Tiny Jamaica’s factory of speed

Financial Review

PUBLISHED: 28 Jul 2012

Anna Bernasek

The race ends in the blink of an eye. With millions watching around the world, a pistol shatters the silence and in a little over nine seconds, a mere 40 strides, the 100-metre sprint is history. The 100-metre event, among the oldest and greatest athletic competitions ever devised, is the ultimate test of nerve, skill and explosive athleticism. That sprint in the London Olympics will probably decide the fastest person in human history.

Favoured to win is the metaphorically named Jamaican sprinter, Usain St Leo Bolt. At 26, Bolt has been the runner to beat since winning three gold medals in Beijing in 2008 for the 100 metres, 200 metres and 4x100-metre relay. Bolt also holds the record for the fastest 100-metre sprint ever, an incredible 9.58 seconds.

He is an extraordinary physical specimen. At 6ft 5in (195cm) and weighing 200 pounds (90kg), Bolt has the physique of an Olympic swimmer, rather than the more compact frame typical of a sprinter.

There are two crucial factors in sprinting ability. One is stride frequency: how fast you can step. The other is stride length: how long each of those steps is. World-class sprinters tend to have very fast stride frequency but ordinary stature, lengthening their strides by applying extraordinary force. Bolt turns his size into an advantage and uses not only remarkable strength but his long bone structure to dominate opponents.

His biggest threat is his teammate and training partner Yohan Blake. The only sprinters close to their ability are Americans Tyson Gay and Justin Gatlin. But London bookmakers are offering overwhelming odds that one of the Jamaicans will win.

Which raises a fascinating question. In a nation of just 2.8 million people, it’s incredible that Jamaica has produced not just one contender for the fastest person in the world, but two. You’d expect the US – the richest nation in the world, with a long sporting tradition and a population 100 times greater – to produce champions. Is it pure luck that Jamaica is sending not one but two of the fastest men in the world to London?

It turns out Bolt and Blake are not unique in Jamaica. The country also has some of the top women sprinters in the world, including Veronica Campbell-Brown and Shelly-Ann Fraser-Pryce.

In the past 75 years, Jamaica has won 42 Commonwealth gold medals, 14 world championship gold medals and 13 Olympic gold medals in athletics. Looking at the 100-metre event alone, Jamaica has been the leader. Its sprinters have beaten 9.85 seconds in the event 46 times, while sprinters from its closest rival, the US, beat that mark only 19 times.

How does a tiny island nation in the Caribbean produce the best sprinters in the world? It doesn’t happen in a vacuum. When you take a look, you find Jamaica has created an exceptional athletic culture. It’s built a factory of speed.

The story starts in 1948, when two little-known Jamaicans, Arthur Wint and Herbert McKenley, won Olympic gold and two silver medals in sprinting. Then, in 1976, Jamaican sprinter Donald Quarrie, one of the sport’s all-time greats, inspired the nation by winning Olympic gold in the 200 metres and silver in the 100 metres.

Bolt wasn’t groomed to sprint from birth. But when a cricket coach recognised his ability and encouraged him to run, he entered a well-organised system of training, competition and coaching that brought forth his remarkable abilities. There’s no one thing behind it. It’s as important to have tough competitors as good coaches. And it’s as important to have peer approval as financial backing.

Cultures of excellence – of winning – are among the most fascinating and prized economic phenomena. Such things come to exist in an individual company, or in a city or region. They don’t last forever, nothing does. But when they thrive, they produce breathtaking results.

It’s perhaps the most important question in business and economics. How do you create a culture of success? That question gets a lot of attention but it hasn’t been satisfactorily answered, at least not yet. After all, a lot of places have billed themselves as “the next Silicon Valley”, but none of them has succeeded. And let’s not even discuss all the companies that bill themselves as “the next Google”.

While the subject remains shrouded in mystery, there are tantalising clues to creating a winning culture. For one, you need pathbreakers. There would be no Bolt without Wint, McKenley and Quarrie. And money matters. The Jamaican Amateur Athletic Association is a key player, as is the system of sponsorship of pro track athletes. Then there are the coaches and gurus. Pablo McNeil, an Olympic sprinter himself, was among Bolt’s first coaches.

Finally, politics and culture come into play. Bolt attracted personal attention all the way up to the Prime Minister, and there was no shortage of peer approval for an exceptional sprinter in Jamaica.

Business people and economists often use the language of competitive sport to describe the world of commerce. As the Olympics unfold, perhaps we’ll learn a few lessons about how communities can intelligently compete and create lasting success.

Front-running just more secrets and lies

Financial Review

PUBLISHED: 21 Jul 2012

Anna Bernasek 

Before getting into the Libor mess, allow me to introduce a completely different financial scandal.

