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BUSINESS INTELLIGENCE BRIEF

January 20, 2010

Political Realignment and Business
The spin doctors will be exceedingly busy in the next few weeks. Both the GOP and the Democrats will be
at work interpreting the importance of the Senate election in Massachusetts and both will likely overplay the
issue. The symbolism is hard to escape. This is the Senate seat that has been held by the Kennedy family since
1953 in a state that has long been considered the bluest of blue states (despite having elected Republican
governors). The Republicans will assert that this is the end of the Democrats and the Obama agenda while the
leaders of the Senate and House will assert that this means little and that all remains rosy for the majority. The
truth will lie somewhere in between. Most analysts assert that the real message is the one that the voter
constantly tries to send but rarely manages to communicate to the political elite. The electorate is centrist when
it comes down to it and can be reliably counted upon to reject either party when they think it swings too far to
either the right or left.
This is especially the case when it comes to the business community. There is a perception that business
favors the GOP but that is not supported by actual vote behavior or by campaign contributions. If anything, the
business community yearns for stable, middle of the road politics. What is truly loathed is the kind of drawn
out uncertainty that has marked the first year of the Obama Presidency. It has become nearly impossible to
plan strategy in the current economic and political climate. Nobody knows just when the recession will turn to
solid recovery; but in addition to this mystery, there is little certainty over what health care reforms will look Details on page 4.
like, what climate change action will look like, what bank lending practices will look like, what trade policy is,
what union organizing will be and so on. These are enormous factors for business at all levels but especially
for small companies that have to make adjustments.

Analysis: The victory of Scott Brown doesn’t destroy the Democratic agenda as there are still 59 Democrats
in the Senate to the GOP’s 41 and the Democrats still command the House. What it does is remove the
Democrat’s ability to ram legislation through despite GOP objection. The super majority is over and that
means that compromise is back on the table. The power is shifting from the extremes of the two parties to
the moderates in the middle. It also means that the elections this year have just taken on a different flavor. It
turns out that Obama has virtually no clout when it comes to swinging local elections, a position that George
Bush was in during most of his last term. This election places the majority of politicians on notice that the
independent middle is resurgent and they are not too thrilled with the Obama agenda when it comes to the
big hot button issues. Health care reform, as it currently looks, is in trouble and so are some of the other
ideologically based initiatives. What became clear in this election is the Bill Clinton’s campaign slogan
remains relevant today – “it’s the economy, stupid”.

Global Productivity Improves in Developing Nations
The focus for many in the US has been on employment. The various numbers that are trotted out to show whether the economy is
growing strike most people as pretty arcane. It is hard to notice when the GDP goes up or down in the average household. The same can
be said about capacity utilization or the movement of the Purchasing Managers Index. People know these numbers means something and
they are certainly vital to the economist in terms of trying to figure out what is motivating the economic system from one month to the
next but for the worker the most effective way to measure their personal economic situation is by looking at their bank amount, checking
to see if they are still employed and by assessing the price of a cart full of groceries and a tank full of gas. The cost of living has been
pretty stable for the past year and that has meant that people are concerned with employment first and foremost.
The short term impact on employment has been the recession. The nearly 8 million people who have lost their jobs have been let go as
their former employers faced economic head winds. The fastest way to reduce costs and streamline business is to reduce head count and
most companies have been engaged in some slash and burn when it comes to their employees. The slight silver lining to this cloud is that
many of these jobs will come back once the economy recovers. These are the economic lay-offs. It is very cold comfort to those who are
forced to wait for this rebound but they are in far better shape than the people whose jobs have vanished altogether. These are the so-
called structurally unemployed and this is the group of 3 to 4 million who will pose the greatest challenge in the years to come. A recent
study from the Conference Board has revealed that finding new ways back into the workforce for this cohort will be harder than it has
been in the past.

(Continued)

