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marți, 16 iulie 2013

America's Commitment to Volunteerism and Service

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America's Commitment to Volunteerism and Service

President George H.W. Bush built a legacy of service during his time as president — laying the foundation for AmeriCorps and other national service organizations, and conferring 1,020 Daily Point of Light Awards, given to recognize volunteer service at home and abroad.

Yesterday, President George H.W. Bush joined President Obama here at the White House to present the 5,000th Point of Light award.

Find out more about yesterday's event.

Former President George H. W. Bush and former First Lady Barbara Bush present President Barack Obama with a pair of socks in the Map Room of the White House, July 15, 2013. (Official White House Photo by Pete Souza)

How to Grow: 21 Tactics to Acquire Customers

Posted: 15 Jul 2013 07:47 PM PDT

Posted by AndrewDumont

I hate the term growth hacker, but I love the concept. The idea that you can grow a business from 0 to thousands of customers without much of a marketing budget is a beautiful thing, and very much the result of growth hacks â€" free marketing tactics that grow traffic, brand, links, and eventually, a customer base.

Moz is my fourth startup, and at each one, the same question has kept me up at night: What else can we do to expedite growth? You see, an early-stage company is never lacking time and effort, it's lacking tactics â€" tactics that earn customers without relying on a big budget.

Which leads me to this post.

I wanted to pull together a list of all of the "hacks" that I've picked up over the years, along with those from other startups, into a holistic view on how a startup can grow on the web today. For the sake of this post, I've focused the list primarily to software and consumer internet startups â€" which is where most of my experience lies â€" but it can apply to nearly any web business. As you'll notice, I've broken the list down into two categories to help you prioritize; low-hanging fruit and long-term investments. The low-hanging fruit tactics are the things that you should be doing today. The long-term investments are those that you should evaluate, but put some thought into whether or not you should pursue, as they may not make sense for every business.

But enough talking, let's dig in.

Low-hanging fruit

1. FAQ for the long-tail

This one was picked up from my good friend Neil Patel, who is a master of SEO and startup growth. The basic gist is to use your FAQ (or help forum) to target long-tail search queries, specifically those that lead to a buying decision. By the very nature of long-tail queries, the potential customer is usually pretty far along in the buying process. Using keyword research, targeted FAQ topics can help put you in the top of the search results for the questions that your customers are looking for answers to. When you do this, make sure that the FAQ has a clear call to action to sign up for your product or service, as well as a custom domain that doesn't rob you of the indexed pages and content. Content, mind you, that your community is often times creating. Tools like UserVoice (Perks Listing) and GetSatisfaction are great platforms to use for your FAQ, as they allow for domain customization and the use of your own CSS styles. CrazyEgg (Perks Listing), Neil's company, is a fantastic example of this in action.

2. Manual outreach to first customers

Your first customers will likely become your biggest advocates if â€" and only if â€" you treat them the right way. For your first 100 customers, you should be reaching out to each one, personally. I'm not talking about a canned email or an email from your info@ alias. I'm talking about a personal email. This is your chance to build advocates by thanking them for signing up and offering your help, whenever they may need it. It's so simple, yet so many companies overlook it. If you're beyond 100 customers (and have a budget), take a page out of MailChimp's book (Perks Listing) and make the high-touch process a bit more scalable. After sending your first campaign on MailChimp, you'll receive the email below, prompting you to claim your free gift â€" a MailChimp t-shirt (#want).

3. Partner distributions

It amazes me that more software companies don't do partner distributions. The concept of a partner distribution is simple; a discounted offer on your product or service that you distribute through partners. We've done this at Moz, and it's been a huge channel â€" over 7,000 free trials and 2,000 paid conversions in under a year. Keep in mind, there's no cost to running partner distributions, only the increased operating costs of offering an extended free trial (in the case of Moz). To apply this to your business, you'll need a few things. The first thing is a partner page, a custom URL that you can create for each partner that explains the offer and factors in the discount. Next, you'll need some platform to return the favor. At Moz, that's Perks, which allows us to co-market, while providing some awesome value to our customers. Below is an example of a partner distribution that we did with our friends at WPMU (Perks Listing).

4. Track competitor mentions

As many link-builders know, one of the best ways to find link prospects is to monitor where your competitors are getting mentioned. With that context, we built Fresh Web Explorer, to help you understand where your brand and your competitor's brand is being mentioned. Each mention of a competitor is an opportunity. An opportunity to build a relationship and a link. Along with that, you can find press opportunities by searching relevant subject matter in FWE. For example, if I was in the Wordpress hosting industry, I could search things like "Wordpress Hosting" or "Wordpress Development" to find sources that are covering topics related to my product â€" example of that below. Let's call this PR 102.

