Asian business is reforming. Its emerging multinationals will change the way we all live ... BUSINESS power follows economic power. In the 1920s British firms owned 40% of the global stock of foreign direct investment. By 1967 America was top dog, with a 50% share. Behind those figures lie cultural revolutions. The British spread the telegraph and trains in Latin America. American firms sold a vision of the good life, honed by Hollywood and advertising. Kellogg’s changed what the rich world ate for breakfast, and Kodak how it remembered holidays. The next corporate revolution, as we describe in our special report this week, is happening in Asia. This too will change how the world lives. ... rules that have governed Asian capitalism for the past two decades are changing. Asian firms are having to become brainier, more nimble and more global. ... The immediate motivation is underperformance: growth has slowed, and Asian shares have lagged American ones by 40% in the past three years. Three deeper trends are also at work. First, labour costs are rising, not least in China, and East Asia’s workforce is ageing. Second, Asia’s middle class is becoming more demanding. They are no longer satisfied with fake Louis Vuitton handbags; they want clean air, safe food and more leisure, and are madly in love with the internet. Third, competition has intensified from Western multinationals, which have invested $2 trillion in Asia. They also now use the same cheapish labour, and they generally have much more sophisticated supply chains, brands and R&D.
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Market bubbles are called bubbles for good reason. They form, they inflate, they grow to an unstably distorted size, and ultimately they undergo the effects of rapid decompression in search of equilibrium. In a word … they pop. And generally speaking, the bigger the bubble the bigger the bang. … Most of us are pretty good by now, we think, at spotting bubbles. After all, we know what they look like; we recognize their characteristics, don’t we? Maybe. Maybe not. Not all bubbles look or act the same. … Is there a bubble inflating again? … people often shrug their shoulders, scratch their heads, and simply accept that there must be good reasons why stocks have been on a roll. The average investor, after all, is at least one step removed from the markets for intangible assets and therefore has comparatively little experience to help avoid becoming their occasional Venus flytrap dinner. … When it comes to assessing the state of the real economy, on the other hand, most people are more circumspect and not so easily taken in. … this bubble was born of desperation, first by the misguided monetary policy regime and then by investors who are sure to become its unsuspecting victims as they look for return—any return—in all the wrong places. … Railing against Fed policy, of course, doesn’t change it. … we continue to believe it is possible—and necessary—to see both the forest and the trees in order to fulfill our highest obligation: to continue acting in the best interests of our clients. As noted investment manager Francois Sicart said recently: “The attitude of many professional investors toward the current market makes me think of a crowd enjoying a dance party on top of an active volcano. They know it is going to erupt but, instead of planning an exit, they keep dancing while trying to guess the exact date and time of the eruption.”
Around the world almost 300m 15- to 24-year-olds are not working. What has caused this epidemic of joblessness? And what can abate it? … Official figures assembled by the International Labour Organisation say that 75m young people are unemployed, or 6% of all 15- to 24-year-olds. But going by youth inactivity, which includes all those who are neither in work nor education, things look even worse. The OECD, an intergovernmental think-tank, counts 26m young people in the rich world as “NEETS”: not in employment, education or training. A World Bank database compiled from households shows more than 260m young people in developing economies are similarly “inactive”. The Economist calculates that, all told, almost 290m are neither working nor studying: almost a quarter of the planet’s youth (see chart one). … If the figures did not include young women in countries where they are rarely part of the workforce, the rate would be lower; South Asian women account for over a quarter of the world’s inactive youth, though in much of the rich world young women are doing better in the labour force than men. … On the other hand, many of the “employed” young have only informal and intermittent jobs.
Computers seem to be replacing humans across many industries, and we're all getting very nervous. ... But if you want some reason for optimism, visit your local supermarket. ... In a recent research paper called "Dancing With Robots," the economists Frank Levy and Richard Murnane point out that computers replace human workers only when machines meet two key conditions. First, the information necessary to carry out the task must be put in a form that computers can understand, and second, the job must be routine enough that it can be expressed in a series of rules. ... Supermarket checkout machines meet the second of these conditions, but they fail on the first. They lack proper information to do the job a human would do. To put it another way: They can't tell shiitakes from Shinola. Instead of identifying your produce, the machine asks you, the customer, to type in a code for every leafy green in your cart. Many times you'll have to look up the code in an on-screen directory. If a human checker asked you to remind him what that bunch of the oblong yellow fruit in your basket was, you'd ask to see his boss. ... This deficiency extends far beyond the checkout lane.
