Henry Kaufman Roubini And Other Prophets Of Doom Say Financial Crisis Continues - Industry News - Portfolio.com

Economist Henry Kaufman became famous in the 1970s as the bear with the dire view. Now he and his heirs warn that the financial crisis is far from over and that systemic risks threaten to spread from the markets to the geopolitical realm.

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by Suzanne McGee Oct 15 2010


Image: Portfolio.com; designed by Sean Driscoll

Henry Kaufman is far from upbeat about the outlook for the U.S. economy or the financial system.

That should come as anything but a shock to anyone familiar with Kaufman’s background as an economic pundit. After all, he earned the nickname “Dr. Doom” nearly four decades ago for his bearish outlook on interest rates and the bond market and for his fear that financial havoc might spread to the political environment and society as a whole.

Even as politicians and others try to take comfort from the passage of the package of financial reform measures known as the Dodd-Frank Act, Kaufman is reluctant to relinquish his pessimism …“It’s a very cumbersome piece of legislation and creates a tremendous amount of uncertainty,” the economist and financial consultant says. “Many aspects will take years to come into effect, and there are many issues that still have to be resolved by regulators in negotiation with the private sector.”

That, Kaufman says, means that the Dodd-Frank Act has at least two major flaws … In the short term, he argues, rather than accelerating the rate at which credit is created in the economy, the uncertainty means credit growth will actually slow. The longer-term problem is more acute, he says: The legislation doesn’t address the problem of financial institutions that become “too big to fail,” as the saying goes.

“Over a longer period of time, the result of Dodd-Frank will be to increase the size of the government’s role in the economy and in the financial system specifically,” Kaufman says. “Instead of adopting policies that help to downsize financial institutions, we are making this more like the European or Japanese system.” That, he argues, is not a good thing for the financial system or its users. …

Image via WikipediaBut while Kaufman may be the original “Dr. Doom,” these days he is just one figure in a pantheon of prophets of doom. Among his heirs are figures like Nouriel Roubini, a professor at New York University and head of his own economic-forecasting consulting firm, who was one of those who diagnosed the credit bubble and forecast that it would come to an early end. Since 2008, Roubini has warned repeatedly that the financial system and the economy haven’t yet emerged from the crisis and that an intractable public debt problem still looms.

While Roubini has emphasized sovereign-debt problems of the kind that became all too evident in Greece this year, others are trying to draw attention to a different source of concern: … It is the emergence of cash-rich and commodity-rich states as political powerhouses rivaling—and in some cases trumping—traditional geopolitical powers such as the European Union and the United States.

Cover via AmazonThat is the focus of two recent books, one by Ian Bremmer, president of the Eurasia Group (The End of the Free Market: Who Wins the War Between States and Corporations?), and the other by journalist Eric Weiner, entitled The Shadow Market: How a Group of Wealthy Nations and Powerful Investors Secretly Dominate the World.

As the titles imply, the next generation of prophets of doom are focusing on different sources of systemic risk than those that brought the financial system to the brink of disaster in 2008. Weiner, for instance, suggests that if the problems associated with the shadow financial system (all the mortgage originators and architects of structured products) were scary, the problems that could follow the evolution of a “shadow market” composed of countries that view their economic power as something to be deployed in their geopolitical interests could prove far more threatening to the U.S. financial system.

Weiner chooses some well-known examples to prove his point. Among them are China’s ability to use its importance as a source of liquidity in the global markets and as a large investor in U.S. government securities to win favorable treatment in some disputes and fend off criticism of its human-rights policies. … He envisages a secretive new financial world emerging, one in which transactions take place outside of the public arena and end up being hard for regulators or the public to monitor. …

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Tech Professionals Say Venture Capital Model Has Changed Forever

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A slower market for initial public offerings is likely the new norm, and venture capitalists are likely to make smaller bets on smaller companies and make their returns from mergers and acquisitions of their portfolio companies.
That, at least, is what tech honchos surveyed by DLA Piper expect. That’s a major change for one of the most glamorous corners of the innovation business.
It may well mark the end of the big, bold, VC plays, said Peter Astiz, global co-head of the DLA Piper Technology Sector Practice.

