Market Brief: Mild Economic Aftershocks
from North Korea's Test
North Korea tested Oct. 9 what it alleges was a
nuclear device. Politicians and investors alike are
obviously nervous, but the impact will not be nearly
as negative as one might think.
First, let us disabuse our readers of the notion
that the North Korean economy has anything to do
with anyone. The North Korean's guiding ideology is a
local version of communism called "Juche" (translated
roughly, "self-reliance"), which preaches that the
Korean system will be most successful if it is
completely economically sequestered from other
systems. Since economic separatism has not worked
particularly well in any place it has been tried --
Depression-era America and Maoist China come to
mind -- it should come as no surprise that North
Korea enjoys a gross domestic product (GDP) of only
about $25 billion, giving it a per capita GDP of about
Foreign investment in North Korea is minimal. The
net foreign direct investment (FDI) from China,
Pyongyang's ally, in 2005 was only about $15 million
in a mix of assorted small projects. Bilateral trade is
about $2 billion, but nearly all of that consists of
Chinese supplies of energy and food; North Korea's
net contribution to bilateral trade is a small amount
of coal -- something China could easily replace since
it is the world's largest holder of coal reserves. Full
sanctions might actually help the Chinese
economically, as they would be relieved of the task
of subsidizing the North Korean system.
The top investor in North Korea far and away is
South Korea, which maintains joint manufacturing
facilities at the Kaesong Industrial Complex and
Mount Kumgang tourism site. These investments
were designed to put into motion South
Korea's "sunshine" policy of engagement with the
North. A full-sanctions response by the international
community to the North's apparent nuclear test
would shut down these facilities.
But even if it were cut out of North Korea
tomorrow, the impact on South Korea would be
middling. Between state and private investment,
total South Korean investment in Kaesong and
Kumgang is a combined $620 million -- hardly a
massive hit for the overall South Korean economy of
more than $750 billion. Furthermore, the "chaebol" --
South Korean family-owned conglomerates -- are not
exactly happy about the "sunshine" policy. Kaesong
and Kumgang are subject to South Korean diplomatic
restrictions and North Korean legal restrictions. The
net effects are "investments" that are tools of a
bilateral policy that would not likely break, even
without the generous South Korean tax concessions
granted to such "investments." Most chaebol
involved would likely be thrilled to be sanctioned out
of North Korea, even if they would publicly continue
to pay lip service to the ideals that launched the
projects in the first place.
Aside from China and South Korea, no state has
even a negligible economic presence in North Korea.
Thus, any notable economic effects of North Korea's
reported nuclear test will fall into the broad category
of investor expectations.
The list of players that could possibly feel the
effects of shifting investor sentiment are China,
South Korea and Japan. China can be crossed off
immediately; not only would North Korea's rage be
directed at other targets, but China's currency is de
facto pegged to the U.S. dollar -- investor sentiment
would have very little impact.
The other two states, however, are very
different. South Korea, obviously, is on the same
landmass as its northern neighbor and would bear the
brunt of any military conflict. Because of this,
investors are noticeably skittish about the increased
likelihood of conflict.
But what most do not realize is that, in general,
investors are skittish about South Korea on its own
merits. Though Seoul has certainly worked a series of
economic miracles over the past half century,
transforming South Korea from an impoverished
backwater into the world's 10th-largest economy, it
has done this with purely indigenous efforts -- not
via foreign investment. The Koreans almost
pathologically prefer to keep leadership and
management firmly in Korean hands. Under these
circumstances, foreign investment in South Korea
has never been particularly high. It spiked in the
aftermath of the 1997-1998 Asian financial crisis as
many foreign firms sensed bargains, but after five
years of the Koreans -- to put it bluntly --
hoodwinking the foreigners, FDI fell off sharply. In
2005, it edged down to only about $4.3 billion. The
current North Korean situation will likely push FDI
down further, but even if it evaporates completely,
the loss of FDI worth only about 0.6 percent of GDP
is not the sort of thing that will inflict meaningful
distress on South Korea. Japan's reputation with
foreign firms is even worse (for the same reasons).
Its $4 trillion economy only sucked up $2.7 billion in
FDI in 2005.