Contact information:
Armada Corporate Intelligence
ckuehl@armadaci.com ksanchez@armadaci.com kprather@armadaci.com
(816) 304-3017 (785) 550-7129
Analysis: The major concern for business as regards their employee base is productivity. Low wages aren’t all that appealing if the low
wage worker is not productive and the higher paid workers is favored if the skill level is such that productivity soars. This is the basis of
the US workforce competitiveness. The higher pay that workers get in the US is justified by the fact that these workers are far more
productive than any others in the world. The US consistently comes out at the top of the heap along with the equally high paid
Europeans while the workers in other nations are paid less but produce less as well. The assumption has always been that the low wage
nations like China and India will always have a disadvantage when it comes to productivity and that is key to maintaining a strong labor
force in the US.
That assumption is starting to erode and this has major implications for the future of the US and that unemployed cohort. The
Conference Board study shows that productivity in the developing nations has improved dramatically in the last few years. Their growth
over the last five years has been 5.9% while the US growth rate has been only 1.5%. Europe and Japan saw even more modest gains
with growth of 0.5% and 0.8% respectively. In the past, the US has comforted itself by observing that most productivity gains have been
attributed to advanced technology or the acquisition of new machines. The study tried to eliminate these factors by looking at a
measure called “total factor productivity”. This allows an examination of the worker as opposed to their environment and the story is
not encouraging to the developed nations. The worker in the developing nations has become more competitive in every respect. This
means that these states are now in a position to offer low wages and productivity at the same time and that is a major threat to the
labor force in the US, Europe and Japan.
Companies are drawn to those sectors that provide the most overall efficiency. Moving to a low wage environment usually meant
losing efficiency in many areas. The workers were not well trained, the companies were not well managed and there was little
supportive infrastructure. The communications systems were rudimentary, education was spotty and so on. This is a situation that has
changed dramatically. The Conference Board study revealed that the biggest change in terms of worker productivity stems from greater
levels of efficiency. The operations in the developing world have started to improve fast as the better companies have eliminated their
less competitive rivals. This means that these companies are reaching towards parity with their developed world competitors and that
does not bode well for those workers who are now competing with efficient works in other states that get paid far less than they do.
The study is not detailed in terms of what is missing in the US and European workforce but there are suggestions from other analysts.
There appear to be two major problems in the way that US companies are organized. The first and most obvious is that most of the
publicly traded companies in the US are routinely forced into very short term strategic thinking. They do not make investments based
on long term market shifts but are forced to react to the stock market on a quarterly basis. This has inhibited many companies from
making the kind of decisions that take time to evolve. The critics of this short term focus have been vocal for a long time but the
problem gets far worse during times of economic stress as investors are ready to bail at a moment’s notice.
The second criticism is leveled at the training and education of the US workforce. There is an enormous disconnect between the
business community and the education establishment and at every level. The average high school graduate is numerically illiterate and
that affects what they elect to major in at the college level. There are too few engineers, accountants and others comfortable with the
numbers driven world. The sectors of the economy that need trained workers do not find them coming from the colleges and
universities. The company is then tasked with doing that training itself but in an era where loyalty has eroded from both sides there is
reluctance to put energy into that training when the employee may leave. There has been some additional employee stickiness during
the recession but polls show that almost 60% of workers today are ready to change jobs when the opportunity presents itself. The
recession also affects worker attitude in a negative way. It might be assumed that people would be motivated to work harder and
smarter for fear of losing their jobs but it turns out that concerns about maintaining employment make people far less motivated and
more stressed. The per person productivity has improved as there are less people doing the same jobs as before but other studies show
that efficiency is suffering during the downturn.

Banks Still Not Out of the Woods
The big banks are releasing their latest quarterly earnings statements and the news is mixed. The results are certainly not as bad as they
were a year ago but there hasn’t been the kind of progress that had been hoped for. The best that can be said at the moment is that there
are signs of slow progress. The toxic debt levels remain high and there are still shoes to drop as far as loans are concerned. Foreclosures
are still setting records and the commercial property issue is still looming. The expectation is that many smaller banks will fold in the
months to come but the biggest banks will escape that fate. If anything, there has been a greater concentration of bank assets since the
recession. Prior to 2008 the ten biggest banks controlled about 60% of assets and now they control over 70%.

Analysis: The markets are not all that happy with the bank’s position but there is no sign of panic either. The most pressing issue for the
business community as a whole is that there will continue to be challenges in getting credit as long as the banks are weak. On the more
positive side, the inflation threat will remains low as long as the banks are hoarding as much of the Fed sponsored liquidity as they can.
It is when they finally relax that inflation will rear its ugly head.

Business Intelligence Brief is an online information service, published electronically by Armada Corporate Intelligence. It is prepared by
Armada CI. The publisher has taken all reasonable steps to verify the accuracy of the content of this information. Armada Corporate
Intelligence shall not be responsible for any errors or omissions.

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STRATEGIC GLOBAL INTELLIGENCE
January 20, 2010

Chinese Banks Ordered to Halt Lending
Apparently the days of subtle suggestion are well and truly over in China. For the past few months the government has sent every signal
it can think of as regards the overheating economy. The latest move is about as direct as it can get as banks have been ordered to stop
lending for an undetermined period. The issue is the formation of asset bubbles that threaten to visit on China what was imposed on the US
and Europe a year or so ago. It has been a trying year for Chinese government strategists. The first reaction to the global recession was to
stimulate the slowing economy as rapidly as possible. This was the same tactic that was employed in the US, Europe and almost
everywhere else. In China’s case, the effort seemed to have worked a little too well. The $600 billion stimulus plan was actually spent in
the year intended – unlike the US effort. But this is a mixed advantage. On the one hand the Chinese got the bang or the buck they had
hoped or as the economy lurched out of its doldrums in record time. Growth is already back to almost 7% and exports surged by over 17%
in the last month of 2009. The downside is that China has seen intense speculative growth, higher home prices, an overheated stock market
and asset bubbles that are clearly not sustainable. Banks have been issuing loans with reckless abandon and many of these projects will not
come to fruition in the way that was anticipated.
In the US banks became profligate and started issuing loans to almost anybody who asked. In China the process has been similar but has
been rooted in who has political clout. If one is connected, the banks are more than willing to hand over funds for almost anything and this
has created some real concerns in the Beijing leadership. The usual controls have been tried – everything from raising the interest rate to
imposing more stringent reserve requirements but this has been deemed too indirect and too slow. The decision to end bank loans entirely
has chilled the global market as nobody has a sense of how long this restriction will remain in place. The banks had already loaned out
$151 billion in the first two weeks of the year and at that pace the system would be trying to absorb something close to a trillion dollars
before the year was out. That is obviously an unsustainable pace and this provoked the government reaction. The ban will likely be pretty
selective and temporary but the pattern has now been established. If the more aggressive banks do not heed the suggestions as regards their
loan activity the government is clearly ready to step in.

