25, 2012


Italy is located in Southern Europe, a peninsula extending into the central Mediterranean Sea, northeast of Tunisia. Its terrain is mostly rugged and mountainous; with some plains, coastal lowlands and a predominantly Mediterranean climate.

Italy’s natural resources include coal, mercury, zinc, potash, marble, barite, asbestos, pumice, fluorspar, feldspar, pyrite (sulfur), natural gas and crude oil reserves, fish and arable land.
The Italian economy is one of the worlds most developed, the country has a high standard of living with per capita GDP higher than the EU average.
The Italian economy is also further boosted by high public literacy and efficieny in the labor force. Italy is also the world’s fifth most visited country in the world. Due to its rich history and culture, the country is a major tourist hub throughout the year.
Italy’s population as of 2010 was 60.206 million, 8.7 percent of which are unemployed.
Italy’s unemployment rate has been on the rise in the past few years. The unemployment rate has gone up from 6.8 percent in 2008 and 7.5 percent in 2009.
4.2 percent of the workforce is employed in agriculture, 30.7 percent in industries and 65.1 percent in services.

Italy Economy: Overview

According to the World Bank, Italy has been categorized as a country with high standards for business, investment and trade. In addition, the Italian economy is well developed and surpasses that of the UK, Germany and Greece.
In 2010, Italy’s GDP was US$ 1,771.14 billion; down from US$ 1,813.23 billion in 2008 before the recession. However, the Italian economy remained the 11th biggest economy in the world during the financial crisis. However Italy's growth rate shrank 5 percent in 2010 and 1 percent in 2008.
The per capita income remained high as well with the 2010 data confirming it at $30,200, slightly lower than $31,800 in 2008.

Italy Economy: Diversified and Strong

The Italian economy is highly diversified and many Italian brands and products are world famous. Ferrari is one such example. The industrial sector is well divided, based on its geography. Northern Italy is dominated by private companies whereas the South, with its fertile soil is dominated by agriculture.
The Italian economy features a strong budget that is in consonance with global standards.
In 2010, the country’s revenues were $960.1 billion and expenditures were $1.068 trillion. The Italian government has been very active in implementing new structural reforms overhauling costly entitlement programs and increasing opportunities for employment.

Monday, January 23, 2012

Emerging Market Economy

Emerging Market Economies (EME’s) like China, India and the erstwhile Soviet Bloc countries are coming of age with increasing levels of its Gross Domestic Product (GDP) over the last decade. This has happened mainly due to more investments made by foreign companies in these countries.

The term emerging market economy was coined in 1981 by Antoine.W.van.Agtmael of the International Finance Corporation under the aegis of the World Bank. The term actually refers to developing market economies which have embarked on a slew of developmental measures until recently and are emerging in the “global economy scene.”An emerging market economy is said to have per capita incomes in the lower-middle range if calculated by world incomes at the per capita level.
Emerging economies constitute about 80% of the world’s population and more than 20% of the global economy. Emerging markets have the essential characteristic of trade liberalization and opening up their economies at the global stage. This leads to many foreign goods flowing into the domestic market which now competes with locally produced articles. This increases the standard of domestically manufactured goods and services and raises their productivity and also helps to produce export quality articles.
One of the best examples of emerging economies is Vietnam where exports are ever increasing. This is true of most emerging markets where we see a rise in the country’s export earnings coupled with increased foreign exchange reserves, a steady inflation rate and the equity market showing sufficient stability. The exchange rates of the emerging market economies are also shown to be remarkably stable and doing well against the standard international currencies like the Dollar and the Euro.
Most of the emerging markets also experience an increase in value or appreciation of the domestic currency against the US Dollar which indicates the improved performance of the economy. This is no way will cause any hindrance to the international community investing in the country dependent mainly on the economic stability, the political stability and transparency in the economy. Investor confidence is seen to rise in the countries such as China, India, Brazil and Pakistan with foreign investments in infrastructural facilities seen to increase. With international investors engaging in extensive Foreign Indirect Investment (FII) in emerging market economies and putting more and more money on government bonds, the demand for those bonds are also seen to rise with the yield rates on bonds.
The emerging market economies such as India, Pakistan, China and Vietnam are the major success stories of the world. The increased investment on infrastructure by the foreign investors in these emerging economies has seen improved facilities and conditions here for other investors to invest in future. This had helped bring these nations on the growth path to development through more industrialization, more and more job creation for the large number of unemployed in the country and fine tune the managerial and professional skills. It has brought about a huge change in the GDP level of the country with improved standards of living.
EME’s such as in the Indian subcontinent and countries like China, South East Asia and a few Latin American and the erstwhile Soviet bloc have especially benefited from increased interest in these countries by foreign investors. However, to be on the growth track, they need to maintain stability in their system and also transparency to keep the investor confidence high.
Lastly, with high growth rates for these emerging economies in a state of transition, it will only be truly beneficial if these improved standards of living percolate right down to the poorest of poor. We cannot afford to have too many poor and too few millionaires

Saturday, January 21, 2012

Great Financial Crisis? What Great Financial Crisis?