Image via Wikipedia“This is a profound, game-changing development," Astiz said Tuesday in a statement. "If there is a long-term expectation that the IPO market will not rebound, that means a reduction in the number of dramatic ‘home runs’ for venture capital investors and lower overall returns. Fewer IPOs also means fewer small and medium-size public technology companies, which traditionally have been the acquirers for venture-backed company exits.”

Astiz went on to say that tech companies would continue to move forward and investors would still be active, but that the venture model is changing. "For startup tech companies, the bar is being raised, capital will be harder to come by, and pressure to perform will increase.”
Those expectations are reflected in the third-quarter report on venture exits by the National Venture Capital Association’s report in conjunction with Thomson Reuters. (Download a PDF of the report by clicking here.)

Image via CrunchBaseThe market for public offerings of venture-backed companies is recovering from the disastrous 2009 period. But it’s nowhere near the levels seen in the boom times of the late 1990s, and there haven’t been any blockbuster IPOs like that of Google.

Instead, venture capitalists have made their money through the sale of their portfolio companies to other firms. In the third quarter, there were 27 deals with disclosed values worth $3.8 billion, up from 22 deals worth $2.9 billion. As for IPOs, there were 14, worth $1.2 billion, in the third quarter. …
The technology professionals surveyed by DLA Piper agree. Nearly 60 percent say the venture model has been permanently altered. But that’s not all bad news, because with technologies like cloud-based computing available, it’s cheaper now to build a company. So VCs may be able to make smaller bets across more companies and get high rates of returns on those small bets.
In other topics, tech leaders told DLA Piper they expect:

• The economy will continue to grow, albeit slowly, with 85 percent of those surveyed expecting at least a couple of percentage points of growth in the coming year.
• Seventy-two percent expect sales increases in the coming year.
• Forty-three percent expect to keep staffing levels flat.

“While some economists and headlines question whether the U.S. economy is headed for a double-dip recession, technology leaders seem confident of a sustained recovery,” Astiz said. “Tech leaders are forecasting stronger sales and earnings across the board, yet they are not planning to invest in hiring nor R&D. This suggests that we may be in for a prolonged period of guarded investment and slow growth.”

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Finding the Right Job Still Challenging for Many

October 14, 2010 (PLANSPONSOR.com) – Thirty-six percent of workers with college degrees in a new CareerBuilder survey now say they wish they had studied something else when they were in school.

Image by Getty Images via @daylife

Image via CrunchBaseA CareerBuilder news release about the poll said 26% saw the market for jobs in their field get worse from the time they started their college studies to when they actually hit the job market.

Fifty-six percent of respondents found a job in their field within 12 months of graduation, but others were apparently not so lucky. Nineteen percent of college-educated workers still have not found work in their desired profession, according to the poll.

Not only that, 27% who graduated from college 10 years ago or longer say they still haven’t found work in their field, while 21% say it took three years or longer, and 12% five years or longer.

"The job market has been challenging for all workers, regardless of degree level, and has prompted many to think about learning skills for high demand and emerging jobs," said Rosemary Haefner, vice president of human resources at CareerBuilder, in the news release.

Building new skill sets is a priority for more than one in (13 %) workers who said they have plans to go back to school this year to make themselves more marketable.

This survey was conducted online within the U.S. by Harris Interactive among 2,042 U.S. workers with college degrees (employed full-time, not self-employed, both government and non-government), age 18 and over, between August 17 and September 2, 2010.

Fred Schneyer

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Why I Hire Former Convicts and Gang Members

BNET Blog

By John Shegerian, Electronic Recyclers International, Fresno, Calif.

Image via Wikipedia

When I took over Electronic Recyclers International in late 2004, it was a failing company. I decided to restructure and rebrand it. And when it came time to hire new employees, I saw an opportunity to hire individuals from what have typically been marginalized segments of society: former convicts, former gang members, the homeless, people recovering from drug addiction, and people coming off of welfare.

Image via WikipediaIt wasn’t the first time I’d hired employees looking for a second chance. Back in 1993, I co-founded Homeboy Tortillas and Homeboy Industries — two small businesses that train and employ former gang members, helping them transition into the workforce. It was a landmark moment in my life, and from then on, I wanted to make sure any business I took part in had a bottom line for profit and for social responsibility. I felt strongly about continuing that mission at the recycling company, which safely dismantles and recycles electronic waste.

Everyone at our company buys into that mission. … We all agreed that we need to make money, but also that we can seek to turn people’s lives around by opening our doors and our hearts to those in need.