June Gloom, the fog and clouds that often linger here over the Southern California coast this time of year, appears to have spread to the Federal Reserve. ... We agree that QE must end. It has distorted incentives and inflated asset prices to artificial levels. But we think the Fed’s plan may be too hasty. ... Fog may be obscuring the Fed’s view of the economy – in particular, the structural impediments that will inhibit its ability to achieve higher growth and inflation. Mr. Bernanke said the Fed expects the unemployment rate to fall to about 7% by the middle of next year. However, we think this is a long shot. ... Mr. Bernanke’s remarks indicated that the Fed is taking a cyclical view of the economy. ... Our view of the economy places greater emphasis on structural factors. Wages continue to be dampened by globalization. Demographic trends, notably the aging of our society and the retirement of the Baby Boomers, will lead to a lower level of consumer demand. And then there’s the race against the machine; technology continues to eliminate jobs as opposed to provide them. ... It’s reasonable, of course, for Mr. Bernanke to try to prepare markets for the inevitable and necessary wind down of QE. But if he has to wave a white flag three months from now and say, “Sorry, we miscalculated,” the trust of markets and dampened volatility that has driven markets over the past two or three years could probably never be fully regained. It would take even longer for the fog over the economy to lift.
Somewhere between a fifth to a third of the million students graduating out of India's engineering colleges run the risk of being unemployed. Others will take jobs well below their technical qualifications in a market where there are few jobs for India's overflowing technical talent pool. Beset by a flood of institutes (offering a varying degree of education) and a shrinking market for their skills, India's engineers are struggling to subsist in an extremely challenging market. … According to multiple estimates, India trains around 1.5 million engineers, which is more than the US and China combined.
Tunisia has many advantages over other Arab states: no deep ethnic or sectarian divisions; no oil wealth that distorts the economy and draws foreign interference; a tradition of moderate Islam; widespread literacy; a small, apolitical army. ... Democracy didn’t turn Tunisian youths into jihadis, but it gave them the freedom to act on their unhappiness. By raising and then frustrating expectations, the revolution created conditions for radicalization to thrive. New liberties clashed with the old habits of a police state—young Tunisians were suddenly permitted to join civic and political groups, but the cops harassed them for expressing dissent. Educated Tunisians are twice as likely to be unemployed as uneducated ones, because the economy creates so few professional jobs. ... Salafis follow literalist interpretations of the Koran and maintain that all spheres of society must be ruled according to strict Sharia law (which, for example, promotes the removal of women from the public sphere). Those who support jihad make selective theological and legal arguments to justify violence against the perceived enemies of Islam. The targets do not change: the West, Jews, Shiites, the secular governments and security forces of Islamic countries, and Sunni Muslims who are deemed apostates. But the factors that drive young men and women to adopt Salafi jihadism are diverse and hard to parse: militants reach an overwhelmingly reductive idea by complex and twisted paths. ... Part of the success of ISIS consists in its ability to attract a wide array of people and make them all look, sound, and think alike. ... In Tunisia, leaving to wage jihad has become a social phenomenon. Recruitment spreads like a contagion through informal networks of friends and family members, and the country is small enough so that everyone knows of someone who has disappeared.
They delved deeply into Catmull’s rules for embracing the messiness that often accompanies great creative output, sending subtle signals, taking smart risks, experimenting to stay ahead of uncertainty, counteracting fear, and taking charge in a new environment—as Catmull did when he became the president of Disney Animation Studios. ... The fundamental tension is that people want clear leadership, but what we’re doing is inherently messy. We know, intellectually, that if we want to do something new, there will be some unpredictable problems. But if it gets too messy, it actually does fall apart. And adhering to the pure, original plan falls apart, too, because it doesn’t represent reality. So you are always in this balance between clear leadership and chaos; in fact that’s where you’re supposed to be. Rather than thinking, “OK, my job is to prevent or avoid all the messes,” I just try to say, “well, let’s make sure it doesn’t get too messy.” ... Most of our people have learned that it isn’t helpful to ask for absolute clarity. They know absolute clarity is damaging because it means that we aren’t responding to problems and that we will stop short of excellence. They also don’t want chaos; if it gets too messy, they can’t do their jobs. If we pull the plug on a film that isn’t working, it causes a great deal of angst and pain. But it also sends a major signal to the organization—that we’re not going to let something bad out. And they really value that. The rule is, we can’t produce a crappy film.