5. Double loop referral programs

Perhaps one of the most well-known (yet underutilized) tactics is the double loop referral program. Dropbox famously did this with the "invite your friends, get free storage" campaign. In the non-virtual world, DirectTV does this by giving every user that refers a new customer $100 off their bill, forever, along with $100 off to the customer that they refer. The structure can take many forms, but the concept is the same â€" provide monetary value, from both sides, for your users to refer your product, and they just may. Sometimes the traditional affiliate model just won't cut it. Pro tip: try just simply asking your users to refer their friends if they like the product or service. Often times, a reward isn't necessary if the product is good enough.

6. HARO

Wouldn't it be great if press came to you, rather than trying to guess what they're going to write about? Well, that's where HARO (Help A Reporter Out) comes into play. Created by the amazing Peter Shankman, HARO is a twice-daily email that pulls together all of the editors that are looking for quotes or opinions on articles that they're writing, usually on top-tier publications. It's free, and a complete no-brainer. HARO was the only reason why I was quoted in the Wall Street Journal about, yes, workplace fashion. Go figure.

7. Verified program

Link building without the manual outreach? Yes, please. It's amazing how underutilized verified programs are from a marketing standpoint. Some of the best examples of verified programs in the wild are Google Analytics and Twitter. All of these programs provide some sort of verification process or educational program, which in turn provides the individuals and companies that go through that process with a badge to proudly display on their site. As we all know, along with showing some credibility to the individual or company, an embedded certification badge also provides a link back to any site you'd like. Which, I hear, makes the SEO gods happy. We like this idea so much, that we're kicking around the idea of adding an embeddable badge to the Recommended Companies List.

8. Social prospecting

Consider this the guerrilla marketing tactic of the digital age: social prospecting via Twitter. Run a search on your favorite Twitter client for terms related to your product or service and provide helpful responses to those that are looking for help. For example, we do this for Stride, an app I helped create, by searching for the terms like "CRM recommendations" or "client tracking software." Having these searches saved pulls in a constant feed of prospective customers. However, I put this out there with caution; don't be that guy. Don't just tweet out a link. Provide helpful recommendations, often of your competitors, or engage on a topic that may be different from the keywords that led you. There's nothing worse than a feed of promotional garbage.

9. Video syndications

Online education is all the rage these days, and rightfully so. There's platforms like Coursera, Grovo, Udemy, and many more that empowers anyone to learn. If you produce video content and aren't taking advantage of these platforms, you're missing out on a great distribution source. We've done this with Udemy, utilizing our Whiteboard Friday content, and it's been a huge hit. What this allows us to do is reach an audience that wouldn't otherwise know about Whiteboard Friday, and are now exposed to the Moz brand. Like you needed more reason to create video content.

10. Comment marketing

Speaking of Whiteboard Friday, Rand did an awesome one on the next tactic, comment marketing. Using comment marketing intelligently, while providing value, is a great way to build relationships, earn links, and expose your brand to a completely new audience. In attempt to avoid duplicating what Rand said so elegantly, head on over to that Whiteboard Friday post to learn the right way to do comment marketing.

11. In-app sharing

Just putting links to share a page on Twitter or like an app on Facebook isn't enough these days, there's got to be more of an incentive for a user to share your site. The best integrations of social sharing come in the context of the application. For example, when a user achieves a certain milestone or unlocks a certain badge, they're presented with an option to share that achievement publicly. Perhaps the best, and most well-known example of a company that does this beautifully is Foursquare. When you unlock a badge, you're presented with the option to share that achievement socially. A great way to boost your ego, and an even better way to drive brand impressions for Foursquare.

12. Winbacks

This is one that Justin and Renea on the marketing team have been piloting at Moz, and it's simplistically brilliant. For most SaaS companies, once a user cancels their account or doesn't convert on their free trail, they're forgotten about. Why? Just because the product wasn't a fit at that time doesn't mean that it'll never be a fit. The concept of a winback is to send an email to those in said cohort, with an offer that makes it easy to come back to the product. For Moz, it was an extended free trial period:

13. Customer thank-you cards

On the topic of keeping your customers around, a "thank you" can be so simple, yet so powerful. At Moz, we do this in the form of a "happy package" (yes, really) once a Moz member hits a certain level of MozPoints. But it doesn't have to be that elaborate. An investment in something as simple as thank you cards, with a hand-written message, can go a long way in keeping your customers passionate about your product â€" and there's no better marketing than word of mouth.

