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Tracking the consumer evolution of financial services

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The World Development Indicators 2010 | World Bank


For economists and data geeks, the World Bank is today releasing an impressive document containing a host of statistics and economic facts covering all the worlds economies and showing shifts in key areas as noted below.

World Development Indicators 2010 | World Bank

WASHINGTON, April 20, 2010 — The World Development Indicators (WDI) 2010, released today, gives a statistical progress toward achieving the Millennium Development Goals (MDGs).

The WDI database, launched along with the World Bank’s Open Data initiative to provide free data to all users, includes more than 900 indicators documenting the state of all the world’s economies. The WDI covers education, health, poverty, environment, economy, trade, and much more.

“The WDI provides a valuable statistical picture of the world and how far we’ve come in advancing development,” said Justin Yifu Lin, the World Bank’s Chief Economist and the Senior Vice President for Development Economics.  “Making this comprehensive data free for all is a dream come true.”

WORLD DEVELOPMENT INDICATORS 2010

Complete Report as One File(18mb pdf)
http://media.worldbank.org/secure/wdi2010/pdf/complete.pdf

Preface, Acknowledgments, Table of Contents, Partners, Users Guide (1.27 mb
pdf)
http://media.worldbank.org/secure/wdi2010/pdf/Frontmatter.pdf

World View (3.14 mb pdf)
http://media.worldbank.org/secure/wdi2010/pdf/section1.pdf

People (3.03 mb pdf)
http://media.worldbank.org/secure/wdi2010/pdf/section2.pdf

Environment (2.52 mb pdf)
http://media.worldbank.org/secure/wdi2010/pdf/section3.pdf

Economy (3.69mb pdf)
http://media.worldbank.org/secure/wdi2010/pdf/section4.pdf

States and Markets (2.35mb pdf)
http://media.worldbank.org/secure/wdi2010/pdf/section5.pdf

Global Links (2.84mb pdf)
http://media.worldbank.org/secure/wdi2010/pdf/section6.pdf

Primary Data Documentation, Statistical Methods, Credits, Bibliography, Index
of Indicators (521k pdf)
http://media.worldbank.org/secure/wdi2010/pdf/Backmatter.pdf

Written by Colin Henderson

April 20, 2010 at 11:00

Posted in economy

Tagged with , ,

Video – The Descent of Finance | upcoming HBR piece from Niall Ferguson


Written by Colin Henderson

March 6, 2010 at 11:09

“The Fourth Turning” | demographics and predictable change


Demographics is an interesting science, and one that has real impacts on society over time that are really only apparent after the fact.  Mauldin recounts a conversation with Strauss and Howe on their book, “The Fourth Turning“.  The premise is that the US and the western world move in 80 year cycles, with four ‘seasons’ within each cycle.  As historians, they have looked back in time, and concluded the cycles are quite consistent.

Whether you buy that or not, the four cycles noted do describe the 20th century well, and place us firmly in the latter part of the third, or ‘unravelling’ cycle/ first part of the ‘crisis’ cycle.  We have been/ are in a period of high individualism and discredited institutions.  We are entering a period of tearing down, and re-building.  Following the logic, we will enter a period of renewal, collective optimism and willingness to work together and help each other soon.  We can always hope we do not need the full 20 years for the fourth ‘crisis’ cycle.  What do you think?

Outside the Box | Mauldin

The First Turning is referred to by Howe as a High. As this follows a period of crisis, one of the hallmarks of a First Turning is a heightened sense of community and collective optimism, driven in part by the fact that the society has just come through a difficult and challenging time. Consequently, during First Turnings, societal institutions tend to be strong while individualism is weak. The post-World War II “High” of the mid-1940s through early ’60s is the most recent example of a First Turning.

The Second Turning, called an Awakening, typically starts out feeling like the high tide of a High, with signs of progress and prosperity everywhere. But just as everything seems to be going along swimmingly, large swaths of society begin to chaff under the social conformity of the High, beginning to gravitate to more individualistic pursuits and demanding that their personal interests come first. You may recognize the “Consciousness Revolution” of the mid-1960s through early 1980s, correctly, as the Second Turning.

Next up, the Third Turning, which Howe calls an Unraveling, is much the opposite of a High. To wit, individualism dominates, while institutions are increasingly weak and discredited. Quoting Howe on the Unraveling…

“This is a time when social authority feels inconsequential, the culture feels exhausted, and people feel bewildered by the number of options available to them. It is a time of celebrity circuses and a tremendous amount of freedom and creativity in our personal lives, but very little sense of public purpose.