Instead, any hits to investor confidence will be
felt in the South Korean and Japanese currencies as
investors rearrange their bets; indeed, both the won
and the yen have dipped steadily since the test. But
this is not the sort of thing Seoul and Tokyo
generally fret about. In fact, the two states are
most regularly cited by the U.S. Treasury Department
as the world's worst currency manipulators,
habitually pushing down their currencies' values to
stimulate exports to foreign markets. The South
Korean and Japanese governments might be nervous
about goings-on in North Korea, but they see any
resulting weakness in their currencies as the cloud's
Now all of this, of course, assumes the North
Korea crisis really is not a crisis at all in a military
sense -- that Pyongyang has tested a nuclear
device, but that the situation will not spin into a
Should war actually break out, the math would
obviously be different. North Korea has some 10,000
artillery pieces locked in on Seoul, and removing them
from the battlefield with conventional weapons would
be a weeks-long affair. Within hours, the North
Korean military could thus transform the South
Korean capital -- the extended metropolitan area of
which is home to more than 20 million people --
literally into a sea of fire. North Korea also likely
possesses 100 ballistic missiles capable of hitting
spots in Japan. The threat those missiles pose to
Japan is not even a shadow of the danger the
artillery pieces could create for Seoul, but try telling
that to the captains of the container ships and
liquefied natural gas tankers that dock in Japanese
ports on a daily basis.
But such terror would generate a unique
environment as far as global trade is concerned.
Certainly a war would have devastating effects on
Japan, and in particular South Korea, but bear in
mind that northeast Asia is a unique region from an
economic point of view. Both Japan and South Korea
consume massive amounts of commodities but
produce none for export. Global trade routes end and
start in northeast Asia -- they do not transit it.
Thus, if northeast Asia were to plunge into war,
Japan, and especially South Korea, would obviously
suffer terribly, but the rest of the world could easily
sequester the problem. The effects on commodity
markets would be disastrous, but not in the way
most would expect. The two states combined use
about 6 million barrels per day of crude oil, as well as
more liquefied natural gas than the rest of the planet
put together -- about 110 billion cubic meters
annually. In case of war, most of that material --
along with the two states' take of global lumber,
steel, copper, etc. -- would need to find a new
home. Though everyone's gut reaction would be to
expect higher prices, northeast Asia's isolated
location, combined with the characteristics of Japan
and South Korea's trade patterns, would actually
lead to global price crashes, not spikes.
Source: Stratfor, 2006
Staples Targets Kinko's
Office supplies giant Staples, Inc. has beaten
the competition, topping rivals Office Depot and
OfficeMax to become the largest office supplies
retailer. So the company management has set its
sights on new competition: Kinko's.
During a recent investor conference, president
of U.S. stores Demos Paneros announced that
Staples is going after the copy and print-center
market dominated by FedEx Kinko's and plans to open
four small Copy & Print Shops in the Boston area in
the next month as a first U.S. test. (Staples tested
the concept under the Dossier brand in Montreal.)
The shops will take Staples' existing Copy & Print
Center store-within-a-store concept, which offers
faxing, photocopying, color printing, engraving,
document design and shipping services into its own
boxes. The Copy & Print Shops will be standalones
containing between 3,500 square feet and 4,000
square feet of space. Staples expects each location
to bring in from $600,000 to $2 million in annual
sales. The centers have previously delivered about
$350,000 a year.
Source: Retail Traffic
This Weeks Leads
- Designs of the Interior
- Designs of the Interior operates 25 locations
- The stores, selling furniture decorative home
occupy spaces of 3,500 sq.ft. to 5,000 sq.ft. in
lifestyle and power centers.
- Plans call for 20 openings nationwide during the
coming 18 months,
with representation by Commercial Strategies, Inc.
- Typical leases run 10 years.
- Preferred cotenants include Anne Taylor, Bed,
Bath & Beyond, Chico, Crate & Barrel and Williams-
- For more information, contact:
- Jenny Alvarado
- Commercial Strategies, Inc.
- 2377 El Camino Real, Suite 140
- San Clemente, CA 92672
- Fax 949-429-6241
- Email: firstname.lastname@example.org
- Website: www.csiusa.biz.
- Charley’s Grilled Subs
- Gosh Enterprises, Inc. trades as Charley’s Grilled
Subs at 300 locations nationwide and internationally.
- The sub shops occupy spaces of 600 sq.ft. to
2,000 sq.ft. in malls, urban/downtown areas,
freestanding locations and entertainment, lifestyle,
power and specialty centers.
