Life of a Sloan Fellow

A recent Globe and Mail article entitled “Can Alberta Redesign Their Own Economy” by ATB Senior Economist Todd Hirsch asked a very important question: How can we eliminate the boom and bust cycle of the Alberta economy?  Alberta is a province that has been blessed with tremendous natural resources and needs all hands on deck when commodity prices are high.  Unfortunately this means that there are few secondary industries for workers to turn to when the commodity prices drop.

Hirsch makes a key point that government probably can’t help solve this problem.  They have tried in the past, however the results have been less than inspiring.  The market demand for labour means that secondary businesses either have it very good in commodity downturns or cannot find workers during a commodity upturn.  No amount of government incentive can change this fundamental fact.

Hirsch believes the key is to encourage entrepreneurship in the province.  This makes sense, however ignores that many, if not most, of the recent entrepreneurs have commodity focused small businesses.  These entrepreneurs are not diversifying the economy, they are merely changing the employment structure.

In my view, there is a different solution for Alberta, and that is to get more people to move here.   Why do we need more people?  Without more people we cannot maintain a diversified economy.  Other industries and businesses need to know that their talent will not be hoovered up in each economic upswing.  To do this, we need to have a bigger economy with more people.

As an anecdote, I know many people who were employed in completely non-related industries to energy in the late 1990’s and early 2000’s.  These were rare people working for organizations that had no sales in Alberta and were completely exporting their knowledge and products.  Alberta was a great place to be in the 1990’s, as companies were able to find talented people that were paid competitively.  With the boom in oil and gas, these companies have now found it very hard to compete for labour.  As the boom started, energy related companies could offer 15% – 25% raises for the same role.  Our company has routinely recruited from industry stalwarts such as: banks, insurance companies and global software companies to name a few.

It has gotten so bad that I cannot think of anybody not employed in a job that isn’t related to the energy industry right now.  These jobs have been transferred out of Calgary to places such as Toronto, America and overseas.  While the boom has made Alberta richer, it has also made our future riskier.  We are only an energy economy, and while that is a great place to be in a boom, it is devastating in a bust.

It’s great to say “we need people!”, but what are we doing about it?  In my view, only a little bit.  Alberta competes in the global race for talent on high wages and ease of purchasing a home.  We are doing OK, but Calgary is a bit like St. Louis or Denver.  A nice place to live, but not a premier destination to go and work, such as San Francisco, New York City, Toronto or Vancouver.

I think for Alberta to move from a good place to live and make a buck into a place that routinely recruits the best people in the world we need to look at what makes a great city, and steal some of their ideas.  Specifically I think we need diversity.  Alberta has some of this, with a wide range of nationalities and a very tolerant culture.  But diversity doesn’t just mean languages and nationalities, it also means having people doing different jobs, having different backgrounds, education, values and goals.  Looking at Calgary, I actually think that despite the different nationalities in the city, we are a city with a homogeneous background.  Calgary is full of people who work in the energy industry with similar training either through technical colleges, business schools or engineering programs in Western Canada.

I think diversity manifests itself with an artistic community, local shops, great independent restaurants, entrepreneurs and big community events (like Montreal does in summer).  If we could add these characteristics to what Alberta already has, I think we can become a leading global city full of engaged people with a fantastic overall quality of life.  This will bring more and more people to Alberta, thereby strengthening our economy and making us one of the select winners in the war for talent.

A great thing about being at London Business School is the diversity of intelligent people.  Sloan Fellows mimic this diversity, with over 20 nations represented bymy 52 colleagues.  This means that instead of wondering “what do they do in Asia, Africa, Latin America, Europe”, I can ask business leaders from those countries, who just happen to sit beside me in class for 6 hours a day!

I’m interested in globalization, and I have wondered whether it was affecting how we invest our money, specifically equity investment.

My starting assumption was that people around the world were investing in global companies on global exchanges (Tokyo, London, New York, Hong Kong) with investment on regional exchanges being less than half (except where mandated by law).  What I found out was very surprising:

1. Every single person I talked to was primarily invested in their local stock market (in many case 100% of the equities they owned were on their national stock exchange).  This surprised me, as I assumed that there are a range of companies that every person would want to own.

2. People used mutual funds / iShares to diversify risk, though even on iShares they were largely local (+/- 50% were based on national exchanges where an iShare option existed).  These large investment vehicles (and pension funds) were the primary investor in foreign markets.

3. People in developed countries were worried about investments in developing countries / markets due to risk (both in return, growth projections and future currency fluctuations).  As a result, they were much more  comfortable investing in developed countries and were very limited to where they wanted to invest in developing countries (India and China).

4. People in developing countries were not that interested in purchasing developed world stocks.  The returns were just not that attractive by comparison to what was happening on their national exchanges.  Risk was not a significant issue, with a roller-coaster ride expected.