14. Influencer program

Taking care of influencers, and getting them into your product early can be one of the most impactful things you can do for your company. For example, if I were creating a new product in the inbound marketing space, Rand is one of the first people I'd reach out to offering him early access. Using tools like FollowerWonk or Klout is a great way to find the influencers in your space â€" it's then up to you to provide them with early access, a free account, or anything else to incentivize them to use your product. Nothing fancy here, just good old fashioned influencer outreach.

Long-term investments

15. Tap into the viral loop

If you're lucky enough to have a product that lends itself well to the viral loop, you'd be a fool not to take advantage of it. Simply speaking, a viral loop is the idea of utilizing a natural function of your product to expedite growth. Heading back down the path of congratulating MailChimp on all their awesomeness, they do a fantastic job of utilizing the natural viral component of their product. If you've ever used MailChimp, it's likely you're familiar with MonkeyRewards, an option they offer when sending a campaign that allows users to place a "Powered by Mailchimp" badge at the bottom of their email in exchange for campaign credits. By doing this, they exchange a cheaper bill for free marketing to hundreds of thousands of people. Not a bad trade.

16. Guides

You're likely all familiar with Moz's Beginner's Guide to SEO. What you may not know, however, is how powerful it is from a growth perspective. Without digging into too much detail on numbers, it's suffice to say that the beginner's guide contributes significantly to our consistent stream of free trial sign-ups. If you're thinking to yourself, "Well, that's just because you're Moz," you're only partially correct. I wanted to test it for myself, with a lesser known brand, so I did. We created a Beginner's Guide to Sales for small businesses through Stride, and it's been just as powerful from a growth perspective, only on a smaller scale. But beware, guides, if done correctly, are a huge investment of time and design resources. At Moz, Ashley and her team have been working on some new guides on the topics of social media and content, and they've taken months of work. But, from the data I've seen first-hand, it's well worth the investment.

17. OEM deals

Back in the business development camp, there's a heavy investment opportunity that exists for most products called an OEM (Original Equipment Manufacturer) deal. Essentially, this is a deeply integrated partnership where a software (or hardware) provider bundles your product as part of their offering in order to fill a need or gap in their offering. The reason why it's such a heavy investment is that it often requires co-branding work, a separate billing infrastructure, and the negotiation of complex agreements. We've gone down this path a few times at Moz, only to walk away because the investment was greater, in our opinion, than the output. OEM deals are more commonly found on the hardware side, where a laptop, for example, ships with a software product pre-installed (example of that below). However, software OEM deals are becoming more and more common. If you're in the service business, play around with pairing your services with a related software product, similar to what we've done with Distilled.

18. Product integrations

The integration of your product into an existing, often much larger product, makes a lot of sense. Depending on how in-depth of an integration you're looking to do, this could almost be considered a low-hanging fruit option. There's truly no barrier to do it, only the investment of your time. In the software world, there's a few examples of great integration marketplaces. Notably Salesforce, Hootsuite (Perks Listing), and Zendesk. From our discussions with Hootsuite, they see an average of 100 to 500 installs per day of each application in their gallery. That's up to 500 people per day, or 15,000 per month, that could be exposed to your product for zero cost. Not only that, but product integrations are often the entry point to a much deeper relationship â€" potentially even an acquisition.

19. Industry surveys

Becoming the voice of an industry can have massive implications on growth. One way to do this, as we've found at Moz, is to create an industry survey and publish the results. By doing this, you not only get to use the results for your own product intelligence, but also become the point of reference for thousands of people in your industry. This, as you can imagine, is a lot of work. Evangelizing the survey to the point it has enough data to make an impact, putting time into the analysis, and finally visualizing the data in a beautiful way can be a huge time investment. That's not to say it's not worth it, only something to consider when prioritizing. Looking back on the impact of industry surveys at Moz, it was definitely worth the time.

20. Rally the troops

It's tough to say that this is really a no cost tactic, but it could be if you tried hard enough. The high level concept of rallying the troops, is to bring together a group around a cause, which is then advocated by your brand. I know, a little difficult to digest. Let me provide a more concrete example: Gnip's Big Boulder Initiative. Here, they use their brand to bring together people that are in the field of social data to discuss issues and opportunities. By hosting an initiative like this and bringing people together around a topic, your brand stands at the focal point of an issue that is relevant to your business. Which, if done with the right intentions, can have a huge impact on the growth of your brand.