The most recent Third Turning began in the mid-’80s with Morning in America, and continued through the ’90s. Previous periods of Unraveling in American history were also decades of cynicism and bad manners. Think of the 1920s, the 1850s, the 1760s. And history teaches us that the Third Turnings inevitably end in Fourth Turnings.

Finally, there is the Fourth Turning, called a Crisis. The recent Third Turning appears to be winding down, and we are currently on the cusp of a Fourth Turning. This is a time of great turmoil, when society’s basic institutions are torn down and rebuilt, and seemingly insurmountable problems are addressed. During Fourth Turnings, America engages in a struggle for its very survival and redefines its identity as a nation. Large wars are often a part of this process. The American Revolution, Civil War, Great Depression, and World War II were all features of past Fourth Turnings.

Written by Colin Henderson

June 30, 2009 at 10:27

OECD forecast revised upward, but underlying economic forecast conditions remain unchanged


The OECD today produced a report that is sure to be controversial. They are upgrading all their forecasts both for 2009, and 2010, but that FT headline mask the real underlying situation as it applies to consumers and businesses which I see as relatively no change from other forecasts.

OECD sees strongest outlook since 2007 | FT

Country Forecast for 2009 Forecast for 2010
Current Previous Current Previous
US -2.8% -4.0% +0.9% 0%
China +7.7% +6.3% +9.3% +8.5%
Japan -6.8% -6.6% +0.7% -0.5%
Eurozone -4.8% -4.1% 0% -0.3%
Source: OECD

The report notes that the unemployment rates and slackness in the world economies will persist at end of 2010.  The optimism reflected in the headline appears centred on the GDP numbers, which are being driven by Government spending, not consumer or business spending.  Recovery is still looking L-shaped.

This chart on housing is illustrative of the depth of the shift.  The Canadian Price to Rent/ Income remains high relative to others.

world house prices

Here is the link to the report.

OECD June 2009

Here are selected country headlines.

Canada:

The sharp contraction that began in the last quarter of 2008 intensified in the first quarter of 2009, led by collapsing exports, fixed investment and stockbuilding. The pace of contraction appears to be slowing, but recessionary conditions are expected to linger through the third quarter, with only a slow recovery thereafter. Unemployment is projected to keep rising until early 2010 and inflation pressures to stay muted.

US

The US economy is going through a severe and protracted recession which is projected to bottom out later this year, as fiscal and monetary support takes hold and the housing cycle bottoms out. In 2010, even after a recovery gets under way, GDP growth is likely to remain weak because of the slowdown
in capital accumulation, negative wealth effects and still adverse, albeit improving, financial conditions. In this environment, a considerable degree of economic slack, especially in the labourmarket, is likely to persist over the projection period, bringing inflation to very low rates.

Japan

The global crisis triggered a deep recession that is likely to be the most severe in Japan’s post-war history. The contraction in world trade led to a sharp plunge in exports and business investment, while falling employment and wages have reduced private consumption, leading to a projected
output decline of almost 7% in 2009. Fiscal stimulus is expected to lift output growth into positive territory from the second half of 2009, although at a rate that remains below 1% through 2010.

Euro Area

The euro area is in a deep recession, with external demand collapsing and domestic demand being weakened by tight financial conditions, rising unemployment and heightened uncertainty. Activity is expected to contract throughout 2009 and pick up only gradually in 2010, as the tensions in financial markets start to fade and the full effects of policy stimulus are felt. Rapid growth in unemployment and a large negative output gap will continue to dampen inflationary pressures throughout the projection period.

UK

The economy is in a severe recession, with output projected to decline by 4.3% in 2009 and recover only mildly in 2010. The financial crisis has severely impaired the supply of credit and house prices have fallen sharply, thus restraining business and household spending. The depreciation of sterling is mitigating the downturn, but cannot overcome falling foreign demand. The unemployment rate is projected to rise towards 10% in 2010, with inflation well below the 2% target for an extended period.

Written by Colin Henderson

June 24, 2009 at 09:32

Posted in economy

Tagged with , ,

The Aftermath of Financial Crises | study


A short and useful paper offerring some points that help to frame the next few years for strategic planning purposes.  This to be read of course in the context of politicians preaching ‘road to recovery’ which leaves the uninformed with the view that we will get over this blip and back to normal.

