Cyrillic Partners

We’ve been writing a lot recently on the effects of the falling dollar, its impact on earnings and what the Federal Reserve is likely to do because of it.

Paul Krugman has an interesting blog post about it, worth reading. The takeaway is excerpted below:

Finally, there’s a fairly subtle argument about term structure and timing.

You see, the Fed only controls short-term interest rates, while investment spending depends on long-term rates. Meanwhile, the effects of a weak dollar on exports take a while, maybe as much as two years, to take full effect.

So there’s a story that runs something like this: a plunging dollar will eventually be very expansionary, and will force the Fed to raise rates to cool off the economy — not now, but a year or two from now. But the expectation of this future rise in short-term rates will push up long-term rates now, causing a recession even if the Fed does nothing.

From the FT:

Shares in Starbucks slumped after the café chain on Thursday stirred concerns about the health of the US economy when it reported its first quarterly fall in traffic at its US stores and announced plans for its first television advertising campaign.

The planned holiday season advertising comes as Starbucks acknowledged that its supposedly “recession proof” sales of frappuccinos and flavoured latte drinks were feeling the impact of broader slowdown in US consumer spending.

Shares in Starbucks fell 8.6 per cent at $22.02. The company’s shares are now down 38 per cent this year.

There’s no secret in what’s driving the Starbucks slide: the falling dollar. The coffee business is commodity based: it’s major input is coffee beans, which have to be imported. When the dollar weakens against foreign currencies, it’s more expensive to buy commodities such as coffee. Starbucks gets stuck with the bill.

But when the company tries to pass the price along to consumers with a $0.09 increase in its per-cup prices, the law of supply and demand kicks in and people buy fewer frappuccinos.

This isn’t a story about “Recession” or “Inflation.” Nope. It’s all about international trade and currency. The Federal Reserve is willing to crucify companies that are net-importers, at least in the short term, in exchange for domestic growth.

Good bets right now are on companies that are net-exporters, themselves a rare commodity in the U.S. these days.

[Image thanks to Boston.com]

Two startups in Silicon Valley are launching a service that will sequence your DNA and report back on the probability you face of contracting certain diseases. VentureBeat has a good summary story of the services.

Such services could turn the insurance industry on its head. Although each profile might be private for each user, meta data might be sold to insurance companies looking for a better profile. The meta data might suggest, for example, that men between 40 and 45 who grew up in a specific town have a higher risk of certain types of cancer. That would allow an insurance company to adjust its premiums for anyone who fit those criteria.

The other side of the meta-data coin is the chance to remedy public health problems before they hurt people. But that still seems a ways off.

For more on each company, check out 23andMe and Navagenics.

Not everybody loves the Federal Reserve as much as we at Cyrillic Partners do. NORFED seems to be an organization that is so against Bernanke, et al, that it has decided to publish its own currency system, one based on silver holdings.

Everything was going fine for the group until mid last year, when the U.S. Mint issued a press release stating that NORFED’s “Liberty Dollars” were illegal. So NORFED owner Bernard von NotHaus sued the Mint and the Treasury and a bunch of other people earlier this year.

It seemed like a good idea until the FBI raided NORFED headquarters earlier last week and seized gold, silver and two tons of copper coins featuring Republican presidential candidate Ron Paul, according to a report by the AP.

NORFED’s position is particularly interesting to Fed-watchers. The organization’s premise is that backing their dollars with silver will eliminate the inflationary pressures on the U.S. Dollar. The group offers the following charts on its website:

The theory here is that increasing U.S. Federal Debt is driving the buying power of the dollar down. Right… Well anyway, people don’t necessarily have to fear inflation. It’s all about what rates you’re locked into or how sticky your wages are.

I’m not sure that the currency really “competes” with the U.S. Dollar, which is what most of the case will turn on, it seems. From The Washington Post story: In the affidavit, an FBI special agent states that he is investigating NORFED for federal violations including “uttering coins of gold, silver, or other metal,” “making or possessing likeness of coins,” mail fraud, wire fraud, money laundering and conspiracy. “The goal of NORFED is to undermine the United States government’s financial systems by the issuance of a non-governmental competing currency for the purpose of repealing the Federal Reserve and Internal Revenue Code,” he states.

Couldn’t the same thing be said for any number of “currencies” printed or created for the purpose of exchange? Postage stamps come to mind.

[Images from NorFED website.]

Federal Reserve Board Governor Randall S. Kroszner made a speech Friday that pundits are interpreting as a signal that the Federal Reserve will not cut rates in December. You can find the whole text of his speech at the Fed’s site. Here’s an excerpt:

Against this backdrop, inflation expectations have remained reasonably well anchored. The prices of oil and other commodities continue, of course, to be a source of major uncertainty for the overall inflation outlook. Currently, quotes from futures markets suggest that investors expect food and energy prices to come off their recent peaks next year. That said, I think it’s also fair to say that political and economic developments around the world, not to mention the vagaries of the weather, make any forecast of oil and other commodity prices highly uncertain. Moreover, spillovers from the latest run-up in crude oil prices could begin to put upward pressure on core inflation.

So, to sum up, the economy seems poised to grow for a while at a noticeably slower pace than it did during the summer, in part because of lower home sales, less residential construction, and generally smaller increases in consumer and business spending. A sequence of data releases consistent with the rough patch for economic activity that I expect in coming months would not, by themselves, suggest to me that the current stance of monetary policy is inappropriate. I will, of course, continue to carefully assess the implications of the incoming economic data and financial market developments for economic growth prospects and the outlook for inflation.

[Thanks to the University of Chicago Chronicle for the image.]