21. Free standalone tools

Last but not least, is the tactic of creating standalone tools as a top of the funnel acquisition method. One of my favorite companies that utilizes this tactic is HubSpot. They've created tools like the Marketing Grader and RetweetLab as a way to offer a free service that essentially acts as a funnel to pre-qualify users of HubSpot. By having someone run a report of how they're doing from an inbound marketing perspective, HubSpot can then use that data to make an argument for the use of their product to help increase their visibility. It's absolutely brilliant, and great fuel for your core product. Moz has a similar strategy with tools like OSE, GetListed, MozCast, and others. For a steady stream of qualified leads, there's not much that can beat this tactic.

And, that's it. Easy, right? :) Don't let this list overwhelm you. Depending where you're at in the stage of your company, some of these tactics may make a whole lot of sense â€" others not at all. This is meant to be your ammunition belt, something that you can pull ideas and tactics from as you reach certain plateaus or sticking points in your business. It's not meant to be a checklist.

Adapt to it, add to it, and put your own spin on it. Even better, if you have something to add to the list, feel free to drop it in the comments below.

I'll see you at the top of the growth curve.

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Seth's Blog : Simple steps for successful partnerships

Simple steps for successful partnerships

The connection economy is built on ecosystems, and they depend on partnerships.

Don't change the rules.
If you have to change the rules, tell your partners in advance.
And even if you can't do #2, at least tell them the new rules.

Trust is precious and easily wasted, and guessing is a lousy foundation for future progress.

• Email to a friend •

luni, 15 iulie 2013

Mish's Global Economic Trend Analysis

Political Atom Bomb Explodes in Spain; Prime Minister Refuses to Step Down After Being Implicated in Slush Fund Scandal; Eventually ...
Big Miss in Retail Sales vs. Expectations; Trend Change or Another "Soft Patch"?
"China Urbanization Growth Fallacy"; Trouble with Ponzi Schemes; Stopped Clock Syndrome; Wrong vs. Early

Political Atom Bomb Explodes in Spain; Prime Minister Refuses to Step Down After Being Implicated in Slush Fund Scandal; Eventually ...

Posted: 15 Jul 2013 01:12 PM PDT

Prime Minister Mariano Rajoy in in the battle of his life following additional revelations by Spain's former treasurer that Rajoy personally received undeclared cash payments.

Let's start this start this story with a flashback snip from my February 4 report Ledger Book Shows Rajoy Received 35 Payments Totaling €322,231; Rajoy's Incredulous Denial; Anger Rises.

"This is all false. I'm not in politics for money. I have never received undeclared money" said Rajoy.

Adding fat to the denial fire, accounting books allegedly written and kept by Luis Bárcenas, the former PP treasurer, implicate Rajoy personally, to the tune of €322,231.

Bárcenas' curious "atom bomb" defense was that the books were phony. Yet Bárcenas' promised to set off a political "atom bomb" if convicted.

My comment in February was: "If everyone is innocent, then it is logically impossible to set off a political bomb of any size, let alone an atom bomb. Simply put, the denials do not add up."

Opposition Calls for Resignation of Rajoy

Yesterday, the opposition called for "immediate resignation" of Mr Rajoy

Alfredo Pérez Rubalcaba, the leader of the opposition Socialists, called for the "immediate resignation" of Mr Rajoy, and warned that his refusal to stand down was causing "incalculable damage to a country that is living through difficult moments". His call was echoed by other opposition leaders. The Socialists also declared that they would no longer co-operate with the Rajoy government, only weeks after the two sides issued a joint declaration setting out Spain's interests ahead of the June European summit.

The Socialists also declared that they would no longer co-operate with the Rajoy government, only weeks after the two sides issued a joint declaration setting out Spain's interests ahead of the June European summit.

The latest attacks on the government follow the publication of several mobile phone text messages that were sent between Mr Rajoy and Luis Bárcenas, the former PP party treasurer who allegedly operated a slush fund that made under-the-table payments to top party leaders, including to Mr Rajoy himself.

Mr Bárcenas was arrested at the end of June, after a judge ruled that the former treasurer should await his trial in prison. He is the subject of an investigation into how he managed to amass as much as €48m in accounts in Switzerland and elsewhere. Bail was set at €28m.

Rajoy Dismisses Calls to Step Down

Today the Financial Times reports Rajoy dismisses calls to step down as PP loses support.

Mariano Rajoy was battling on Monday to contain the political fallout from the slush fund scandal that has rocked his party, dismissing calls for him to step down and warning of the risks of plunging Spain and its long-suffering economy into "political instability".

"I will defend political stability and I will complete the mandate given to me by the Spanish people," the Spanish prime minister said.