Hiring marginalized workers
We hire our workers through a temp agency, and all different types of jobs — from scraps sorters to management positions — are open to applicants. It just depends on their skills and education level, and what they’re interested in doing. They go through extensive background checks, drug testing, and questioning. We put them through a skills test to see if they’re as capable as they claim to be. Depending on the position, they’ll generally start at the bottom, but if they prove themselves, they’ll have the chance to work their way up.

We partner new at-risk employees with those who’ve been on the job longer. They’re able to mentor the new hires and help them adjust to their work situations. But we emphasize personal accountability, so the workers are aware that they are responsible for making the right choices. … I’ve generally found that when you hire someone who’s looking for one last chance to turn his life around, he’ll roll up his sleeves and give you everything he’s got.

Sometimes people don’t work out, but in the 17 years I’ve been hiring people from disadvantaged backgrounds, I’ve never had a major problem. Most of the time, if someone we’ve hired is slipping back into old habits, he’ll just stop showing up or he’ll give notice to his supervisor. …

From drug dealer to top salesman
About four years ago, a former convict came in for an interview. He was a smallish guy with over 100 tattoos over his body. … I talked to him for a while and he told me he’d had 60 interviews, but no job offers. He said, “They don’t even want to talk to me after they see all the tattoos.”

He’d been in prison for dealing drugs, but he seemed very intelligent, so I hired him. He did a great job working his way up on the line crew, and after a while, my wife, who is our COO, took notice of him. She said, “He’s a really smart guy, he’s got some good skills. If he could sell drugs years ago, what’s so different about selling commodities for our company?”
Now, he’s our top commodities salesperson. He’s taking calls 19 hours a day from places around the world, buying and selling plastics, glass, copper, and other materials. …

Building a stronger company and a better world

Image via WikipediaBetween 50 and 60 of our 400 employees come from traditionally marginalized groups, and we’re receiving some tax incentives for hiring workers through the welfare-to-work program — depending on the state, employers can receive up to $9,000 in tax credit for each employee who meets certain criteria through the Work Opportunity Tax Credit program.  …

I think our hiring practices make our company stronger because they show that our management is sensitive to the human condition. We’re all one accident or one tragedy away from being in a tight spot. Business can be a battle, but when a company shows its DNA this way, it makes for a very tight-knit group and helps us work together.

There’s not a community in America that isn’t suffering from drug, gang, and recidivism problems. … If every business owner hired just one person from the margins, it could make a world of difference within the community. Helping people get that second chance is our great opportunity and our great challenge.

John Shegerian serves on the California Governor’s Gang Advisory Committee, helping state legislators create policies to reduce gang violence.
– As told to Kathryn Hawkins

Resources:

• Consider the pros and cons of hiring workers who’ve been incarcerated.

• Learn about the Work Opportunity Tax Credit, which provides tax incentives to companies that hire disenfranchised workers.

• Help support the nonprofit Homeboy Industries, which was forced to lay off most of its staff due to California’s budget crisis.

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Do you have a long-term pricing strategy?

Actively pricing products across their life cycle is increasingly important, particularly in innovation-intensive industries. Failing to do so may forego potential profits or even destroy value.

McKinsey Quarterly
OCTOBER 2010 • Walter L. Baker Michael V. Marn, and Craig C. Zawada



In the late 1990s, the world’s three major independent producers of hard-disk drives invested about $6.5 billion in research and development in the course of just four years. During the next decade, the bytes that can be stored per unit of a drive’s surface area increased a thousandfold—while the price per unit of that surface area dropped 70 percent. The three companies created enormous value for customers. Yet their failure to price products correctly throughout this period of significant innovation contributed to net losses totaling almost $800 million.

Image via WikipediaEntire industries can suffer when companies fail to grasp the importance of pricing products or services across the life cycle, particularly in innovation-intensive sectors such as consumer electronics and consumer durables, IT hardware and software, medical devices, and pharmaceuticals. … Companies introduce products more regularly, with life cycles often measured in months, not years. There’s external pressure for low prices from customers expecting more for less and internal pressure from the belief that pricing is a make-or-break factor when products launch. And a company may have a number of related products in the marketplace simultaneously, which complicates their life cycle pricing.