The latest exposé of how some financial players make their money centres on gaining advance knowledge of analyst recommendations. A few well-connected hedge funds appear to have come up with a clever way of front-running the market by finding out when analysts are about to change their opinions on stocks, before they become public.

According to a report in The New York Times, hedge funds controlled by BlackRock, Two Sigma Investments and Marshall Wace created comprehensive surveys for stock analysts to enable those funds to predict upcoming shifts in stock recommendations. The funds were positioned to make quick profits ahead of public disclosure.

It seems to have been something of a shared secret. Analysts across the industry are reported to have participated in these surveys including those at Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Merrill Lynch and UBS while the practice grew over recent years. And not without reason. When a well-regarded analyst changes her view on a stock it tends to affect the price. Any hedge fund that knows ahead of time is almost guaranteed a profit.

Front-running is a practice as old as the markets. As much as organised markets offer attractive liquidity and transparency, they also afford unique opportunities for parasitic operators to take advantage of unsuspecting customers and the general public.

According to an internal memo by Barclays, which owned a money management company conducting analyst surveys, the practice was understood: “The results support prior evidence that our signal enables front-running individual analyst recommendations.”

It’s further evidence that what’s behind many a successful Wall Street career is secret information. Fortunes can be made by knowing things others don’t – at least not yet – and exploiting that for gain.

There are growing indications that the basic services of finance, the bread and butter of our economy, aren’t profitable enough to satisfy the lords of finance. After all, who makes money on plain vanilla brokerage or banking any more? When Wall Street pays lip service to transparency and efficiency, be sceptical. A level playing field isn’t what insiders are after. It’s not good for profits.

Hedge funds in particular have spent millions of dollars lobbying to ensure disclosure rules aren’t strengthened. Banks have been no better fighting disclosure on the grounds it will expose crucial information to competitors.

What’s really going on is a process of creating and protecting deep pockets of knowledge not available to the public in order to make windfall profits. Banks know it, hedge funds know it, and regulators ought to know it.

The free market is almost an icon of the developed world. Yet the very notion of a free market open to all depends on maintaining a level playing field. Secret information is antithetical to free markets, undermining confidence and raising costs for broad swaths of society.

You can trace a solid line through the illiquid junk bonds of the 1980s, the over-promoted stocks of the late 1990s and the faulty real estate bonds of the 2000s to the Libor and front-running scandals unfolding today. In each case a highly profitable sector of Wall Street looks less like the free market than a low grade Coney Island scam.

It makes one wonder who’s in charge. Regulators, banks and funds all share a vital long-term interest in the markets. They need to speak up. Wrongdoing should be systematically exposed and rooted out, not allowed to fester and grow in the dark recesses of the markets. Regulated disclosure has to be priority number one.

Which brings us back to Libor. A little disclosure would have done a lot in avoiding the Libor mess. The Libor rate is one of the most important rates in finance. It’s treated as the actual rate at which a typical bank can borrow. You’d think such a benchmark would be calculated based on hard evidence. In fact it is based on an opinion survey. Effectively, regulators ask a few large banks what they guess it would cost to borrow. Some answers are thrown out and the rest are averaged.

What an invitation to mislead! Barclays apparently did this during the financial crisis to make itself seem healthier. Is it too much to ask for banks to disclose their actual borrowing rates? The truth tends to be relatively useful for markets.

If you’re like me and sometimes wonder why financiers have big houses compared with journalists, here’s your answer. Financial players find things out and keep it to themselves. Journalists trot the secrets out for all to see. That’s the difference between a public service and something that’s neither public, nor a service.

Disconcerting choice in US election

Financial Review

PUBLISHED: 14 Jul 2012

Anna Bernasek

US unemployment is stuck at 8.2 per cent, so it’s time to look at a true story of two candidates vying for the same job. Each has impressive academic and experiential credentials. By most objective measures either one would be well qualified for the job. But this isn’t any job. It’s a very senior executive position. The folks deciding who to hire need to look deeper.

The first guy has experience in an analogous position in the same organisation. His performance was spotty – some impressive achievements but lacklustre, bordering on unacceptable, in dollars and cents results. The other talks a big game and freely criticises his rival. When asked for his ideas though, he avoids the question.

The job, incidentally, is President of the United States.

The first candidate, of course, is the incumbent Barack Obama. He’s personally stunning – brilliant, articulate and at times decisive. His signal achievement, healthcare reform legislation, hasn’t taken full effect but even passing it was a huge win. The economy is another matter. His presidency has been marred by sluggish growth and persistent high unemployment.

The other is Mitt Romney, a high-powered and successful financier who was governor of Massachusetts. Incidentally Romney did healthcare reform first, in Massachusetts, although he denies that now. His few ideas for returning the nation to prosperity amount to giving more tax breaks and benefits to the extremely wealthy in the hope it will somehow rub off on everyone else – a tried and failed Republican strategy for promoting widespread prosperity.