The New Normal is when plain logic no longer applies; when common sense takes the back seat. I have for a long time been defending the Federal Reserve Bank, and have not at all agreed with all those hawks who thought the Fed was sitting on its hands. Until recently, I felt very comfortable taking that view, but I am no longer so sure. Common sense suggests to me that the Fed ought to tighten a great deal more than they have already done, but does common sense apply? That is what this month’s Absolute Return Letter is about. ... something is not quite right, but what is it? Before I answer that question, let me share one more observation with you. Because the Fed is so inactive, there are signs of moral hazard growing in magnitude. Complacency appears to be sneaking in through the back door yet again. We humans never learn, do we? ... As GDP growth slows, more debt needs to be established in order to service existing debt, which will cause GDP growth to slow even further. I therefore think that, unless it suddenly becomes fashionable to default, debt will continue to rise and GDP growth will continue to slow in the years to come. ... I have changed my view in one important aspect. As debt levels continue to rise (short of any massive debt restructuring), governments will bend over backwards to keep interest rates at very low levels, as the only realistic alternative to low interest rates is default. ... Historically, when central banks have sat on their hands for too long, the end result has almost always been a bout of unpleasantly high inflation, and that has nothing whatsoever to do with the changing demographics.
How much will people work in the future? The rise of automation and, more generally, IT-driven structural change in the labour market have made policymakers and researchers worry about ‘disappearing jobs’ and a dire future for employment. In this column, we argue that to the extent productivity improvements continue, hours worked in the marketplace will indeed likely fall. However, the argument is not that jobs will disappear. ... Is the pattern representing a gradual disappearance of jobs since the early 19th century, perhaps as a result of technological change? No. The reason, we argue, is rather that technological change has raised labour productivity. People have then acted on this opportunity – they have chosen to work less hard as a result of technological change. Structural change makes some jobs disappear, but new ones emerge. Working hours are an outcome of not just demand but also of supply.
Financial crises pose challenges for macroeconomists. Schularick and Taylor (2012) show that credit booms precede crises. Mendoza and Terrones (2008) claim that not all credit booms end in crises. Herrera et al. (2014) argue that crises are not necessarily the result of large negative shocks, but also of political considerations. There is a need for models displaying financial crises that are preceded by credit booms and that are not necessarily the result of large negative shocks. ... In a recent paper (Gorton and Ordonez 2016), we show that credit booms are indeed not rare, that some end in crises (bad booms) but others do not (good booms). Are these two types of booms intrinsically different in their evolution, or do they just differ in how they end? We show that all credit booms start with a positive shock to productivity on average ten years before the end of the boom, but that in bad booms this increase dies off rather quickly while this is not the case for good booms. This suggests that a crisis is the result of an exhausted credit boom. We then develop a simple framework that rationalises these empirical findings and highlight several shortcomings of standard macroeconomic models that tend to neglect the interplay between macroeconomic and financial variables.
Paul attempted work on a memoir he had begun some years earlier, but he wasn’t confident that his life story was worth telling at all. He had expected a few consulting gigs to materialize, but each fell through, for one reason or another. A friend told Paul he had to be more entrepreneurial, to create his own opportunities. But Paul didn’t feel like an entrepreneur. He’d spent his life as a company man. ... Wanting to impress his fellow interns and bosses, Paul went to Ralph Lauren and spent his entire projected summer earnings on suits. ... as with any internship, the hope was that Paul would get as much as he gave—that he’d be learning something. Sally asked that Paul prepare to give a few presentations about his career to the other interns. That way, Paul would get a chance to hone his communication skills for an audience decades his junior.
For the teams of students involved in this year’s RoboMasters tournament, the stakes were clear: 350,000 RMB (roughly $53,000) in prize money, more than four times the average salary of a Chinese worker. Winners achieve celebrity status among the 6 million fans who watch the action stream live online, as well as a shot at landing a job at at DJI, the Chinese drone maker that created this competition. Over the last two years the company has hired around 40 engineers out of the tournament. ... For DJI, the stakes are reversed. It is battling to win top talent in some of technology’s hottest fields: computer vision and autonomous navigation. Over the last three years, the company has emerged from obscurity to become the market leader in the booming consumer drone market, setting the pace for innovation in the category. ... The city became the heart of the world’s supply chain for consumer electronics. But while it conquered the business of manufacturing for others, the quality of products designed and engineered in Shenzhen were largely inferior to those with roots in the West. Over time, however, that dynamic began to change. ... DJI epitomizes that evolution. In 2006, Frank Wang, an engineering student obsessed with remote-control helicopters, started Dà-Jiāng — which roughly translates to "without borders" — Innovations Science and Technology Corporation. His target market consisted of professionals who used remote-control aircraft for filming and photography, and hardcore hobbyists who built their own flying machines for fun. At the time, everyone built their units from scratch, there was no casual consumer market, and few people used the word "drone." ... Like many early Shenzhen companies, at first DJI made just a single component: flight controllers. ... PricewaterhouseCoopers estimates that the drone industry will grow from a few billion dollars this year to more than $120 billion by 2020.