- Growth opportunities are sought nationwide
during the coming 18 months. Typical leases run 10
- A vanilla shell is required. The company is
- For more information, contact:
- Bobby Drouin,
- Gosh Enterprises, Inc.,
- 2500 Farmers Drive, Suite 140,
- Columbus, OH 43235;
- 614-923-4700, Fax 614-923-4701;
- Email: email@example.com;
- Web site:
- Schakolad Chocolate Factory
- Schakolad Chocolate Factory trades as Schakolad
Chocolate Factory at 32 locations
throughout CT, FL, GA, MA, MI, NJ, NY, OH, TN, TX,
VA, Washington, DC, the Bahamas and Israel.
- The stores, which specialize in European-style
hand made chocolates, occupy spaces of 1,100
sq.ft. to 1,600 sq.ft. in urban/downtown areas and
specialty, entertainment and tourist centers.
- Growth opportunities are sought throughout the
eastern, midwestern and southern states during the
coming 18 months.
- Preferred cotenants include Starbucks,
Cheesecake Factory, Marble Slab Creamery and
- Typical leases run five years with five-year
options. A vanilla shell is required.
- Preferred demographics include a population of
50,000 within five miles earning $50,000 as the
average household income.
- Competition is cited as Godiva. The company is
- For more information, contact:
- Edgar Schaked,
- Schakolad Chocolate Factory
- 5966 Lakehurst Drive, Orlando, FL 32819;
- 407-248-6400, Fax 407-248-1466;
- Email: firstname.lastname@example.org;
- Web site:
- Rocky Mountain Chocolate Factory
- Rocky Mountain Chocolate Factory, Inc. trades
as Rocky Mountain Chocolate Factory at 310
locations nationwide, in Canada, Guam and the
United Arab Emirates.
- The stores, which specialize in chocolate, candy
and nuts, occupy spaces of 600 sq.ft. to 1,000 sq.ft.
in specialty, outlet, tourist, entertainment and mixed-
use centers and malls.
- Plans call for 40 openings nationwide during the
coming 18 months.
- A vanilla shell and specific improvements are
- The company is franchising. Competition is cited
as Godiva. Typical leases run five years.
- For more information, contact:
- Kraig Carlson or Dave Richie,
- Rocky Mountain Chocolate Factory, Inc.,
- 265 Turner Drive, Durango, CO 81303;
- 970-259-0554, Fax 970-259-5895;
- Email: email@example.com;
- Web site:
Market Brief: Mild Economic Aftershocks from
North Korea's Test
Managing your organization by the evidence
Plateauing: Redefining Success at Work - Part 2
|Plateauing: Redefining Success at Work - Part 2
Fewer Promotions, Fewer Pensions
Peter Cappelli, director of Wharton's Center for
Human Resources, has done extensive research into
the changing nature of the workplace. As he and
others have noted, companies no longer promise job
security, generous benefits packages or even
pensions, and employees no longer feel loyal to their
employers or obligated to stay for long periods of
time. Employees are responsible for managing their
own career track and seeking out the mentors and
training they need to move on in their current
company or, just as likely, in a new company.
Cappelli agrees that organizations "don't have
quite as much influence over people as they used to
in terms of shaping their goals and aspirations, in
part because people come to these jobs at an older
age and change jobs more frequently than in the
past. Does that necessarily mean people are on their
own career path? It depends what you mean by
that. I'm not sure it means they are eschewing
corporate success. But they are looking outside their
current employer's definition of success, more so
than in the past."
Cappelli cautions, however, that it's unlikely
employees can go on cruise control and still hope to
be retained and valued by their employers. "It used
to be you could just lie low and wait for the pension.
That doesn't happen much any more." And while
some employees may not pay as much attention to
the goals that their companies want them to pursue,
they "continue to work hard because they are afraid
of being laid off.... Companies systematically go
through and fire people who are not pulling their
weight. The ability to punish people into appropriate
behavior is one of the great and unpleasant lessons
of the 1980s. Employee morale sank and productivity
stayed up because people were afraid of being fired,"
Cappelli notes, adding, however, that this dynamic
changes in a tight labor market.