Polls show the scandal has already inflicted severe damage on the standing of both the PP and Mr Rajoy personally, with fewer than a quarter of voters saying they would vote for the ruling party if elections were held now.

Mr Rajoy was speaking just hours after the man at the centre of the scandal launched a fresh legal broadside against the prime minister and other senior PP officials. Luis Bárcenas, the former party treasurer, told a criminal court in Madrid that he indeed managed a slush fund that was fed by secret donations from construction companies and other businesses.

According to several accounts of the closed-door hearing, he also confirmed allegations that the fund was used to make quarterly cash payments to top party functionaries, including to Mr Rajoy himself. In a new revelation, Mr Bárcenas said he made additional cash payments worth €20,000-€25,000 to Mr Rajoy and to Dolores de Cospedal, the party leader, between 2008 and 2011.

"He was really very credible. He gave a lot of details," one lawyer present at the hearing said.

Political Atom Bomb Explodes

And so here we are. Bárcenas exploded his "atom bomb" with additional, credible details as promised.

Rajoy wants to stay in power and proclaims a political mandate. What kind of mandate does one have with support running less than 25%?

What kind of mandate does Rajoy have when he has taken huge political bribes without bothering to pay taxes on them?

Eventually ...

Eventually, a populist will stand up with a dual message "to hell with the euro and to jail with all the liars and thieves".

That person will be elected.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Big Miss in Retail Sales vs. Expectations; Trend Change or Another "Soft Patch"?

Posted: 15 Jul 2013 10:24 AM PDT

Retail sales were up 0.4% in June compared to Bloomberg estimates of +0.8%. May retail sales were revised lower, to +0.5% from an originally reported +0.6%.

The increase seems healthy enough until you dive into the details. Here are some retail sales comments from Bloomberg to help put things into perspective.

Restaurants and bars decreased 1.2 percent in June, the most since February 2008.
Sales dropped 2.2 percent at building materials outlets, the most since May 2012.
Purchases at department stores declined 1 percent in June.
Retail sales excluding autos and gasoline unexpectedly fell 0.1 percent.
Purchases rose 2.4 percent at furniture and home furnishing chains, the most since May 2012.
Automobile dealer sales rose 1.8 percent
Purchases excluding autos, gasoline and building materials, which render the figures used to calculate gross domestic product, rose 0.1 percent after a 0.2 percent increase in the previous month.

That last bullet point explains why the next GDP number will likely be below stall speed.

Yet economists still predict the US economy will expand at 2.3% in the third quarter. I will take the under (not that there is much meaning to GDP numbers in the first place).

Census Bureau Report

Let's now take a look at some charts from the ADVANCE MONTHLY SALES FOR RETAIL AND FOOD SERVICES JUNE 2013 report by the Census Bureau.

Retail Sales vs. Previous Months

Retail Sales vs. Last Year

Retail Sales Synopsis

Business	Percent Change
	June 2013 Advance From		May 2013 Preliminary From
	May 2013	June 2012	April 2013	May 2012
Total	0.4	5.7	0.5	4.4
Total (excl. motor vehicle & parts)	0	4.5	0.3	3.6
Retail	0.6	6	0.7	4.4
Motor vehicle & parts dealers	1.8	11.4	1.4	8.2
Auto & other motor veh. dealers	2.1	12.9	1.5	9.1
Furniture & home furn. stores	2.4	4.6	-0.4	0.3
Electronics & appliance stores	-0.1	-0.3	-1	-0.8
Building material & garden supplies	-2.2	9.4	1.2	10.7
Food & beverage stores	-0.1	2.3	0.5	2.8
Grocery stores	-0.2	1.9	0.5	2.5
Health & personal care stores	0.2	3	0.5	1
Gasoline stations	0.7	4.3	0.4	-0.8
Clothing & clothing accessories	0.7	4.8	-0.1	4.9
Sporting goods, hobby, book & music	0.7	3.4	0.8	1.1
General merchandise stores	0.1	1.1	0.5	1
Department stores (ex. L.D.)	-1	-5.1	-0.2	-4.3
Miscellaneous store retailers	-2.5	5.8	1.6	9.8
Nonstore retailers	2.1	13.8	0.4	10.5
Food services & drinking places	-1.2	3.1	-0.6	4.4

Trend Change or Another "Soft Patch"?

Note the numbers for motor vehicles and parts dealers, and also for auto and other motor vehicle dealers vs the rest of retail sales.

How sustainable are those numbers? I suggest not very. Next note furniture and home furnishing stores.