My time in China has taught me the pleasure and value of craftsmanship, simply because it’s so rare. To see somebody doing a job well, not just for its own reward, but for the satisfaction of good work, thrills my heart; it doesn’t matter whether it’s cooking or candle-making or fixing a bike. ... the prevailing attitude is chabuduo, or ‘close enough’. It’s a phrase you’ll hear with grating regularity, one that speaks to a job 70 per cent done, a plan sketched out but never completed, a gauge unchecked or a socket put in the wrong size. ... implies that to put any more time or effort into a piece of work would be the act of a fool. China is the land of the cut corner, of ‘good enough for government work’. ... sometimes there’s a brilliance to chabuduo. One of the daily necessities of life under Maoism was improvisation; finding ways to keep irreplaceable luxuries such as tractors or machine tools going, despite missing parts or broken supply chains. ... More usually, chabuduo is the domain of a village uncle who grew up with nothing and can whip up a solution to anything out of two bits of wire and some tape.
For years, enlightened restaurant-goers, shocked and horrified by Fast Food Nation, pink slime, and the evils of Big Food, have felt an almost religious pull to Chipotle’s "Food With Integrity" mission ... When a listeria outbreak caused by Dole’s packaged salads was linked to four deaths last year, the public outcry was not nearly as intense or sustained (despite an ongoing federal investigation). When Tesla reported its first driver fatality while using its Autopilot feature last June, it didn’t affect the company’s stock price at all. Why were these deaths only blips for Dole’s and Tesla’s reputations? By contrast, Chipotle spent a year in hell even though no one died—and more than 265,000 Americans get sick annually from illnesses linked to E. coli. ... Chipotle has had no choice but to grapple with the reality that its prestige status has evaporated. And there is no obvious road map for gaining it back. ... what’s ailing Chipotle is more pervasive and insidious than any foodborne illness. For Chipotle to win back all it has lost will require a soul-cleansing broader than perhaps even Ells and Moran realize. ... As Chipotle has grown, its operation has evolved to be anything but simple. The company purchases 185 million pounds of what it considers responsibly raised beef, pork, and chicken annually. ... Chipotle goes through more than 200,000 pounds of avocados daily ... The kitchen theatrics that Ells has deftly used to promote his food’s freshness to customers—the sizzling plancha, the tortilla grill—obscured that it was less safe than conventional fast food. The company had disclosed this fact to investors long before the crisis. ... Chipotle’s future hinges less on hourly audits or triple-washed lettuce or rewards programs than a reimagining of what Food With Integrity means for the next 20 years.
Two groups of true believers are driving changes in the developed world. The first: single-minded central bankers who spent trillions of dollars pushing government bond yields close to zero (and below). While this unprecedented monetary experiment helped owners of stocks and real estate, its regressive nature did little to satisfy the second group: voters who are disenfranchised by globalization and automation, and who are on the march. What next? The fiscal experiments now begin (again). ... why do we see 2017 as another year of modest portfolio gains despite the length of the current global expansion, one of the longest in history? As 2016 came to a close, global business surveys improved to levels consistent with 3% global GDP growth, suggesting that corporate profits will start growing at around 10% again after a weak 2016. More positive news: a rise in industrial metals prices, which is helpful in spotting turns in the business cycle ... Furthermore (and I understand that there’s plenty of disagreement on the benefits of this), many developed countries are transitioning from “monetary stimulus only” to expansionary fiscal policy as well. Political establishments are aware of mortal threats to their existence, and are looking to fiscal stimulus (or at least, less austerity) as a means of getting people back to work. The problem: given low productivity growth and low growth in labor supply, many countries are closer to full capacity than you might think. If so, too much fiscal stimulus could result in wage inflation and higher interest rates faster than you might think as well. That is certainly one of the bigger risks for the US.
