Brij Singh's Random Musings

Mortgage industry

Numbers are pretty big -

Mortgage brokers, virtually nonexistent 25 years ago, now number 400,000 workers at more than 50,000 firms. They are scrappy entrepreneurs and sales representatives who match up borrowers and lenders on roughly 7 out of 10 mortgages. This year, they will collect some $33 billion from their share of an estimated $2.8 trillion in home mortgages.

Was talking to a realtor recently and he sounded very sober about the coming slow-down.

This whole sector is about to cool off.

China Factor

So my friend lost a half a million dollar worth  deal to some Chinese textile supplier.  Naturally he  is not happy about it and thats not because he has anything against Chinese.  In fact he is all mad against the buyer - supposedly some upscale French department store.  Point is where do you draw the line on the low cost graph.  You can always find someone willing to cut prices in half to build their reference account !

Low cost argument works only so far as the margins can be protected. Margins need volume. So the theory goes.  In a commodity market invariably volume players dominate.  In the software sector India can maintain it's low cost position because of good supply of developers and same applies for Chinese manufacturing strength.  More hands,  more volume and hence more resilience in the discounting game.

So what do you suggest to a friend who is not THAT big yet.  He is a successful small business player and now feeling the low cost pinch.  Only way out is to innovate and get out of the low cost game. Easier said than done in the slow moving garment manufacturing sector.  At least software still allows garage level tinkering !

While listening to his stories I couldn't stop comparing it with whats happening in the software sector.  Where every now and then some new consulting company shows up and is willing to deeply discount the deal.

More on the bubble

For the sake of comparison:

Penn cited an article in The Economist and reported that the total value of residential property in developed countries had risen by more than $30 trillion over the past five years, to $70 trillion, an increase equivalent to 100 percent of those countries' combined GDPs.

Penn went on to say that such rapid growth dwarfed the global stock market bubble of the late 1990s which demonstrated an increase over five years at 80 percent of GDP, and the Wall Street crash (55 percent of GDP). Penn also observed that the stock market crash of 2000 triggered a 32 percent decline in the semiconductor market in 2001.

It's a GAS

Before we get ahead of ourselves here. Lets do quick fact check -

Politician claiming success (first doubt),  Tis the season of energy and oil (second doubt) and the amount is just too much (which makes me wonder at what cost drilling !).

I will be more than happy to be proven wrong here.

Lot of people need energy and in that part of the world people have all the right to go nuts on Hummer as well.

35 is the magic number

Thats the magic number to take lot of India based BPO companies down the drain if dollar hits that number against rupee. Currently it stands at ~43.

This will cause new business development alignment to take shape.

The Reserve Bank of India has a relatively easy job protecting its $125-odd billion forex kitty -- it can hold Euro or Yen-denominated assets. In fact, the Central Bank has already started to diversify away from US government T-Bills.

The IT industry cannot shift that easily from America. Those markets produce nearly three-fourths of IT revenues and more than 80 per cent of BPO revenues.

Dont we live in a highly connected world !

Skilled Labor out of favor ?

Asked which assets will be most valuable to the company five years from now, 53 percent of respondents said "products/services." Another 26 percent said "brand/reputation," while "management" and "intellectual property" each were selected by about 10 percent. None of the respondents chose "skilled labor."

How did we come to this outcome?

America: the world's biggest hedge fund

More Buttonwood analysis on the impact of interest rate rise -

The current account essentially comprises two things: the trade balance and overseas investment income. America’s trade deficit is bad and getting worse, even though the dollar has fallen by 23% from its recent high in February 2002. A $46.6 billion trade deficit in March had risen to $48.3 billion in April. In the absence of a net surplus from foreign investment, notes Jim O’Neill, the chief international economist at Goldman Sachs, this would mean a current-account deficit for the year of more than $600 billion, or getting on for 6% of GDP. No problem, say the more sanguine: America has long been able to finance its large and growing deficit because it is such a wonderful place in which to invest.

There are, however, a couple of snags with this argument. The first is that Americans find foreign climes more attractive to invest in than foreigners regard America: net foreign direct investment (FDI) has amounted to minus $155 billion over the last 12 months. And who can blame them? Returns on FDI into America were 5.5% in the first quarter, compared with returns of 11.7% on American firms’ foreign investment. Nor is this an aberration: the returns in America have been consistently lower for many years

..the United States is like a giant hedge fund, borrowing huge wodges of cheap money at home and then investing it in higher-yielding foreign assets.

Much of this money is now flowing into hot areas like India and China. Question is whether these newly emerging economies can survive a massive pullback of these American FDI or not. They will eventual survive but with some frequent hiccups like the one we saw right election results in India when FIIs pulled back strongly on the election surprise in the equity market.

New economic era begins

NYT on Fed's meeting this week to revise the interest rates -

The new era of rising rates, with its uncertain implications, begins in two days.

More What-ifs..

Buttonwood's dreading the worst case

what would happen to the American economy were property prices to tank, at the same time that oil prices soared and the fiscal stimulus ran out. It wouldn’t look pretty, that’s for sure.

Talking about probability, IMHO this dire what-if for triple whammy is highly unlikely.
On the related topic, Dan Gillmor should come to Bangalore to see how Bay Area has a friend when it comes to the real estate market craziness.

Keeping track of the numbers

Paul Krugman dissecting Bush's hired gun's projections
And employment is chasing a moving target: it must rise by about 140,000 a month just to keep up with a growing population. In April, the economy added 288,000 jobs. If you do the math, you discover that President Bush needs about four years of job growth at last month's rate to reach what his own economists consider full employment

AMR on IT jobs
Because of IT worker productivity gains and minimal IT spending increases, AMR Research estimates that U.S. IT head count requirements will grow at less than 1.5%, or roughly 700,000 workers, in the next five years. Since India's capacity will grow by 1.5 million IT workers, the net result is that not only will the demand created by the 700,000 new jobs be filled by India, but that 800,000 existing jobs will also migrate to India. The 30% to 50% cost savings offered by India is too great a benefit to ignore and will more than counteract the jingoistic attitudes that threaten to delay the transfer of work.

Business Week's review of Rational Exuberance
From 1993 to 2003, real wages for all workers, adjusted for inflation, rose by 9 percent, based on wage and price data from the Bureau of Labor Statistics. That's outstanding, especially when compared with a gain of only 1 percent from 1983 to 1993, the previous 10-year period.

State of EU

The EU boasts of 6 million jobs created since 1999 -- the bulk in services like health care and tourism -- but no one tallies how many jobs are being lost due to relocation of factories or outsourcing of business functions, such as call centers or bookkeeping .. France had lost 1.5 million jobs between 1978 and 2002, but the country’s industrial sector was still around 20 percent of the economy.

How much productivity is eating into the jobs and how much is going outsourcing way ?