Image via WikipediaTwo points are essential to price effectively throughout the life of a product or service. First, companies should actively manage the trade-off between price and volume (or profit and market share) to maximize returns. Most businesses fail to test customer value perceptions and price sensitivity after products launch and have no idea how the critical trade-off between price and volume shifts over time. Second, companies must make pricing decisions in the context of their broader product portfolios because when they have multiple generations of a product in a market, a price move for one can have important implications for others.

With these two principles in mind, companies should consider how they respond to pricing challenges during the three major phases in the life cycle of a product or service: launch, midlife, and late life.

The launch phase

Image via Wikipedia… In the launch phase, it’s critical to concentrate on three imperatives: setting a launch price that maximizes the long-term capture of value, avoiding “anchor effects” from older products, and working the product portfolio to a company’s advantage.

One prerequisite for setting a launch price that maximizes long-term value is conducting scenario-based analyses that incorporate different pricing models, potential responses by customers and competitors, and the implications for earnings. This approach can help companies avoid common mistakes, such as setting the launch price too low or reducing a product’s price soon after launch. The careful adjustment of prices for existing products also can minimize the degree to which they drag down prices for new ones. More broadly, businesses should assess new-product pricing in the context of their existing product portfolios. (For a step-by-step example of how to use pricing strategy to manage a product portfolio, see the audio-enhanced interactive exhibit, “Pricing new products in a portfolio.”)

Pricing new products in a portfolio
With the right pricing strategy, a company can avoid discounting and instead compete at higher average price points based on product benefits.
Launch Interactive

Interactive: Pricing new products in a portfolio

Consider the case of a medical-device manufacturer that launched new versions of all major products every 6 to 18 months. Each version—whether it was a significant innovation or a minor improvement—was priced only a few percentage points above the existing one, in an effort to encourage migration and mitigate potential customer backlash. The company would then drop the price of older products precipitously (by 20 to 40 percent) while continuing to sell them for an extended period because of ongoing demand from some customers and the company’s desire to provide a lower-cost alternative to the new products.
This approach dragged down the prices of new products because their incremental value versus the old ones remained more or less constant. As happens at many companies, the average price for each product line declined every year despite annual R&D investments in the hundreds of millions of dollars. … Once the company recognized what was happening, it eliminated “fire sales” on older products, changed the incentives of the sales force to support the new life cycle–pricing strategy, and carefully launched subsequent products at greater premiums.

The midlife phase

Once a product has launched and gained stable market acceptance, it enters the midlife phase. This phase … often occurs when companies earn a majority of a product’s operating profit but also when “me too” products may appear and when price compression is most extreme. Organizations rarely revisit their price–volume trade-offs or value maps at this point, nor do they undertake essential market-based customer research. If they did, they could more effectively fine tuning price–volume trade-offs, anticipate internal and external pricing triggers, and identify and adopt new pricing models that capture more value. …

Image via WikipediaCompanies should change product prices in midlife carefully. Managers need to analyze whether the changes are appropriate (for example, whether lowering prices will raise life cycle profits) and, if so, the most effective timing. One personal-computer company, for example, conducted weekly market price tests, implementing cuts only when unit sales had declined and the tests showed that a lower price would significantly increase unit sales. Managing prices in this way (rather than by steadily reducing them) during the midlife stage has allowed the company to generate tens of millions of dollars in additional operating profit over the lifetime of most of its computer models.

There are many midlife trigger events for pricing: internal (such as the launch of a new model or a change in cost position) and external (price moves and product introductions by competitors or shifts in customer demand, for example). Companies need to monitor the market so they can anticipate such events, or they will face the consequences of failing to take advantage of changes in their rivals’ behavior. Take the case of a medical-device company that, after enjoying a period of product exclusivity, decided to lower prices simply because that had been its standard practice. The company then failed to respond when its two main competitors introduced products similar to its own but at much higher prices. Instead of raising prices to capture a larger margin—or at least maintaining them—the company continued to discount, hurting prices and margins for everyone, without gaining market share.
…[A] new midlife-pricing model can reinvigorate a product. Maintenance services for jet engines, for example, were historically undertaken by engine manufacturers using a standard pricing model of “time and materials” associated with each visit to a service shop. As third-party service providers entered the market at lower prices and began to gain prominence, one engine manufacturer introduced long-term service agreements based on hours of flight operation, which roughly correlates with engine wear and tear. Airlines liked the new model because it made their service costs highly predictable, the manufacturer’s volume and margins grew substantially, and industry price compression slowed.

