Falling unemployment - everything's fixed now?

The latest unemployment report was released on Friday, showing the unemployment rate in the US steady (at a still elevated but falling) unemployment rate of 8.3%. I've long maintained that Employment is arguably the biggest problem that the Americans face today, as if you somehow manage to get people back in the workforce, all the other "problems" over time will fall into place. Government defecits, budget defecits, trade defecit, consumer confidence etc etc should all improve with an improvement in the labour force data. The US economy is a consumer led economy; however, for a real recovery, and confidence to return to allow the economy to get back on track, a real improvement in the jobs data is surely a pre-requisite.

Surely then falling unemployment can only be good news? Not necessarily.

Firstly, just to appreciate just how far we had fallen off a cliff, and what the rebound has looked like, lets compare the current cycle to previous ones.

We see quite clearly the extent of job losses in the current employment recession is in a league of its own when it comes to previous downturns in the job cycle; both in terms of extent and duration.

Surely though, a falling unemployment rate can only be a good thing?

The red line, shows the unemployment rate. 8.3% and sharply falling, yes, that is certainly an improvement. However, to be confident that a fall in unemployment will feed through to the real economy, one would like to see that the fall in unemployment rate would be accompanied by a rise in the participation rate, basically that the fall in the unemployment rate would be felt by a higher proportion of the population. Alas no. Extrapolating from the graph, the US is well on its way to becoming the first country with no unemployment, yet nobody participating in the labour force!!!

Yes, jobs ARE being created. But not enough. The steady/flat black line (employment/population ratio) is indicative that the number of jobs being created are only enough to keep up with the increase in population. 

But the news gets worse. The unemployment rate, and all the other statistics/graphs shown only deal with the quantity, they do not account for quality. Problem number 2, is that as with all statistics, the output is only as good as the input or assumptions made. The data in the labor force data, is subject to many revisions, often with a many year time-lag. Additionally, numbers are often not comparable, as a later consensus will suddenly show an additional x million people that previously hadn't been accounted for.

When looking at the quality of jobs generated, I prefer to go to the Feds website and look at tax data. Those figures are not played with whatsoever, there are no seasonal adjustments etc, nor is the data dependent on any population census. The numbers are reflective of the income tax received by the Government. No fudging whatsoever. A rising number is indicative of rising employment, and/or rising wages. And the numbers are startling.

The table is one that I made based on figures taken directly from the Feds website. They take 2 corresponding periods, the 4 month period from 1st October 2010 until 31st January 2012, and the corresponding period the following year. We can see that in the first period, the Government received $592.985B and over the course of the 4 months, there were an additional 571,000 jobs created. In the corresponding period the following year, the cumulative tax received by the Government FELL to $592.676B, despite an additional 715,000 new jobs created. Over the entire period, between 30th September 2010 and 31st January 2012, a period in which there were an ADDITIONAL 2.5 million jobs, aggregate tax revenue received fell. This means that yes, DESPITE new jobs being created, they were lower paid, poorer quality.

This is not a healthy state, and it seems to me to need some catalyst, to end this cycle. This has serious and substantial ramifications to the Treasury's forecasted debt issuance schedule. When issuing new debt, the Treasury works on many models, one of them being the rate of unemployment. Their working assumption of lower unemployment is going to need serious modification if the current trend of falling Government revenue despite falling unemployment continues.

And whilst I have focused on, and highlighted the negative trend in the US employment, Europe is in a far worse state.

  In the US, whilst the unemployment trend is very much down, in Europe and the UK it is still on the way up.

I think the graph is pretty self explanatory ...... and scary!!!

The full article as originally published in the New York TImes appears here:

http://www.nytimes.com/2012/01/22/opinion/sunday/the-dangerous-notion-that-debt-doesnt-matter.html

The Infolinks Global Advertising Timeline Infographic

A couple of days ago, Mashable published an Infographic that Infolinks (a Goldrock portfolio company) designed. It is a brief history/timeline of advertising and its evolution. Starting off in ancient Egypt, explaining the first print ad in an English prayer book, to the reason for the billboard concept - all the way to today’s methods of advertising on the internet, some of the biggest and most interesting landmarks are documented on this fun and creative timeline. Interestingly, the first keyword ad was “golf”! 