In rich countries the link between learning and earning has tended to follow a simple rule: get as much formal education as you can early in life, and reap corresponding rewards for the rest of your career. The literature suggests that each additional year of schooling is associated with an 8-13% rise in hourly earnings. ... Many believe that technological change only strengthens the case for more formal education. Jobs made up of routine tasks that are easy to automate or offshore have been in decline. The usual flipside of that observation is that the number of jobs requiring greater cognitive skill has been growing. ... The reality seems to be more complex. The returns to education, even for the high-skilled, have become less clear-cut. Between 1982 and 2001 the average wages earned by American workers with a bachelor’s degree rose by 31%, whereas those of high-school graduates did not budge, according to the New York Federal Reserve. But in the following 12 years the wages of college graduates fell by more than those of their less educated peers. Meanwhile, tuition costs at universities have been rising. ... automation tends to affect tasks within an occupation rather than wiping out jobs in their entirety. Partial automation can actually increase demand by reducing costs
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Although robotic ships of this sort are some ways off in the future, it’s not a question of if they will happen but when. My colleagues and I at Rolls-Royce anticipate that the first commercial vessel to navigate entirely by itself could be a harbor tug or a ferry designed to carry cars the short distance across the mouth of a river or a fjord and that it or similar ships will be in commercial operation within the next few years. And we expect fully autonomous oceangoing cargo ships to be routinely plying the world’s seas in 10 or 15 years’ time. ... Remotely controlled ships, piloted by people on shore, and autonomous ships, which can take actions for themselves, are the latest beneficiaries of increasing digital connectivity and intelligence. These developments in electronic sensors, telecommunications, and computing have sparked interest in a range of autonomous vehicles including cars, planes, helicopters, trains, and now ships. ... That people should be seriously interested in robotic ships is easy enough to explain: Such ships are expected to be safer, more efficient, and cheaper to run. According to a report published by the Munich-based insurance company Allianz in 2012, between 75 and 96 percent of marine accidents are a result of human error, often a result of fatigue.
To the uninitiated, the figures are nothing if not staggering: 155 million Americans play video games, more than the number who voted in November’s presidential election. And they play them a lot: According to a variety of recent studies, more than 40 percent of Americans play at least three hours a week, 34 million play on average 22 hours each week, 5 million hit 40 hours, and the average young American will now spend as many hours (roughly 10,000) playing by the time he or she turns 21 as that person spent in middle- and high-school classrooms combined. Which means that a niche activity confined a few decades ago to preadolescents and adolescents has become, increasingly, a cultural juggernaut for all races, genders, and ages. How had video games, over that time, ascended within American and world culture to a scale rivaling sports, film, and television? Like those other entertainments, video games offered an escape, of course. But what kind? ... Technology, through automation, had reduced the employment rate of these men by reducing demand for what Hurst referred to as “lower-skilled” labor. He proposed that by creating more vivid and engrossing gaming experiences, technology also increased the subjective value of leisure relative to labor. ... As with all sports, digital or analog, there are ground rules that determine success (rules that, unlike those in society, are clear to all). The purpose of a game, within it, unlike in society, is directly recognized and never discounted.
The number of active workers, who live across the globe, is estimated to run between 15,000 and 20,000 per month, according to Panos Ipeirotis, a computer scientist and professor at New York University's business school. Turkers work anywhere from a few minutes to 24 hours a day. ... American Turkers are mostly women. In India, they're mostly men. Globally, they're most likely to have been born between 1980-1990. About 75% are Americans, roughly 15-20% are from India, and the remaining 10% are from other countries. ... "Requesters"—the people, businesses, and organizations that outsource the work—set prices for each task, and the tasks vary widely. ... what do Turkers make, on average? It's hard to say. But Adrien Jabbour, in India, said "it's an achievement to make $700 in 2 months of work, working 4-5 hours every day." Milland reported that she recently made $25 for 8 hours of work, and called that "a good day."
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In the fancier precincts of the food-service world, where watching a barista spend four minutes prepping a pour-over coffee is a customer’s idea of a good time, robots might not seem like the future of food culture. But spend some time at the restaurants where the majority of Americans eat every day, and you’ll catch a distinct whiff of automation in the air. ... Given job creators’ distaste for organic employees, it’s easy to see how automation might play out in Quick-Service Restaurants, or QSRs—the industry term for both fast-food operations like Hardee’s and slightly more upscale “fast casual” restaurants, like Chipotle. You already have to stand in line, order your own food, and then (in most cases) pick your order up at the counter when it’s ready. Pop a couple kiosks up front, maybe let people order on their phones, and bingo, you’ve automated away all the cashiers. ... More than 14 million people—almost 10 percent of the American workforce—work in restaurants, and almost 2 million of those work for casual-dining chains. ... Besides bumping check averages, the tablets can generate revenue with game fees and display ads, which the restaurants split with the tablet companies. And once the platform is in place, it becomes a powerful tool for data collection.