Analysis: The balancing act is still the focus of Chinese policy. There is no desire to see the economy of China slow down to the point it
was a year or so ago. The nation has to grow at a 6% pace at the very least and it is preferable to be at 8% or higher. The country has a
massive population to take care of and it needs to find work for millions of people every year. The money that was allocated by the
government in the stimulus effort was supposed to be funneled into development activity that created jobs and local economic growth.
Much of it has been directed in that way but significant sums have managed to find their way into highly speculative ventures and
commercial development. China is in the midst of another massive property boom and this has been fueled by the flood of cash. This is
the speculation that China wants to slow.

European Parliament Forces Bulgarian Candidate to Withdraw
The resignation of Bulgaria’s Foreign Minister from consideration as the EU’s Humanitarian and Crisis Response Commissioner is
sending some shock waves through Europe. Rimaina Jeleva was savaged almost immediately by a coalition of parliamentarians from the
left in Europe. She is part of the Bulgarian center-right coalition that came to power last year. She was blasted as being too weak for the
position and there were questions about her financial situation. Bulgaria has struggled to overcome the corruption that pervades the system
and this has caught many politicians already. She is the first nominee who has been forced to withdraw since the hearings started and this
has created some very bad blood between the conservatives in Europe and the leftist elements.

Analysis: This episode is also underscoring a very serious issue in Europe; The EU response to the Haitian situation has been
embarrassingly weak. There has not even been an EU wide meeting on the subject and it has been over a week. The efforts have been
paltry and disorganized. France has distinguished itself by asserting that the US is trying to “occupy” Haiti. This remark came as the
French were forced to land in the Dominican when they tried to send relief. Never mind that the French were sending yet another field
hospital when the UN has been explicitly requesting that no more be sent. There are plenty of such hospitals in place now – what is
needed is transportation, food, shelter and water. The flights carrying these items are being given priority but France ignored this.

Long Process of Recovery in Haiti
As the immediate crisis continues there is now intense discussion over what happens next. The head of the World Bank, Robert Zoellick,
is trying to indicate that a major commitment will have to made, the rebuilding of Haiti will cost in the trillions and it will be halting and
volatile at best. It is not clear that the world is ready to make this decision.
Business Intelligence Brief is an online information service, published electronically by Armada Corporate Intelligence. It is prepared by
Armada CI. The publisher has taken all reasonable steps to verify the accuracy of the content of this information. Armada Corporate
Intelligence shall not be responsible for any errors or omissions.

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Tourism and Tragedy
There is a constant dilemma faced by many people. What is the appropriate response to tragedy when it isn’t directly affecting you? We
have all experienced the jarring juxtaposition of news stories. First we see screaming children getting their legs amputated in a field
hospital and the very next story is about some starlet or the upcoming football game. The taking head shifts from a depressed and hushed
tone to the bright and cheery in a second’s time. We deal with this in everyday life as well. We hear of a person’s tragic circumstances –
death of a relative a serious illness. We commiserate and then what? The awkward moment when we shift back to the job or some
comment about the last movie we saw. Life goes on and we struggle with how long we remain quiet. There is some intense controversy
over the fact that one of the cruise lines has continued to bring well fed tourists to an island off the coast of Haiti for some fun in the sun.
Some hold that this is insensitive and inappropriate but the question is why. Should we all suspend our daily pleasures until the crisis is
passed? More to the point – the cruise line is probably the only thing contributing to the Haitian economy right now and in the future the
tourist industry has to be one of the first things to be rebuilt.

Analysis: There is no easy answer to the question of how to react to tragedy in the world. Some ignore it and pursue their own lives while
others can’t shake the scenes from their minds. Many try to do what they can with donations but then go back to their lives. The fact is
that we all experience tragedy at some time or the other. What ensures surviving these periods is the knowledge that life does go on. It
has been my own experience that much solace can be taken from the fact there is still joy and happiness in the world – even as here is
pain and suffering.

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Armada Corporate Intelligence
P.O. Box 733
Lawrence, Kansas 66044

Business Intelligence Brief is an online information service, published electronically by Armada Corporate Intelligence. It is prepared by
Armada CI. The publisher has taken all reasonable steps to verify the accuracy of the content of this information. Armada Corporate
Intelligence shall not be responsible for any errors or omissions.

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