It's Great to Recognize the Accomplishments of a Friend

While my normal commentary focuses on politics and economics, I learned yesterday of an honor that a friend in Los Angeles received recently and I wanted to share it here. It this day of worrying about our own butts and surviving the financial crisis, some people manage to keep focused on the larger picture and creatively address the problems of the larger society.

Janet Halbert, herself a cancer survivor, has created a program called Hurdle Jumpers to address a simple but serious need--that of providing support to those undergoing the tribulations of chemo and radiation therapy for cancer. Everyone complains of the side effects of these treatments. Janet has done something about it with the energy and determination that she has always shown.

The City of Los Angeles has recognized Janet's work and named her one of 15 recipients of the Pioneer Woman Award for 2009. She deserves the award.

Learn more about Hurdle Jumpers and help them out. You can find more information at their web site, www.hurdlejumpers.org.

Congratulations, Janet. Parabéns. Mazel Tov!

Why the New Title

I've just changed the title of this blog to "Brazil Thoughts" from "Thoughts from a Distance". Why? A few days ago, I did a Google search for this blog with its title words. I discovered that this is a common phrase in the world of spiritism religions – the distance referring to the gap between our world and the world of spirits, or whatever the belief entails. Although I wish them well on every dimension, that's not the audience I'm after. So, I've changed the title in the hope it will make the blog more apparent on search engines and therefore increase my meager readership. I've seen 33 hits in a tracking report over the past month, so I'm more optimistic that people other than those I've personally urged to read it have logged in. It's a start.

More Pennies Dropping/Fichas Caindo

As I've been predicting in lectures and classes, shopping malls in the US are the next problem area for the financial system there. Today, GGP filed for Chapter 11 bankruptcy protection because it has not been able to restructure all the debt it took on during the housing boom of 2002 - 2006. GGP has 200 malls throughout the US of which 158 also filed today.

There are two basic reasons why shopping malls, particularly those owned by REITs and other public companies, are vulnerable to this recession. In general, they took on absurd amounts of debt during the boom, normally exceeding the standard 80% that banks and other lenders have allowed in the past. As I just explained Tuesday night to my entrepreneurship class, the risk with debt is that you have to make the payments whether you have sufficient income to support the payment or not. In a boom environment, that is generally not a problem. Rental income rises as consumer demand for goods in the stores increases. However, when there is a precipitous drop in consumer demand, rental income shrinks, frequently leaving the mall operators with an income insufficient to pay both expenses and debt.

Why rental income shrinks in a recession is the second reason why malls are vulnerable. Unlike apartments, rental contracts in shopping malls have two income components. The first is a fixed rent charge (like apartments). The second is a variable component based on the store's sales figures (generally 7% of sales). If sales go down, two things happen. First, the store owners are themselves squeezed. Although their variable rent will decrease, their sales may be insufficient even to pay their full fixed rent after they pay for their merchandise and administrative expenses. And, as I just said, variable rents go down with the decline in sales.

As a result, the mall operator faces two risks. First, a declining variable income, which he or she may rely on to pay the mortgage payment (although a bank, insurance company or fund should only have counted a small portion of this in assessing the creditworthiness of the mall property). Second, an increase in the stores in the mall that are in default on their rental payments because of their loss of income.

The mall operators have tough decisions to make. Should they keep on the stores even if they are in default in the hope that the default will be brief and that a workout can be structured for them? How should the mall "de-leverage", the artless term used by GGP on their web site, that is, to reduce their debt load to bring their level of debt back into balance with their properties' ability to pay? The situation is not a pretty one right now. Other large mall operators are likely to file for Chapter 11 reorganization in the wake of GGP's filing. This could be the next major bubble to break as the loan holders, the creditors, themselves are being pressured to restructure their debt portfolios, get out of the boom mentality and return their businesses to a more conservative debt posture.

If consumer demand is falling, then consumers are staying at home with their credit cards in their wallets. One reason for this is they themselves are falling to default on their credit cards. This could be the next major area of impact that will keep the United States in a recession through 2009 and keep the credit markets closed.

America and Innovation - Thoughts on Sustainability

I have been reading Tom Friedman's latest book, Hot, Flat and Crowded, and I was struck yesterday by one small portion on America's role in the world. He argues that the United States has traditionally led the world in technological and institutional innovation and that it must exert this same leadership our environmental problems.

He says:

It's not just technology innovations we need to be offering the world. America has also been an innovator in the conservation of natural resources, and we can promote this value globally as well. . . . If America would become the world leader in building clean energy technologies and promoting conservation, it would tip the whole world decisively in that direction. This probably sounds a little old-fashioned or jingoistic. I do not mean it that way. It is just that I continue to hold the view that many large-scale bad things happen in the world without American leadership, but few large-scale good things happen without American leadership. . . . Americans forget, especially in recent years, when so many people around the world seem to be criticizing us, how much American either stops setting trends or sets bad ones, the whole world fees the effects. (pages 176 -177)

From my perspective here in Brazil, I believe Friedman is right. His linking of innovation to American leadership and the need to create a sustainable world puts a challenge to the Obama Administration that the rest of the world agrees with. Technological innovations in the environmental area are expensive and are beyond the financial capabilities of most of the developing world, as Friedman and development economists such as Jeffrey Sachs point out. Likewise, only in the United States does the concentration of science, engineering and entrepreneurship permit innovation on a sufficient scale to create the basic technologies, which can then be adapted and applied throughout the rest of the world.

For example, support in Brazil for technological innovation is clearly lacking and technological innovations coming from Brazilian research centers suffer from lack of industrial development of them. The three big exceptions to this are Petrobras (the state-owned oil company), Vale de Rio Doce (mining), and Embraer (aviation). These three companies appear on all the "Top 1000" companies' lists for R&D. Brazil does have the industrial capacity to manufacture the innovative products created in other regions of the world, but it simply does not have the to develop fully new technologies. The situation is the same throughout the developing world.

Whether developing countries are angry at the United States for its aggressiveness or its "go it alone" posture towards foreign relations, they do look to America for innovation indeed.

Another factor to be considered is America's potential moral leadership to bring other countries along to sustainable thinking. A group of American environmental policy students recently visited the MBA program where I teach in Brazil. In the round table discussion they had with our students and staff, one of the Americans offered the opinion that Brazil would do best to avoid America's dependence on an industrial and consumer culture. This is the kind of naïve view that harms America's relations with the world. It was politely pointed out to this student that participation in industrialization and consumption is exactly what the U.S. had been preaching for the last 50 years and this is exactly what people in Latin America were seeking. How could the US suddenly pull the rug out from under these decades of aspiration and say, "Well, that didn't work, so don't you do it."

The message that could enable the US to establish its moral weight in favor of sustainable development is quite different. It should be that the US is willing to invest heavily in new sustainable technologies that will allow growth to continue but in a different direction than it has in the past sixty years. The US government needs to commit to an R&D program for sustainable development as part of its recovery plan from the financial crisis. Since the financial crisis became apparent some six months ago, many commentators and policy makers have urged American and worldwide industry to adopt a new, sustainable model for growth. A commitment from Washington to do just that would both help lead the world in the new direction that Friedman is speaking of and create a useful program that could help sustain America's technological leadership for a long time still to come.

Sorry for the delay in posting

We've been getting ready to move to our new apartment and the last two weeks of fitting out have been hectic indeed. To those few of you who read this blog, I offer apologies.