Strength in those numbers reflects the strength in housing. How sustainable is housing with the huge rise in mortgage rates in the last month? Once again, I suggest not very.

Yet, the consensus view is this somehow represents a bottoming action in the economy rather than a topping action. Time will tell which view is accurate.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

"China Urbanization Growth Fallacy"; Trouble with Ponzi Schemes; Stopped Clock Syndrome; Wrong vs. Early

Posted: 14 Jul 2013 11:33 PM PDT

China bulls point to China's plans to move millions from farms to cities as some sort of guarantee that that China's growth will continue.

What If?

What if such analysis is ass backwards?
What if urbanization is the result, not the cause of growth?
What if pressures to maintain the symbolism of growth (as opposed to actual growth) do far more harm than good.

Michael Pettis at China Financial Markets tackles the above questions via email on "The Urbanization Fallacy". What follows is a synopsis from Michael Pettis, written as a guest post.

Begin Pettis

The Urbanization Fallacy

Special Points

Sentiment among China analysts is changing rapidly, and there is a great deal more pessimism about growth prospects, allied to greater support for the radical reforms the new administration is proposing, but the very late change in analyst sentiment underlines how mistaken most analysis about the Chinese economy has and continues to be. Over the next few years, as a consequence of this failure, analysts will continue to lower their growth forecasts for China dramatically.
If we were expecting the June 20 liquidity crunch to slow growth in Wealth Management Products (WMP), we may be disappointed. Preliminary numbers suggest that WMP rates have risen dramatically but WMP issuance may be as strong as ever.
The main impact on WMP issuance may turn out to have been deterioration in asset quality, as higher rates are likely to turn away real business borrowers but will probably have no impact on borrowers who simply need to roll over their existing funding.
China's plans to shift 300 million people into cities has become the new default argument for high growth, but it is based on a fallacy. First, urbanization does not create growth. Growth creates urbanization, and so the urbanization process is simply a highly pro-cyclical mechanism that increases high growth and exacerbates slowing growth.
Second, urbanization is actually a cost, not a source of growth, and this cost is only economically justified if the increase in the overall productivity for newly urbanized workers is greater than the cost of urbanization. If China is growing so quickly that it is desperate for new workers to leave less productive jobs in the countryside and take more productive jobs in the city then urbanization will make China richer.
Urbanization, in other words, is a consequence of rising wealth and can accommodate it. It is not a cause of rising wealth.
Use of the "stopped clock" analogy – when those who warned about an unsustainable process turn out to be right, for example, they are only right in the way that a stopped clock is right twice a day – is almost always an indication of economic illiteracy.

This year there has been a huge shift in sentiment about China, with many analysts, especially on the sell side, struggling to remain relevant in the face of their earlier assurances about growth and risk in China. That their attitudes have shifted is probably a good thing, but it is not always clear to me that increased skepticism about China's growth prospects has occurred because of a deeper understanding of the root cause of the investment/consumption imbalances and the relationship between debt and growth. I worry that many analysts are arguing now that the current disruption in Chinese growth is a temporary effect of unexpected adverse shocks – especially shocks caused by poor lending decisions on the part of individual entities – and so they are underestimating both the urgency of fundamental reform and the extent of the slowdown in economic growth.

For many years, and even as recently as 20011-12, these analysts were fairly confident that China's growth model was in reasonably good shape and required only minor reforms to keep growth rates high for many more years, but now these same analysts are celebrating the new administration (correctly, in my opinion) for the vigor and determination with which they are forcing through dramatic changes in China's growth model.

I mention this not to criticize the change in sentiment, but rather to point out that as I see it there have been no substantial changes in China in the past five to seven years that would justify such a dramatic change in sentiment. It should have been obvious, at least back in 2009, when analysts were all falling over themselves to applaud China's fiscal and credit response to the global crisis, that we were making a bad situation immeasurably worse, and that the reforms, urgent then, would become all the more urgent under the new administration.

If it wasn't obvious in earlier analyses of China's economy why we were in trouble back then, I worry that the latest analyses are also failing to understand the underlying problem. While everyone correctly applauds Premier Li's determination to tackle the underlying problems, it is important that we understand what the underlying problem has always been. For the newly converted, the risk is that they see the recent slowdown as a consequence of unexpected adverse developments, rather than as an expression of the underlying systemic problem with the growth model. This should have been obvious many years ago, and not just a problem this year now that local government financing and shadow banking have hogged the headlines.