Elections, like hiring, sometimes turn on trivial issues of personality or likeability. But the real focus should be on how the next US president will tackle the biggest problem facing the nation – unemployment and its accompanying dead weight loss.

Jobs are the key to widespread prosperity. Unless the US economy starts creating jobs at a strong and sustainable pace, most Americans will remain under financial pressure and a sense the system is failing them will prevail. Sufficient job creation, on the other hand,ends the housing crisis and renders America’s debts manageable.

The latest jobs figures for June showed job growth has stalled, well behind population growth. In June a mere 80,000 new jobs were created, the third straight month of jobs growth under the 100,000 or so needed just to tread water. The jobless rate is stuck at 8.2 per cent, the same as Britain’s; it’s 11 per cent in the rest of the euro zone.

But those numbers are misleading. The real problem is twofold: high long-term unemployment and high youth unemployment.

It seems that a vast section of the population may never recover from the financial crisis unless policy action is taken. And a whole new generation may be left vulnerable to future shocks. A third of those out of work have been out of work for more than a year.

Among younger workers, the rate is 17.3 per cent, more than double the headline rate of 8.2 per cent. Although youth unemployment in the US is nowhere near the levels of Spain or Greece at 45 per cent, it is double Germany’s 8.5 per cent.

More troubling is that youth jobless rates for minorities is higher. For Latinos the rate is 20.5 per cent; for African Americans, 30.2 per cent.

There are reasons to expect job growth to remain weak or even falter. Corporate profits fell in the first quarter of 2012, the first decline in four years, due to a slowdown in growth globally. And the slowdown in China, India and Europe doesn’t look like it will reverse soon.

So how do the candidates rate on solving the jobs problem?

Obama has had a chance to tackle the jobs problem. Since he became president, he stopped the destruction of jobs that occurred in the immediate aftermath of the financial crisis but failed to make sustained headway on job creation. An analysis by Andrew Tanenbaum, who writes the political blog Electoral Vote, says Obama is to blame for the slow jobs growth.

While Romney’s policies are not fully fleshed out, there’s little doubt his basic philosophy is one of laissez faire. He has expressed his view that government should get out of managing the economy and he has not proposed widespread economic stimulus or mass hiring to promote jobs growth.

So Americans face a disconcerting choice in November: a guy who did about half of what he should have done on the most pressing issue and a guy who won’t do anything. Whoever wins, the real loser will be the American public.

Cheap money fuels asset bubbles

Financial Review

 
PUBLISHED: 07 Jul 2012

Anna Bernasek 

If you could borrow money for nothing, would you? The answer probably depends on your personality and life situation. Certainly many people would jump at the chance to invest interest-free funds in the hope of making some money.

So, today, with interest rates at historic lows, in some cases zero in effect, shouldn’t we expect to see some kinds of speculative behaviour?

Well, yes. Asset price bubbles have been the consistent companions of low interest rates. And they’re still going on.

Take a look at Toronto, the fifth largest city in North America with close to six million residents. It’s caught in the grip of a major housing boom.

In March alone, prices increased 10 per cent, according to official data. Average nominal home prices have steadily advanced more than 85 per cent over the past decade. Bidding wars have broken out and talk of a housing bubble is on everyone’s lips.

David Townsend, a professor of Medieval Studies and English at the University of Toronto, just sold a small house in the centre of the city one week after listing the property.

In that week, 85 people came to take a look. Three made bids. The property went to a woman who had lost out to higher bids on at least three other properties. Determined not to lose again, she bid $70,000 over the asking price of $450,000.

The boom is especially prevalent in condos. Toronto has more high-rise building projects under way than any other city in North America, even New York City. According to a market researcher, 6070 new condo units sold in the first three months of the year, a record number of sales for a single quarter. Another 11,000 condo units are expected to be available for sale in the second quarter.

The Canadian housing boom caught the attention of the International Monetary Fund late last year. It warned that the Canadian housing market was vulnerable to a correction, especially in light of a slowdown in the commodities sector and a worldwide slowdown in growth.

“Adverse macro-economic shocks, such as a faltering global environment and declining commodity prices, could result in significant job losses, tighter lending standards, and declines in house prices, triggering a protracted period of weak private consumption as households reduce their debt,” the IMF wrote in an annual report about Canada.

Canadian officials have also weighed in, urging households not to take on too much debt. Yet all that seems to be having little effect while the Canadian central bank keeps official interest rates at 1 per cent. Some mortgage rates are as low as 3 per cent.

With interest rates so low, demand remains strong for housing in the centre of Toronto and that’s where many new buildings are going up. A compact city centre makes Toronto a pedestrian- and bicycle-friendly place to live.