I prefer to think of this as a shift that will profoundly change things for the next few years, with some good and some not so good elements in that shift.  It may be good that the banking industry will be shaken up, and out of that some innovation and better services will appear.  The less good part is that more bank customers will have to work harder and longer for less money, and accumulation of wealth will return to a savings culture rather than an asset accumulation one.

All this provides a different prospect for financial services, and products will need to be restructured or invented to match those busier, poorer customers who nonetheless have financial goals such as debt reduction and wealth accumulation for retirement.

The paper outlines three core results of financial crises.  This is based on empirical evidence of 18 post war crises in the developed world, including “the big five” (Spain 1977, Norway 1987, Finland, 1991, Sweden, 1991, and Japan, 1992) along with some developing country crises (the 1997–1998
Asian crisis, Colombia 1998; and Argentina 2001.

No real surprises here;  Low asset values, high unemployment, and high government debt.  Click through for details (13 pages).

The Aftermath of Financial Crises pdf – Reinhart (Univ of Maryland), and Rogoff (Harvard)

First, asset market collapses are deep and prolonged. Real housing price  declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years.

Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment.

Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes.

Interestingly, the main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system. Admittedly, bailout costs are difficult to measure, and there is considerable divergence among estimates from competing studies. But even upper-bound estimates pale next to actual measured rises in public debt. In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn.

Written by Colin Henderson

May 25, 2009 at 09:44

A more pragmatic view of the near future for scenario planning


Right after I posted this piece, thinking that finally people were starting to look to the future with a more pragmatic eye,  I came across this from David Olive in The Star.  I am by nature an optimist, however rationalisations such as this piece cannot alter some obvious facts.

David Olive: Will the economy get worse? | The Star

No. The current market downturn is still small by historical standards and the seeds of recovery are already planted. By talking the crisis up, we’re only prolonging it. Here’s some ammunition for the optimists among us.

First we can begin with this graph of the unemployment rate of growth compared to previous recessions.
07jobs-graf01
Both the rate of fall off in jobs and the extent of fall off are unprecedented.  incidentally no-one is expecting a turnaround in March.

Secondly, the value of assets in the world since a peak in Oct 2007 has dropped between 25% – 65% depending on mix of real estate and equities.  Yet consumer debt levels remain at historic highs.

No-one disputes that there will be a turnaround in the economy sometime, and whether it is 2009, 2010, or 2011 is not something I am qualified to judge.  However in my area of interest, or in industry in general, it is clear that the ‘recovery’ will not bring back ‘business as usual’.  The unsaid truth about recovery remains that it will not take us back to where we were before.

Relevance to Bankwatch:
Surely a better approach would be to plan for  a different future – a set of new assumptions to build into strategic plans that are not based on a return to ‘normal’   – for example, over the next 7 years what if we see:

  1. reduced car and home ownership by 30%
  2. increase in rent as a way of life/ reduced home ownership
  3. debt reduction as a way of life for many segments
  4. retirees with portfolios valued at 25 % of what they had expected

These are new reality scenarios that banks must consider, and more likely to generate a sense of positiveness by being grounded in a sense of the possible.

Written by Colin Henderson

March 9, 2009 at 22:54

Enter the Zombie banks: Liquidity fixes for banks will not solve their solvency problem


James Baker of all people sums up precisely why the current government approaches to fixing banks’ problems is flawed.  As you will have gathered I fall in the Niall Ferguson/ Martin Wolf camp that says this situation is not just worse than we think but more importantly it is different than the prevailing wisdom.   We risk fixing the wrong problem in other words.

‘How Washington can prevent ‘zombie banks’ | Financial Times

Beginning in 1990, Japan suffered a collapse in real estate and stock market prices that pushed major banks into insolvency. Rather than follow America’s tough recommendation – and close or recapitalise these banks – Japan took an easier approach. It kept banks marginally functional through explicit or implicit guarantees and piecemeal government bail-outs. The resulting “zombie banks” – neither alive nor dead – could not support economic growth.

A period of feeble economic performance called Japan’s “lost decade” resulted.

Unfortunately, the US may be repeating Japan’s mistake by viewing our current banking crisis as one of liquidity and not solvency. Most proposals advanced thus far assume that, once confidence in financial markets is restored, banks will recover.