5. It is very hard to buy foreign equities everywhere.  In Canada, I can buy US shares, but I need to talk to a specialist to purchase an Aussie mining company or a British Aviation firm.  This is the same everywhere, with mutual funds or iShares the only way to get international exposure.

Before talking to my colleagues, I thought that our investment world was going to converge on a few super-regional exchanges (NY, London, Shanghai) and investors around the world would hold a similar basic basket of shares.  As countries developed and became wealthier, this basic basket idea would drive demand for a core of 100 – 250 global shares as everybody holds a bit of these companies.  This would obviously produce a price premium relative to other shares.  This doesn’t fit with what others have told me.

I am left with the feeling that demographics may remain the most important feature to consider for the next 20 years.  As it stands, developed countries are getting older and we will soon start to see net outflows from Western stock markets as retirees start living on their savings.  This will translate to a reduction in demand and increased supply.  This is not a good place to be.  The flip side is that developing countries with young populations just now starting to save will be looking for investment vehicles for their savings.  Based on my classmates, people will likely use their national stock exchanges to purchase assets.  There will be limited supply of shares and rapidly increasing demand for those shares.  This is a great place to be.

I have long assumed that markets were global and the demographics issues for investors in developed countries would be solved by a whole bunch of new investors from developing countries.  This does not seem as likely a I thought and it might be time to increase my exposure to emerging economies.

When I left London in 2002,  I could buy 9p beans at Sainsbury, 28p was the cost for a packet of crisps, a chocolate bar or a pack of gum at a corner shop.  In the pubs, £2.20 would get you a good pint, and many places would sell a lager at £1.85 or so.

Coming back in 2010, there has been a massive change in prices.  My cheapest pint (and also one of the best) was a pint of Sussex Best Bitter at £3.05.  Most regular pints run around £3.40.  Gum, crisps and chocolate are all around 55p.  My favorite music magazine (Uncut) has gone from £3.10 to £4.50.  Beans are now 45p at best.  Bus tickets have gone from 65p to £1.20 using an Oyster card or £2.00 paying cash.  I am not even going to go into the increased rental rates of property or petrol prices.

What is going on here?  We are repeatedly told that inflation is minor and remote, however there is overwhelming evidence that prices are in fact going up much faster than 2%-3% per year.  I think that inflation is not uniform, and we are seeing significant inflation in most goods except goods where the manufacturing has been moved to more competitive markets.  This means that CPI is not a good indicator of inflation, as it is being misled by a huge drop in labour costs and is this making us ignore what is right before our eyes. In effect, CPI is hte balance between “stuff”, which is dropping in price and commodities that are rising in value.

I think we may be in a situation where everything is actually inflating (food, minerals, oil, gas, water, land, equities and everything associated with the above) but this is being obscured by the fact that our “stuff” is being manufactured by people making $1/hour versus $15/hour?  If this is the case, at some point we will have moved all production to low-cost countries and we will start seeing regular inflation from the people making $1/hour wanting $1.10/hour next year.  If and when that day comes we may have to deal with 12% inflation of both “stuff” we want and the commodities that are core to our lives?

If we are living in a hidden inflationary age right now, what types of assets should I be holding to capitalize on future inflation?

We were fortunate enough to have the former CFO of one of the largest UK television channels in class yesterday to discuss the media revolution that has happened in the last decade.

He described the challenges of the television industry right now, with increased competition (through internet, satellite, dvd’s, TIVO, other channels) and declining revenues from television advertising.  He painted a bleak picture as free, on-demand, no commercial easily beats typical television services that require viewers to pay a subscription, watch commercials and be limited to what is scheduled.

However in this bleakness there are some surprising bright spots.  People will endure commercials for live events (specifically the talent shows and sports).  In addition, for long-running sitcoms, people will also endure commercials.

The motivations behind these two groups of people are very different though.  For live events, people don’t want to miss out on what happens, especially as their friends are texting them in real-time to discuss the event.  It is a very collaborative and interactive viewing experience that cannot be replicated watching it on TIVO or online after the fact.  In contrast, long-running soaps maintain healthy audiences watching on television, even though the plot is the same over and over again and online viewing options are easily found.  These viewers are using television almost as a distraction to their life and a way to easily fill up empty time.  Viewers don’t begrudge the commercials, as they have nothing else to do.

Where does this leave the future of television?  It strikes me that the future of television is going to become more interactive, specifically as the only advantage TV has is the wide-scale interaction amongst people due to the scheduled nature of the product.  I can watch any show I want online on my schedule, however what television offers is the ability to interact with a mass market.  In some cases, this interaction will be with friends based on a dynamic event like an ice hockey game or a talent show.  For those watching TV to kill time, I think there is a tremendous opportunity to connect the audience together to greatly improve the quality of the viewing event, make it more social and instead of just killing time, transform it into spending time with friends.

It is clear to me that the future of television has to change rapidly with a new business model being required moving into the future.