That seems to be the attitude in 2011. Which worries us at, because we do not believe that the underlying problems have been solved. If anything, they have been exacerbated.
World Economic Statistics at a Glance - 2011 Forecast
World GDP (PPP): $78.092 trillion
GDP Growth Rate: 3.3%
GDP Per Capita (PPP): $11,100
GDP By Sector: Services 63.4%, Industry 30.8%, Agriculture 5.8%
Growth In Trade Volume: 6.953%
Industrial Production Growth Rate: 4.6%
Population: 6.768 billion
Population Growth Rate: 1.133%
Urban Population: 50.5%
Urbanization Rate: 1.85% (125 million people move to cities every year)
The Poor (Income below $2 per day): Approx 3.25 billion (~ 50%)
Millionaires: Approx 10 million (~ 0.15%)
Labor Force: 3.232 billion
Inflation Rate - Developed Countries: 2.5%
Inflation Rate - Developing Countries: 5.6%
Unemployment Rate: 8.8%
Investment: 23.4% of GDP
Public Debt: 58.3% of GDP
Market Value of Publicly Traded Companies: $48.85 trillion, or 62.6% of World GDP
Sources: Economic Statistics Database, CIA World Factbook, IMF, World Bank
The World Economy in 2010 was worth $74.007 trillion in GDP terms, using the Purchasing Price Parity (PPP) method of valuation. This is expected to grow to $78.092 trillion in 2011.
The overall global economy averaged a 3.2 per cent growth rate between 2000 and 2007, suffering a slight dip in 2001 - 2002 thanks to the Dot Com Crash, but continuing to grow throughout that period. In fact 2004 - 2007 were boom years. The Emerging Markets, led by the giants of China, India, Russia and Brazil (the BRIC countries) had been posting 7 per cent - 10 per cent growth rates for years. Property and stock market booms had brought consistent growth in North America and Europe. Investment was bringing economic development to much of the Middle East and Africa, and even Japan was recovering from its deflationary 'Lost Years'.
Economic conditions within these countries play a major role in setting the economic atmosphere of less well-to-do nations and their economies. In many aspects, developing and less developed economies depend on the developed countries for their economic wellbeing.
Theories were even circulating that thanks to the growth of the developing world, we might enjoy years of unfettered growth, as new markets would go through successive growth spurts and counter the effects of slowing growth elsewhere. It was suggested that Asia was 'decoupling' from the US and able to grow under its own steam thanks to its two 'Awakening Giants'.
Sadly, that turned out to be hogwash, as deregulation allowed western banks to build up unsustainable levels of debt that brought the global economy to the brink of depression.
As the 'Sub-Prime' Crisis morphed into a fully fledged crash then global Financial Crisis, 2008 started to bomb and 2009 became the first year that the world recorded a loss in GDP since World War II. 2.031% was wiped out of the global economy - or $3.3 trillion of value.
We are now in what the IMF calls a 'Two Speed Recovery Process'.

Tuesday, January 17, 2012


Slowing growth amid greater uncertainty and fiscal consolidation 

Weak private consumption and fiscal policies  depress growth
The  outlook for the US economy has worsened  considerably compared to the spring forecast.  Real GDP growth  decelerated from 0.8% q-o-q  in the  fourth quarter of 2010 to a mere 0.1% and 0.3% in the first and second quarter of 2011, the weakest  growth since the first half of 2009. The slowdown largely reflected weak private consumption coupled with an increasingly negative impulse from the fiscal side. Some temporary factors  weighed on activity in the first half of 2011. High commodity prices combined with supply-chain  disruptions relating to the Japanese tsunami disaster constrained output across the economy and  deferred corporate employment and investment decisions despite buoyant profits.
Private consumption slowed sharply from a robust  0.9% q-o-q in Q4-2010, down to 0.3% and 0.5% in the first and second quarter of 2011. Households have  borne the brunt of peaking oil prices and  stagnation in the labour market, where improving trends from 2010 and early 2011 have stalled  leaving unemployment above 9% amid the lowest activity rates since the early 1980s. Confidence  and wealth were further depressed by a series of stock market declines that wiped out most of the gains from the 2010 equity rally and led consumers to further curtail spending. 
Private capital formation fared better, supported by robust corporate investment in equipment, software and structures in selected industries (e.g. mining). Investment benefited from  robust corporate balance sheets and the low cost of capital  but has become increasingly thwarted by rising  uncertainty regarding the economic outlook. The housing market remained subdued in 2011 and most indicators suggest that it has not bottomed out yet. New residential construction stabilised at a low level but the large supply of existing homes coupled with weak demand is putting downward pressure on prices. House price indices declined in the first quarter of 2011 and have remained flat since then.