To prevent a bank run, all depositors of recapitalised banks should be fully guaranteed, even if their deposit exceeds the Federal Deposit Insurance Corporation maximum of $250,000 (€197,000, £175,000). But bank boards of directors and senior management should be replaced and, unfortunately, shareholders will lose their investment. Optimally, bondholders would be wiped out, too. But the risk of a crash in the bond market means that bondholders may receive only a haircut. All of this is harsh, but required if we are ultimately to return market discipline to our financial sector.

Baker suggests quick and decisive action, and I agree.

This is a crisis of debt and bubble asset values.  The asset values are being re-stated in the equity markets and housing markets as we see evey day.  That horse has left the barn, as they say.  The result is a set of debt around the world on the balance sheets of companies and consumers that is too high relative to the asset base.

The prevailing theme of government and therefore consumer belief is that government stimulus plans will address the economic shortfalls, and return us to growth later in 2009.  But what does that mean, even if successful?

The key is to define “growth” and what that means.  That would mean GDP, that mix of consumer, government and businesss expenditures and investments is no longer dropping.  There are two key points that have to be said here.  Even if growth in GDP returns, that does not mean asset values will return to 2007 levels – no-one can believe that now.  Despite a return to normal patterns of consumer, business and government expenditures sometime in the next 2 years, house prices will not rise by the 25 – 50% that would be required to attain 2007 levels, nor is it likely that the stock markets will grow the 100% + that will be required to return to 2007 levels.  Those things are possible, but we have to believe unlikely in the near term (5 – 7 years)

As Baker states clearly above, this is a crisis of solvency.  A liquidity crisis merely means value is tied up in assets that are not quickly useable as cash.  Solvency means debt exceeds asset values.  The banks have a solvency crisis.  That brings be back to Niall’s point.  This is a crisis of debt.

The delusion that a crisis of excess debt can be solved by creating more debt is at the heart of the Great Repression. Yet that is precisely what most governments propose to do. (Niall Ferguson/ LA Times Feb 6th, 2009)

A crisis of solvency has requires help for debtors and there is some relief coming on that for US people mortgages, although the plans are not yet completed.

But the worry is the banks.  As Baker says above, and Wolf said yesterday on the Fareed interview on CNN banks are frozen in a state of inaction by virtue of potential asset value losses that exceed their capital base.  They also cannot generate new assets, ie lend, because they do not have an adequate capital base to support.  Enter, what I have been calling financial utilities, and Baker calls zombie banks.  Banks that are moribund and merely exist to provide very basic functions under the guidance and auspices of their bureaucrat overseers.  This does not bode well for innovation, nor new and better services.

Relevance to Bankwatch:

The good news is that the opportunity remains for those that choose to accept it.  This timing of this economic mess is not co-incidence and although few predicted the precise date, many knew a day of reckoning was to come [link to The Upside of Down].  When Thomas Homer-Dixon wrote that book in 2005 the characterisations of stress in the world he saw were these.

Homer-Dixon contends that five “tectonic stresses” are accumulating deep underneath the surface of today’s global order:

  • energy stress, especially from increasing scarcity of conventional oil;
  • economic stress from greater global economic instability and widening income gaps between rich and poor;
  • demographic stress from differentials in population growth rates between rich and poor societies and from expansion of megacities in poor societies;
  • environmental stress from worsening damage to land, water forests, and fisheries; and,
  • climate stress from changes in the composition of Earth’s atmosphere.

With the benefit of hindsight it is easy to see he was correct in the assessment.  More imporantly though these stresses point to a systemic shift in the world that requires different and better solutions, if we are to mitigate future crises, economic and otherwise.  For example it is all very well to point to the Keynesian approach of replacing consumer spending with government spending to address the problem, but what ought the government spend its money on, if the target is a different and better system than we have today?

Going back to the banks’ – the information we have just summarised strongly suggests they are not going back to the way things were before.  What better opportunity to rethink strategy.  We are now in a period of an experential economy, powered by customer empowerment.  Internet has seen to that and that change is also systemic.

If a big bank can really, and I mean really, grasp the power of internet, and the associated cost benefits associated with customer empowerment, ie, customers willingly doing the work for them, in return for better value, and banking on their terms. just perhaps a bank could join in the disruption for banking that is surely upon us.

Written by Colin Henderson

March 2, 2009 at 14:09

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