China's problem, in other words, is not that in the past three years a bunch of irresponsible borrowers have emerged to ruin the party, and the solution is not that these irresponsible borrowers must be disciplined. China's problem is deeper than this. Economic growth is systematically dependent on a thoroughly unsustainable credit expansion. China cannot rebalance the economy and it cannot reduce its growing credit risk until it thoroughly overhauls the growth model and the capital allocation process, and it simply cannot do either at economic growth rates at much above 3-4%.

Yes, sentiment is changing and growth expectations are dropping, but analysts continue to misunderstand the nature of the problems and so continue to get it wrong – although at least they are now moving in the right direction.

Has bad credit been constrained?

I have no doubt that higher rates will eventually cause a reduction in demand for WMP funding, but as long as there continues to be an implicit guarantee from the issuing banks, which are in turn implicitly guaranteed by the central government, I see no reason why wealthy depositors will shun WMP. On the contrary, higher rates with no change in risk should actually increase the supply of WMP funding, just as it seems to have done in the past two weeks.

Trouble with Ponzi Schemes

It will take one or more major WMP defaults in which depositors lose money before the supply of WMP funds dries up, but of course the risk there is that if we do see defaults the result could be a destabilizing run on WMP. This is the trouble with Ponzi schemes once they become too big – you're damned if you stop them and damned if you let them continue.

What worries me about the higher WMP rates is that they can have an adverse sorting impact on the asset side. Higher rates of course might dissuade borrowers who are using the money for productive purposes – as the higher borrowing cost approaches or exceeds the expected return on investment – but higher rates will have almost zero impact on borrowers who need new financing just to roll over old financing. They will continue to borrow at any rate as long as they can. One consequence may be that even as (or if) WMP growth slows, the quality of the assets funded will deteriorate, so that the overall risk for the banking system continues to grow as fast as it did before rates rose.

Controlling debt

Meanwhile in all the excitement over WMP and SHIBOR we risk losing sight of the fact that, contrary to what a lot of analysts are suggesting, the problem in China is not that there are specific areas of risky lending that need to be controlled. The real problem is that increased economic activity is inextricably tied to unsustainable increases in debt, and this is a system-wide problem. It will prove impossible both to control increasing financial risk and to keep growth even at current levels. Any attempt to crack down on one form of bad lending will only cause another form of bad lending to surge, and if Beijing really wants to control the worsening financial risk it will have to tolerate growth rates of 3-4% or less.

Tey point is that the economy is addicted to unsustainable increases in debt, and while Beijing can flail away at individual problems areas, it cannot resolve the underlying debt problem without a sharp slowdown in growth.

Most analysts have lowered their forecasts substantially in the past two years, and especially in the past month, but they are still deluding themselves about longer-term growth prospects.

I just don't see how we can grow at 7-8% without running the risk of a serious debt crisis before the end of the period. As it is we are having a hard enough time understanding what current growth rates really are. Power consumption, for example, simply doesn't suggest that growth rates have been able to hold up.

Last year's GDP growth clocked in at 7.9%, although a lot of analysts believe it may have been closer to 5.5%, and if power consumption year to date is already much lower than it was last year, unless there has been a major – and hard to detect – improvement in energy efficiency it is hard for me to imagine why growth this year and next year should even match last year.

Ignoring Overinvestment

Analysts have (finally) started to understand the weaknesses of China's growth model and they recognize that it is imperative that investment and credit stop growing, but in their analysis, they wholly ignore the previous overinvestment and the associated costs. In other words they assume that if China stops overinvesting now, they can predict future growth rates while wholly ignoring the costs already incurred of many years of overinvestment.　

But this is a mistake. It is not just that China has to stop investing in non-productive projects, and so growth must slow. China must also write down many previous years of investing in non-productive projects, and so growth must slow even more as these asset are written down in the form of continued transfers from the productive sectors of the economy to cover the gap between economic returns and debt servicing costs.

It is as if analysts believe that once China stops wasting money on uneconomic projects, it can move forward as if nothing has happened. But many years of wasted investment must have a cost, or else why bother stopping? This was the same mistake made about Japan's growth in the early 1990s. Analysts, it seems to me, are assuming that China can start with a clean state and grow at a slower but healthier rate once it corrects its mistakes. All that piled up debt is simply ignored.

Is urbanization the answer?

Growth rates over the next decade cannot exceed 3-4%. There are a lot more growth forecast downgrades to follow. There is still a lot of resistance to this idea.

Like so many of the earlier bull arguments, however, this new belief that urbanization is the answer to China's growth slowdown is based on at least one fallacy. The first and obvious reason is that urbanization is not an act of God, and therefore indifferent to earthly conditions. Urbanization itself responds to growth. Countries do not grow because they urbanize, in other words, they urbanize because they are growing and there are more good, productive jobs in the cities than in the countryside. In that sense urbanization is not a growth machine. It is simply a pro-cyclical process that accommodates growth when growth is rising and reduces it when it falls.