Wharton management professor Sara
Kaplan "could imagine a scenario where people have
discovered that there is not too much point being
loyal to their employers, and then go on to
say, 'Okay, I have gotten where I am going to get,
and I am going to focus on the other part of my life.
I will keep working but won't invest all my energy in
But Kaplan also thinks "everyone needs
something to be passionate about, so it would be
hard for me to imagine that people would simply ramp
down on their job without having a crisis or without
having found something else" to interest them.
Indeed, in today's economy, she adds, "you can't
keep your job unless you are engaged, to a certain
extent. Corporations don't want people who don't
want to go higher. They don't want people who
won't strive. You can't plateau; there are always
people biting at your heels."
Directly related to the issue of job satisfaction is
the question of job design. "Management scholars
have been studying this for a long time," says
Wharton management professor Sigal
Barsade. "Whenever a company designs a job, it
must take into account how employees view that
job, whether their goal is to get ahead, whether work
is central to their lives, and so forth. A company can
make a real error trying to redesign a job to be more
enriched if the employee doesn't want that,"
especially if the new job definition requires them to
What is crucial, Barsade says, "is good job fit. Is
the person doing what the company needs done? If
the answer is 'yes' and the person also is good at
what they do but simply doesn't want to do more,
then that could actually be a good situation,
especially for jobs that don't include room for
promotion." This is applicable in particular to
customer service positions where people need to be
engaged while they are providing the service, but are
not expected to be thinking of ways to redesign the
whole customer service system. "So the fit needs to
be between what the organization needs and what
the employee wants and values. If that fit isn't
there, that's when you are going to have a problem."
When should employees who have no interest in
advancing or taking on higher challenges worry about
losing their job? "I think as long as these employees
are working diligently and competently and are willing
to change -- whether that means learning a new
technology or adapting to a new work process --
they should be safe," says Barsade.
Continued Next Week!
Source: McKinsey& Co.
|Warning Sign For Office Market?
It’s tough to argue that the
health of the nation’s 7 billion sq. ft. office market is
anything but robust. Demand is strong and vacancy
rates have fallen. Lofty construction costs have
tamped down new supply and asking rents shot up at
their fastest rate in six years during the third quarter.
But a host of economic risks, ranging from weak
job growth to ripple effects from a housing
slowdown, could impact the office market in coming
months. The shift may already be upon us: Take
third-quarter job growth, which many economists
viewed as mediocre -- non-farm payrolls increased
by just 51,000 in September after rising by 188,000
in August. The consensus prediction among 23
economists polled by Dow Jones Newswires was that
payrolls would jump by 125,000 in September.
While recessions are notoriously difficult to
predict, some troubling signs have emerged in recent
months. One quirky example is the Federal
Reserve’s “beige book” report from September.
This closely watched survey, essentially a
roundup of regional economic reports, used the
word “weak” 50 times. The July report only featured
40 references to “weak.” What’s telling is that the
January 2001 report used the word 53 times and that
was two months before the last recession officially
began. One real estate economist believes that the
office market is slowly feeling the effects of weaker
Leasing demand answers to job growth. So will
this be a gradual slowdown or a flat-out recession?
The Conference Board, a global research and
business membership organization, reported on
Tuesday that several economic indicators suggest
slower growth --but not a recession -- on the
Within the past three months, the Conference
Board’s index of leading economic indicators has
turned down relative to its level six months ago.
That’s significant because it marks the first time that
the index has fallen since the current economic
expansion began in 2003.
“While this signal is not particularly alarming,
since the downturn is still rather modest, it does
suggest that the economic cycle is more mature than
is generally presumed,” says Gail Fosler, executive
vice president and chief economist at the Conference
“Everybody is watching the job numbers and the
housing market very carefully,” says Bob Bach,
national director of market research at Oak Brook, Ill.-
based Grubb & Ellis. “It’s also getting harder to deny
that growth has pulled back a bit given the recent
Sam Chandan, chief economist of research firm
Reis, points to a more troubling sign of a slowdown:
Net absorption fell from 16 million sq. ft. nationally in
the second quarter to 10.7 million sq. ft. during the
third quarter. That means tenants are taking on less
space and demand is cooling.