The late-life phase

Counterintuitively, the late life of a product may be an opportune time to raise rather than lower prices. The reason is that its “all in” costs may have increased or its inherent value for the remaining customers may not have decreased as much as it has for those that moved on. … All this may translate into a willingness to pay higher prices. … Organizations should be guided by three late-life pricing imperatives: capitalizing on pockets of customers with a high willingness to pay, minimizing competition with next-generation products, and actively working to reduce unfavorable product proliferation.
Certain customers may be fairly price insensitive for an older product because they are more comfortable with it, see more value in it, or regard switching costs as prohibitive. A semiconductor manufacturer that profitably managed the transition from a legacy product to a new one wanted customers to adopt it but recognized that the older product still had strong value for some users. The company actually raised the price of the late-life legacy product after the new one launched. By continuing to sell the older product at significantly higher margins for several more quarters, the company captured at least $250 million in additional profits. …
Even if a company’s first instinct is to discount older products before or just after the launch of a new one, excessive markdowns may hurt newer offerings by making older products seem like a better value. A way to hasten the exit from older products and to achieve higher margins on their remaining sales is to follow the lead of the semiconductor manufacturer above … although companies must guard against the risk that higher prices will create obsolete or expired inventory. Another approach—simply eliminating products—can reduce needless complexity in supply chains, service operations, and customer service.
Finally, many companies, especially those selling to businesses, do not manage product proliferation well: … In addition, few companies carefully evaluate their products’ economics over time, especially during the late-life stage. While doing so is troublesome for all companies, it is especially problematic for those using a cost-plus methodology, in which prices are set by applying standard margins to standard product costs.
An industrial-equipment manufacturer, for example, ignored life cycle differences and spread its costs across all products—making it appear that it was still making a reasonable margin on older ones. A closer examination of the company’s costs in each phase showed that older products cost substantially more to produce than expected and that many were actually unprofitable (exhibit). Once this came to light, the company eliminated some older, unprofitable products and charged more for others so that it was paid appropriately for producing and stocking them.

Exhibit: Ignoring life cycle differences, one company overestimated the profitability of some of its older products.

Sustaining returns across the life cycle

Companies that capture price advantages across the life cycle of their products have several distinct characteristics. Their perspective on pricing is not myopic: they continually strive to think across life cycle stages, building all their questions and analyses into that framework. Managers regularly scan internally and externally for information about potential trigger events. …[The] ability to undertake fast, deep customer research or to produce insightful analyses on a multitude of variables—is higher than that of most companies. …[Their] capabilities reflect the more dynamic and interdependent pricing environment that prevails when companies manage product life cycles. Businesses can take a number of steps to manage and price their products in this way:

• Examine life cycle pricing up front. … [Savvy] companies … consider alternative price–volume trade-offs and strategies over time and envision how each scenario might play out across different customer segments. The process explicitly incorporates price moves during the life cycle and anticipates internal or external triggers that might prompt the company to shift prices up or down.
• Maintain a longitudinal view. … Organizations that capture the price advantage escape the common “launch and forget” pricing pitfall once new products hit the market. Their review processes explicitly monitor life cycle pricing performance, while properly aligned incentives keep employees focused on the opportunity. Much of life cycle pricing inherently involves setting expectations about the way prices and volumes may play out. Sophisticated companies track these assumptions and regularly check performance against them.
• Find ways to increase life cycle value. Companies that manage life cycle pricing well are dynamic and adaptive. … Beginning with a high-level plan for managing a product to the end of its life cycle, these companies refine their approach by constantly monitoring market conditions, the moves of competitors, internal operational changes, and customer perceptions.

Companies that master pricing do so across the three phases of a product’s life cycle—launch, midlife, and late life—and make decisions in the context of adjacent products in their portfolios. In this way, these companies ensure that they reap the full rewards of their innovations by creating price advantages for themselves.

About the Authors

Walter Baker is a principal in McKinsey’s Atlanta office, Michael Marn is a principal in the Cleveland office, and Craig Zawada is a principal in the Calgary office. They are coauthors of the second edition of The Price Advantage (Wiley Finance, June 2010).

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