And pro-cyclicality is a bad thing, not a good thing. It means that increases in growth are enhanced but reductions in growth are exacerbated, so it adds costly volatility to the economy. As the economy slows, in other words, urbanization itself slows, thus subtracting economic activity.

Of course if 300 million people move from the Chinese countryside to the cities, we would need to build lots of new apartment buildings (assuming the existing apartment buildings are already full, which is an heroic assumption in China), roads, hospitals, schools, and so on to accommodate them, but these do not make China any richer. They have to be paid for, and their cost is equal to the cost of capital (resources, machines, steel, copper, etc.) plus the total amount of labor that workers building all these things were doing (and no longer can do) before these things were built. We can assume, if we like, that all of the labor was previously unemployed, in which case the labor cost of urbanizing will be zero, but there will still be a tremendous cost of resources.

Paying for these resources would require transfers from other sectors of the economy, so that the economic activity created by all this building would be exactly equal to the economic activity subtracted from the economy.

The only way China would be "wealthier" is if the value of the new stuff created was greater than the value of the stuff that would have been created but no longer can be.

No more stopped clocks, please

Before closing allow me – perhaps a little foolishly – to display a little peeve. For many years before 2007-9 a few analysts have warned that rising consumer credit in the US and peripheral Europe was unsustainable. They warned that rising debt to support misallocated investment in China was also unsustainable. They warned that soaring US mortgages backed by little more than the hope that land prices could only rise would lead to a real estate crisis. They warned that commodity-exporting countries that did not hedge their bets would find themselves in serious trouble when commodity prices collapsed,

Of course you could not have had a bubble unless the majority of analysts disagreed with these warnings, and most analysts did indeed disagree. So what happened when the warnings turned out to be right? Obviously enough the mistaken bulls publically acknowledged that their models were incorrect and promised to hit the economic history books so that they never again would be so foolish.

Just kidding. What actually happened is that the former bulls immediately trotted out the stopped-clock analogy. The reason the worriers turned out to be right, they earnestly explained, is that they are perma-bears, and as everyone knows a stopped clock will always be right twice a day. This doesn't mean, however, that models used by the worriers were right and the models used by the bulls were wrong, so of course there is not need for the bulls to change their models.

Regular readers of my newsletter know how often I gripe about the superficiality of those analysts who don't see why describing a growth model that is generating an unsustainable increase in debt is not the same thing as predicting a collapse in six months. Debt can rise unsustainably for many years before the debt burden itself becomes unsustainable – after all it is not true that those who worried about the rise of consumer credit in the US in the mid 2000s were "wrong" until the stopped clock eventually was right.

But this strikes me as an incredibly superficial analysis, explained only by the fact that many of us expect economic analysis merely to predict whether the stock market will rise or fall this week. Those who worried about rising consumer credit in the US were not wrong every single year until 2007-8, when they accidentally became right. They were right every single year, and were proven right in 2007. Those who have been arguing that China is experiencing an unsustainable increase in debt have not been wrong every quarter that China has not collapsed. They are almost certainly right and it is hard even for the most foolish of bulls any longer to deny it.

An analysis that points to an unsustainable trend is always right if the trend turned out indeed to be unsustainable. The fact that it may have taken many years before the limits were reached is not an indication that the model was wrong. It is simply how the economy works.

End Pettis

Stopped Clock Syndrome

I have great deal of sympathy regarding Pettis' stopped clock message. I have been in a similar situation regarding equity risk in the US for two years.

Looking even further back, I was a year or two early calling for a housing bust, a credit crunch, and a collapse in treasury yields in the US. The email taunts mounted.

After catching the rebound, I became too cautious, too early, as the stock market marched higher. Taunts come in again now.

Thus, I know far too well what it is like for Pettis to call for 2% growth in China for the rest of the decade (on average), when everyone else thinks 7% is a huge slowdown.

Wrong vs. Early

Right vs. wrong has to do with timeframe and the nature of ones positioning in the interim. But how far can one carry the message?

Are hyperinflationists wrong or early? Here is the answer: A dollar collapse has supposedly been coming every year for over 10 years. With each pullback in the US dollar index, screams get louder and louder, and the comparisons to Zimbabwe more and more absurd.

If by some 1% chance that hyperinflation does occur in the next decade, I will be the first to admit I was dead wrong.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

marți, 16 iulie 2013

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