Fiscal contraction vs. loose monetary policy
The gradual phasing out of crisis stimulus packages as well as shrinking public consumption and investment resulted in a fiscal contraction in the first half of 2011. By contrast, monetary policy remained accommodative with the Fed committing to keep policy interest rates at historically low levels (0% to ¼%) at least until mid-2013.
Furthermore, during its September meeting the Fed decided to extend  the average maturity of its holdings of  securities  so as to  put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative ('Operation Twist').
Labour market improvements, still tentative at the turn of 2010, have stalled. After falling to 8.8% in March 2011 the unemployment rate rebounded above 9% in April and has remained there since then. Persistently weak labour demand led to the lengthening of unemployment duration, increased exits from the labour force and depressed activity rates. High commodity prices (predominately oil and food) pushed consumer price inflation up to its pre-crisis level (3.9% y-o-y in September 2011). At roughly half the rate of headline inflation, core inflation has been accelerating as well to reach 2% in August (up by 1 pp. from January), suggesting significant pass-through of supply shocks to core prices.

Slow growth scenario
Real GDP is expected to rebound from the exceptionally sluggish growth in the first  half of 2011, but the overall outlook for the coming years has deteriorated considerably compared to the spring forecast. Real GDP growth is expected todecelerate from 1.6% in 2011 to 1.5% in 2012 and 1.3% in 2013, largely reflecting the negative impact of fiscal policies combined with slack private demand, weakened by domestic and global uncertainties. 
Private consumption, which accounts for almost 70% of US GDP,  is predicted to remain sluggish over the forecast horizon. Weak employment prospects coupled with a contractionary fiscal environment (particularly in 2013) will generally restrain spending, as will the feeble situation in the housing market and the ongoing process of deleveraging. While households have made great progress in deleveraging in recent years (see graph below), the process is likely to continue over the forecast horizon, limiting the chances of robust credit-led spending growth.

Grim labour market outlook delays recovery
The labour market outlook is expected to remain challenging, reflecting high unemployment combined with declining activity rates. The share of long-term unemployed (27 weeks +) in the total number of unemployed has registered historical highs (above 40% since early 2010 compared to 10% in the 1990s), pointing to new labour market and social challenges emerging in the US. These negative trends limit prospects for a major decline in the number of unemployed over the forecast horizon. The unemployment rate is expected to remain at around 9% until 2013.
Gross fixed capital formation is expected to regain some strength in line with rebounding corporate investment. We expect confidence to improve gradually  over the forecast horizon under the assumption of a resolution to the European debt crisis and the emergence of a convincing plan formedium-term fiscal consolidation in the US. This should lead corporations to intensify investment particularly in areas neglected in the past couple of years (e.g. structures, transportation equipment).
Private residential investment has yet to bottom out as the persistently difficult labour market situation limits the scope for a rebound in the short term. At present, a flat supply of new homes meets a rising number of existing homes on sale. The resulting downward pressure on prices  further worsens the position of homeowners , leading to more mortgage defaults via a feedback loop. This situation is expected to ease in the course of 2012 and trigger a very subdued and gradual recovery of house prices and, subsequently, of residential investment.

Uncertain profile of fiscal consolidation
Fiscal policy is set to exert an increasing drag on economic growth over the forecast horizon.  On 2 August President Obama signed  the Budget Control Act of 2011 (BCA) which cuts federal spending over  the  next 10 years in exchange for raising the debt ceiling. The act imposes budget cuts  amounting to  at least USD  2.1 trillion until 2021. Out of this amount USD  0.9 trillion will come from agreed caps on discretionary spending while an additional USD 1.2 trillion is to be found by 23 November by the bipartisan Congressional Committee for Deficit Reduction (CCDR). If the Committee fails to reach an agreement,  broadbased spending cuts are to be applied automatically from 2013 of an amount equal to the difference between the agreed savings and the USD 1.2 trillion target.
The  BCA sets the US on a path of steady consolidation that is designed to be front-loaded in 2012 and 2013, with deficit reduction equivalent to 2.3% and 3% of GDP in both years. This results from the BCA-agreed spending cuts coupled with the scheduled expiration of the 2010 payroll tax cuts and unemployment benefits, the expiration of the 2001 and 2003 Bush tax cuts as well as the ongoing effect of  crisis-linked stimulus and other programmes coming to an end. 
However, the amount of actual fiscal  tightening over the forecast horizon is likely to be lower than implied by the current law, due to a number of recent initiatives aimed at easing the major fiscal drag ahead. This forecast assumes  that: (i) the least disputed tax-cuts-related part of the USD 447 bn  American Jobs Act proposed by President Obama in early September will be enacted into law generating a positive fiscal impulse of around 1% of GDP; (ii) the Bush tax cuts set to expire in 2012 are likely to be partially extended, thus easing the 2013 consolidation by around 1% of GDP. The extent of fiscal restraint in 2013 is unclear, due to the unknown outcome of the Committee's negotiations at the time of publication, as well as to the number of policy options currently discussed in Congress. 

Risks tilted to the downside
The risks to the outlook are  clearly  tilted to the downside.  Fiscal policy will remain a source of
uncertainty as the design of medium-term fiscal consolidation is complicated by the weak economic outlook and a political gridlock ahead of the presidential elections. Should the consolidation plan to emerge from the current debate be insufficiently ambitious or credible for financial markets, this would undermine already weak business and household confidence.  Resumingstock market declines  triggered by  any unfavourable policy developments domestically or internationally  could further  harm consumer confidence and discourage spending, putting the modest growth scenario at risk.