The Associated Press has a good Q&A-style story about who wins and who loses thanks to the falling dollar. A piece of this instructive story is excerpted below:

Q: Does anybody win from the weaker dollar?

A: American manufacturers and farmers are enjoying a surge in export sales to record levels as the weaker dollar makes their goods cheaper and thus more competitive abroad. The export boom is helping to lower the U.S. trade deficit this year following five straight years of record highs.

The growth in exports is helping cushion the economic impact from the steep slump in housing, adding nearly a full percentage point to growth in the most recent quarter. Without the export boom, many economists believe the country would be in much greater danger of falling into a recession from the combined blows of the housing slump, the credit crunch and soaring energy bills.

The falling dollar affects venture capitalists and other U.S. based investors putting money to work overseas. VCs that raise their funds in U.S. dollars and then invest in China, India, Europe, Israel and other places can expect to pay more for their deals than they would for equivalent deals in the U.S. (China is a bit of an exception, since its currency is linked to the U.S. Dollar). The falling dollar should put a tamper on venture investment outside of the U.S.

Last year, Netflix offered a $1 million prize for anybody who could improve its algorithm for recommending movies by 10 percent. It’s a data junkie’s dream, a veritable “Who Wants to Be a Millionaire” for statisticians. Alex and I even thought about entering it ourselves.

Nobody’s hit the target yet, but a team from AT&T Labs has come closest, hitting a 8.43% improvement and scoring $50,000 from Netflix. The team has spent about 2,000 hours working on the problem, which means, at this point, they’ve earned an average of $25 per hour. Not very impressive for a bunch of PhDs.

Alex says he’s gunning for the Princeton team.

Read the NYT’s story.

The Federal Reserve is going to publish its economic estimates more frequently and expand them to include additional metrics.

Call it pay back to Alan Greenspan for his negative predictions (we republished a cartoon about this). It’s a subtle way to take power away from the various would-be prognosticators by publishing even more information. It makes the black box of the economy look a little less opaque.

Here’s the plan, from the Fed’s site:

In the future, the FOMC will compile and release projections four times each year rather than twice a year. In addition, the projection horizon will be extended to three years, from two. FOMC meeting participants will now provide projections for overall personal consumption expenditures (PCE) inflation, as well as for real gross domestic product (GDP) growth, the unemployment rate, and core PCE inflation. Projections of nominal GDP growth will be discontinued. Summaries and explanations of the projections will be published along with the minutes of the FOMC meeting at which they were discussed. These descriptions will provide a fuller discussion of the projections, covering not only the outcomes that most meeting participants see as most likely, but also the risks to the economic outlook and the dispersion of views among policymakers.

Read more about it in the Economist Magazine’s story.

The CPI increased 0.3% during October, keeping pace with the rate it set in September, according to the Labor Department. The core index, which doesn’t include energy price increases, only grew at 0.2 percent.

So what is the Federal Reserve going to do next month? It seems like the U.S. economy, despite a falling dollar and rocketing oil prices, is bullet proof.

The futures traders are betting on a quarter-point cut in the Target Rate, but I’m not certain it will happen. A lot of it will depend on the strength of the pre-Christmas buying season.

From the NYT story: “There’s been a lot of concern in the marketplace and in the business press about the dollar and high commodity prices feeding into core inflation and causing a problem for the Fed,” said Zach Pandl, an economist at Lehman Brothers. “Those concerns are pretty much overstated, and I think that was confirmed in the report.”

[Thanks to the Indy Star for the image.]

I’m teaching a class on how to write an effective executive summary Saturday at Monte Vista High School, in Danville, Calif., and felt totally unprepared until I turned to the Internet for help. Guy Kawasaki has republished some interesting advice from Bill Reichert. I’ll summarize: The job of the executive summary is to sell, not to describe.

So here’s my sales pitch: I’ve talked to hundreds of entrepreneurs, executives and venture capitalists through my years as a journalist and have specialized in conveying their big ideas in a concise, compelling manner.

Write Your Pony Statement

I’ve always felt the same way about news stories and blog posts. If you don’t get a person’s attention, he or she will never make it to the end of your story and won’t ever appreciate your brilliance. You’ve got to go with the good stuff and give it to people fast.

That may be the hardest thing entrepreneurs have to do. Figure out what they have that’s really impressive. As one repeat entrepreneur told me: “You’ve got to find the pony.” A lot of schools teach students how to write a thesis statement and finding the pony can be a little like that, but it comes in a slightly different flavor. It tells people what to expect from the rest of the executive summary. Think of it as movie trailer. It doesn’t tell everything, it teases you, makes you want to find out more.

Here’s an example. Suppose you were pitching Google to a Kleiner Perkins back in 1999. Here’s what you might have said: “We’ve come up with an algorithm to find online information more effectively than Yahoo, a multi-billion dollar company.” It’s not perfect, but it says two things: (1) We have a technical innovation that beats Yahoo and (2) That could make us a multi-billion dollar company. It’s nice because it tells what it is that you have that’s special and hints at what that could be worth. Continue Reading »

[Picture by Yuri Bereznyuk/European Pressphoto Agency, via NYTimes.com]

Bad weather damaged nearly a dozen small oil tankers in the Kerch Strait, which links the Sea of Azov with the Black Sea, leaving sea birds slicked with oil, the NYT reports.

A world away, a tanker grazed the Bay Bridge and sent a slick out across the San Francisco Bay. CNN reports: Nearly 200 dead birds have been recovered from the bay, while another 465 birds have been rescued alive but oiled, according to Lisa Curtis, administrator of Department of Fish and Games office of spill prevention and response. Federal investigators are investigating.

[Thanks to Nicholson Cartoons for the image.]