Have yields stopped listening to economic releases? ......

I came across this very interesting graph this morning. In normal times and circumstances (whatever that may mean), bond yields are heavily influenced by how weak or strong the economies prospects are perceived to be. In the graph, the white line is the Citi economic surprise index, which is an index that shows the deviation of actual economic releases in comparison to the expectations. Clearly, the index has had a very strong move up in the latter half of the year, as US economic releases have generally been stronger than expectations. In the past, the yield (the 10 year - orange in the graph) would have moved up in tandem, as a better than perceived economy would have led to a movement from the fixed income market (lower prices higher yield) into the equity market.
But times are far from normal. Markets are absolutely terrified of PIIGS defaults. Thus despite stronger news emanating from the US, the awful news out of Europe has seen the Treasuries retain an unprecedented demand for the "perceived" safe haven status.

Surely though in unveiling Operation Twist, whereby the Fed is aggressively buying long dated bonds (to keep the yields low) and selling shorter dated bonds, that has been the determinant in keeping lower yields? I'm not so sure. If for some reason, somehow, the market became convinced that Europe was turning the corner, and that there was light at the end of the tunnel, wouldn't the yields be expected to rocket higher, Fed or no Fed?

Yields are at all time lows- yields are pricing in the risk that the market may not exist in a recognisable form in the not too distant future, with fears of defaults and a collapse of the financial system.

The 12 Keys to Employee Retention

Thanks to Jessica Ray of Openview for reminding us of the simple things that are key to creating the environment for a strong team.

In all the businesses we invest in it takes a huge effort from everyone at the company to create success. Fostering those efforts is not as complicated as one might think. Here are easy things to focus.

For the full blog and the 12 points please click through to Jessica's blog - http://blog.openviewpartners.com/the-12-keys-to-employee-retention/

If you have others, please add them in the comments!!

Israeli PE continues to grow

The latest Israeli Public Equity Report published by the IVC and Gross, Kleinhendler has been published.

Some key points:

• In the first three quarters of 2011, $1.98 billion was invested in 45 Israeli private equity deals, an increase of 20 percent over in same period of 2010
• The average deal size was $44 million,
• In Q3 the software sector accounted for 22 percent of the deals, mostly reflecting the $307 million buyout of IT services provider Ness Technologies by Citi Venture Capital International and Riverwood Capital's $110 million buyout of SintecMedia, an enterprise applications company.

http://www.iva.co.il/index.php?option=com_content&view=article&id=69&Itemid=86 

Happy Birthday to Sage!

Much has already been written about the fact that Sage has just reached the "grand" old age of 30.

I would like to focus on some of the drivers to success from a more personal perspective.

The backdrop to the founding of Sage by my Dad, Paul Muller, Graham Wylie and Phil Lever was the early days of Thatcher's rein, deeply depressing economic times, and continuing industrial unrest, with the printing industry being of specific relevance to my Dad. In the North East of England (Newcastle, where the company still has its HQ), there was a dramatic period of de-industrialisation, bringing unemployment and recession.

Specifically my Dad had been running Campbell Graphics, a smallish printing company, specialising in 3-colour magazines, a far cry from computers and hi-tech! Anyone who knows the printing business knows that it is mucky to say the least and somewhat un-glamourous.

I guess (other than marrying my Mum) the most momentous decision of my Dad's life was starting the process that lead to the founding of Sage, ie computerise some of the key elements within the printing process. Not the technology of printing, but the business of printing. For this he needed some outside brains, and by bringing a NASA boffin and computer undergrad (Paul and Graham) in as consultants, this could be solved.

Here is the key moment though: having solved it for his own company, he figured that there may be other David Goldman's who might find it useful. Thus it turned from an innovation into a business. Fortune favours the brave and this band of early eighties entrepreneurs found themselves selling the printing package in its entirety and investing the proceeds so that Graham could write a generic accounts package for small businesses.