The debate inside Canada about whether there’s a housing bubble or not seems eerily familiar. Those who argue against the bubble say that nothing like what happened in the US would happen in Canada.
Canadian banks were far more prudent than American banks, the argument goes, plus there has been no such thing as subprime lending.

Some commentators have argued there’s no evidence of a housing bubble in Toronto anyway. But that’s the disturbing thing about an asset price bubble. You only know with certainty that there’s a bubble once it pops.

If we’ve learned anything from the US housing bubble, it’s this: asset prices don’t go up forever. And when prices move the other way, debt exacerbates the problem.

Household debt levels in Canada are higher than the US at the peak of its housing boom. Official data shows that Canadian household debt rose to a record 153 per cent of disposable income in the third quarter of 2011 compared with 140 per cent in the US.

We’ve witnessed the apotheosis of Greenspanian monetarism, a tacit agreement that monetary policy will cure all ills.

Monetary policy has been remarkably effective in taming general inflation and moderating some types of recessions. But it hasn’t been effective against the inflation everybody loves: asset price inflation.

Designed to manage the real economy, monetary policy produces interesting side effects on the financial economy. Asset price bubbles are Exhibit A.

The trouble with asset bubbles is that they’re tremendously popular. Nobody in Toronto wants to stop the housing party right now. But when a debt-fuelled bubble eventually deflates, and it always does, the effects are noxious. Then everybody will be shocked – shocked! – that it was allowed to happen.

US recovery a decade away, at least

Financial Review

PUBLISHED: 30 Jun 2012

Anna Bernasek

The Federal Reserve dropped a bombshell recently. Two decades’ worth of wealth creation by the middle class had been erased in a mere three years as a result of the financial and economic crisis.

The Fed reported its findings in its June bulletin. What many American families had been feeling but couldn’t prove was in plain sight, an indisputable fact in black and white.

But what can we make of it? What does wealth destruction of that magnitude mean for the future?

First, look at the number that got everyone’s attention. Real median net worth fell almost 40 per cent to $US77,300 in 2010 from $US126,400 in 2007, according to the Fed’s 2010 Survey of Consumer Finances.  

The 40 per cent drop is unprecedented. At least since the Fed began keeping track of consumer finances in 1989, a fall in median net worth had never occurred, let alone of 40 per cent.

The median figure gets to the real middle of the nation, where the story is very different from the top. What that median figure says is that out of 114 million households, 57 million have a net worth of less than $US77,300. On average, a household represents about three persons. For families facing retirement, serious illness or unemployment, $US77,000 will only carry them so far.

The Fed also reported that median family income fell 7.7 per cent to $US45,800 in 2010 from $US49,600 in 2007. Put the median income and wealth figures together and you get a picture of the middle class that’s dangerously stretched. Instead of net worth approaching three times income, middle-class families now have accumulated net worth less than two times income.

What’s behind the sharp fall in net worth? The main culprit is the housing crisis and the historic drop in home prices. Yet there’s something more at work. While nominal home prices fell on average 30 per cent, real net worth fell almost 40 per cent.

The difference is due to leverage. Look at a simple example. If a person buys a $200,000 home and finances it with a $100,000 mortgage, that buyer has a home equity of $100,000. If the price of the home declined 30 per cent, the house is now worth $140,000. That person’s net worth, though, has fallen much more. The mortgage is still $100,000, but equity has dropped 60 per cent to $40,000.

The bigger drop in net worth than in average home prices has taught Americans a costly lesson. Leverage is great on the way up but vicious on the way down.

The downturn has exacerbated America’s wealth inequality. While the middle class mainly have their net worth tied up in housing, the wealthy tend to have more of their net worth in financial assets. While housing prices fell 30 per cent, stocks quickly rebounded and settled at a 12 per cent loss.
So while the middle class has suffered an unprecedented destruction of wealth, the top earnings households haven’t suffered as much.

For generations, the US relied on a virtuous cycle of wage growth and consumption to power the economy. How long it takes to rebuild household net worth may be a good indication of when the economy will return to strength. And it might be a long way off.

There are two main ways to rebuild net worth. One is through savings and the other asset appreciation. The personal savings rate is calculated as personal saving as a percentage of disposable personal income. At the current 3 per cent rate, it would take about 17 years to get back to the 2007 level of household net worth.

As for asset appreciation, it doesn’t look like that will happen soon. Home prices in some parts of the country are still falling.

Just to get back to where household net worth was in 2007, home prices need to rise by more than the 30 per cent nominal fall in prices. Using the example again of a $200,000 home and a 30 per cent drop in prices, it would take a 42 per cent rise in price to get back to the original $200,000. There’s no chance of this in the near to medium term.

So if anyone tries to tell you that an economic recovery is just around the corner in the US, go ahead and agree. But be prepared to wait at least a decade, if we’re lucky!