“The fourth quarter could be a real turning point
for the office market,” says Chandan. “And the
consensus is that 2007 will bring slower growth than
2006, which may go down as a banner year for the
And what about a severe slowdown in the
housing market? History offers some guidance: If the
housing market were to reprise its last major
downturn in 1991, Bach projects that roughly
716,000 payroll jobs would be lost. That total
represents 42% of all net additions to non-farm
payrolls by all sectors between August 2005 and
More than 90,000 of these jobs would be in
housing-related service sectors that tend to occupy
office space. The upshot is that such a severe
slowdown could generate negative net absorption
approaching 16 million sq. ft. over the next four
quarters. But, Bach adds, that is a “worst-case
It’s important to note that most of the bearish
economic forecasts in recent weeks have all touched
upon a housing slump. Last week, for example,
International Strategy & Investment economist
Nancy Lazar said this in the Wall Street Journal: “I'm
very worried about housing and the potential
negative impact on overall economic activity...the
big question for me is how will that impact consumer
Source: The National Real Estate Investor
- Global Business Confidence
- Global business confidence held steady again
in early October at the level that has prevailed since
late August. The recent stability in sentiment is
welcome after the sharp decline this summer.
Sentiment is currently as low as it has been since
the fall of 2003 and is consistent with a global
economy that is growing measurably below its
potential. Confidence is strongest in South America,
followed by North America, Asia, and finally Europe.
The recent stability in sentiment is due to a modest
firming in sales, but this is being offset by weaker
hiring and inventory investment. Pricing pressures
remain elevated, but have abated substantially since
peaking in the summer.
- Wholesale Trade (MWTR)
- Wholesale inventories were well above
consensus expectations, coming in up 1.1% for
August. Wholesale sales were also up 1.1%, and the
I/S ratio remained at 1.15.
- Treasury Budget
The unified surplus for September was $56.0
billion, slightly larger than the CBO’s preliminary
estimate of $54 billion. For the complete fiscal year
2006, which ended on September 30, the U.S. ran a
unified deficit of $247.7 billion, 23% smaller than the
deficit in FY2005. This was the smallest deficit since
- Chain Store Sales
- Chain store sales ended a four-week slide,
rising 0.5% in the week ending October 7, according
to the ICSC. Year-over-year growth accelerated to
- MBA Mortgage Applications Survey
- Mortgage demand decreased 5.5% in the
week ending October 6. Purchase applications
decreased 5.3% and refinance applications
- Oil and Gas Inventories
- Crude oil inventories rose by 2.4 million
barrels for the week ending October 6, according to
the Energy Information Administration, which is
better than expectations. Gasoline inventories inched
up 0.3 million barrels for the week, and distillates
posted a 1.6 million barrel drop, slightly more than
expected. This report is broadly bearish, although the
drop in distillates could spook markets.
- Natural Gas Storage
- Underground storage of natural gas
increased by 62 billion cubic feet during the week
ending October 6. This was a smaller build than the
market consensus of a 66 Bcf increase in inventories.
With the gain, inventories are now 11.8% above the
five-year average, down slightly from the 12.1%
increase in the week prior. This report is likely to
moderate bearish pressure on prices.
- Manufacturers Alliance/MAPI Survey
- The Manufacturers Alliance/MAPI composite
index fell to 64 in September from a reading of 71 in
June. The index points to slowing but continuing
expansion of manufacturing activity in the coming
- International Trade (FT900)
- The nominal U.S. trade deficit in goods and
services widened in August to a new record high.
The U.S. trade deficit came in at $69.9 billion, $1.9
billion more than July's revised $68.0 billion, according
to the Bureau of Economic Analysis. In August, both
exports and imports increased, while imports
increased more than exports. The goods deficit with
China, however, widened $2.4 billion to $22.0 billion.
Crude oil prices increased in August, which in return
increased the nation's total import bill for energy-
related petroleum products to $30.5 billion.
- Job Openings and Labor Turnover
- Gross job flow data are consistent with other
indicators of a slowing economy. The rate of hiring
declined in August to 3.5%, from 3.7% in July but
because separations declined as well, net job
creation remained fairly strong. The economy created
4.7 million jobs in August while 4.3 million workers left
their jobs either voluntarily or involuntarily.
"Problem-solving" is not planning, and
"Planning" is not the same as "problem-
Effective planning can not be done without
addressing the problems that are critical.
Not all problems deserve attention.
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throughout the intermountain west.
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|Thanks to Bob Hasenyager for the great photo!