Sage was born!!

Initially Sage Systems (as it was known at the time), sold systems (hint is in the name) which included the software and also relevant hardware (names from the museum such as Osborne, Apricot, Superbrain and others).

The next key decision was to withdraw from the hardware business and stick with software. For the un-initiated, margins for pure software vendors tend to be somewhat higher than hardware, not to mention the working capital requirements of building a hardware business from scratch.

Thus Sage Systems became Sagesoft!

This brings me onto one of the key fundamentals of the business in my Dad's eyes. It's all about the brand, not the technology, or in other words, Sage is just a marketing company that happens to sell software. The customer is the key, or perhaps the King, and keeping a very close ear to their requirements, problems, challenges etc is the key to understanding how to drive the business forward.

There were many other key milestones along the way; the realisation that Amstrad will change the world of computing for small businesses; creating and focusing on paid maintenance and software assurance; entering the business of bespoke stationery (ironic for Sage to have made so much money out of printing); first acquisition in the US and using it as a platform for multiple additional acquisitions (credit for this to Bernard Fisher, a non-exec at the time who pushed for this move), and of course these successes have continued since my Dad retired in 1997 and passed away in 1999.

I promised a more personal view and shall certainly make good!

During the early years of Sage the main driver for my Dad was to reach financial security for himself and family, a situation he had not experienced to that point. My Dad was no Marc Zuckerberg (in oh so many ways) and started Sage when he was already passed 40. Whilst never EVER complaining about it, my Dad grew up in difficult economic circumstances and worked hard for every penny he made in adult life. This is why reaching financial security was of such importance to him.

Having successfully floated the company in 1989, and reaching (for him) the crucial milestone of joining the ranks of the independently wealthy he set about the task of building Sage into a world beater with even more energy and ambition. I have often wondered why this is, and I have no scientific reasoning. Perhaps having "unburdened" himself of the need to reach financial security there was an unleashing of new energies which expressed itself in even greater ambition for the company, without the worry anymore of paying the domestic bills.

My Dad was very much a people's person. Frankly it didn't matter what type of person he met, be it Bill Gates or the caretaker. He treated everyone the same; polite, to the point, with respect, and with a unique brand of humility and humour. Success did not change my Dad. He believed that doing the right thing was also good business practice, and he did not have a different set of values for his personal and professional life. He loved to be surrounded by motivated, creative and young people, and indeed brought the average age of Sage up by a couple of decades! Even in the 80's technology was perceived as the domain of young people.

There was nothing my Dad liked more than to walk around the Sage offices and talk to as many employees as he could on an almost daily basis. Beyond the pleasure he took from shooting the breeze with the people he loved to work with, he also knew that their success was his success, and that businesses that want to grow and succeed can only do so if everyone feels part of the team. This was his way of showing it!

For somebody who could barely use a computer he did not do a half bad job building a software company. The irony is that had he been in love with technology he may not have had the success he did.

If I had to single out what I believe are the secrets of his and then Sage's success it would probably come down to two key elements:

1. Absolute dedication to the principle that the customer is King and that business must be driven by the desire to fulfill the needs of the market (rather than one's own fantasies). In the long run strong brands will prevail and to dominate a market requires continued investment in the brand
2. Absolute dedication to the idea that all companies (and especially tech companies) are only limited by the desire of the entire team to succeed and that leadership starts from the top. My Dad always made sure that everyone in the company felt part of the success, from Chairman to the guy shrink wrapping the software.

I am very proud to be the son of David Goldman and even to be associated indirectly with the success of Sage gives me continued pleasure. I also know that there are many extremely talented and dedicated people at the company who carry forward the basic ideas that my Dad laid as the foundations 30 years ago.

I wish Sage many happy returns (including investment returns!) and in particular that they claim their rightful position as a beacon of growth and innovation, both for the North East, but the UK in general. My Dad is a role model as an entrepreneur, and there is no reason why Sage cannot be a great role model as a company leading the way through the next thirty years!