high oil prices, falling home prices, unrest in the middle east, a tsunami and a nuclear crisis, and that's just this week. the state of the economy with wells fargo chief economist john silvia. and later, silicon valley's love affair with failure. our reporters from dow jones venture wire deborah gage and tom jiles of "bloomberg business week" this week oppress press. good morning, everyone, i'm scott mcgrew. the housing market is recovering, or maybe it's not. inflation is a big worry, or possibly, it isn't, either.

there's a lot of conflicting information out there about the economy about everything from the deficit to financial reform and a lot of so-called experts. now, when we have questions, we turn to the chief economist of one of the biggest banks in the nation, john silvia runs a team of economists for wells fargo. he's been named one of the best in the nation by both "bloomberg" and "usa today," joined by deborah gage of dow jones venture wire and tom jiles of "bloomberg business week." i don't think we can start any discussion without addressing japan first. this is a show that is pretaped before the sunday morning time slot, so things may have changed. >> yes. >> but assuming things are progressing, what do we know economically about what this is going to mean? >> well, the two key aspects about japan and its relationship to the united states, one is on the output of production site. the semiconductors, so many of the components that go into automobiles and high-tech goods

come from japan, are put into u.s. products and then shipped globally. the second aspect is the financial aspect. japan is a major buyer of u.s. financial assets, particularly u.s. treasuries, and they are a major capital exporter. so, what has bothered people recently is that japan's semiconductor production has been hit as well as their willingness to finance global investment. they've pulled back. a lot of that money is coming back into japan. it strengthened the yen relative to the dollar, but it also has a bias on interest rates. >> explain that to me. i wrote that down. the yen rose to new highs as economists expected funds to be repatriated. so, the yen comes back to japan, and what happens to the currency? >> well, the currency will appreciate because japan is an excess supplier of capital. they save a lot of money. the united states doesn't save a lot of money. >> right. >> so, their savings come to us, but what -- >> they have nothing they can do with their money other than --

they have enough money coming in that they literally then turn it back over and buy our debt. >> buy our debt, buy our companies, buy land to build auto plants. that's what they do with the money. but in this situation, now they're pulling that money back and they're bringing it back into japan. >> right. >> and where are we going to see the biggest impact? is it going to be on the financial side, on the financial chain side? we here in silicon valley very atuned to the impact on the semiconductor industry, in particular intel just nearby. tell me about how big of an impact you're expecting there. >> i think in the short run, tom, the biggest impact has to be on the semiconductor, high-technology goods that we're very familiar with. certainly, toyota and nissan will probably be producing less cars. so, we'll see that in the automobile showrooms. but in terms of supply management, i think that's one of the great challenges most business people are going to have for the next six to nine months is figuring out what is the alternatives to supply from

that region of japan. and japan itself will probably make some decisions about diversifying offshore into areas that are probably less sensitive, less concentrated. so, i think immediately, it will be supply management that's going to be the most interesting challenge. >> how does it impact wells fargo? what are you advising them? >> well, for us, obviously, the currency matters a great deal, the impact on u.s. treasury rates matter a great deal, but also, going to companies and trying to understand, what is their strategy now for dealing with this kind of an environmental change. we have issues with respect to utilities, especially public utilities. where is nuclear power going? what are the implications for using oil and natural gas to produce the electricity, as opposed to nuclear power. when we're looking at companies thinking about, you know, what are their alternatives in terms of producing goods and services that are very sensitive to the international trade. so, it's both a financial aspect, u.s. treasury rates, and

a goods aspect in terms of what's happening with the actual production. >> john, go back to -- you were talking about the currency. explain to me why the yen becomes more valuable as that money goes back to japan. all the way down to economics 101 on that one. >> well, scott, the reality is currencies are always relative value. >> right. >> it's how much are you willing to have dollars as opposed to yen. and the japanese right now don't really need the dollars. what they need today do is get rid of the dollars, get the yen back on the international trade, and then invest the yen in building new roads -- >> our dollars come back in to our economy as they shed them. >> absolutely. >> okay. >> but the problem is, we're demanding more yen, so the value of the yen goes up. >> right. >> we don't really want as many dollars on the global scheme, so the value of the dollar goes down relative to the yen. >> okay. that makes much more sense. and then what happens to a company like toyota, a honda, a sony? all of a sudden, the yen is very valuable, which means their

products are more expensive, is that correct? >> and scott, it's very important to realize, japan is a major exporter. they're an export economy. so, to the extent that the yen appreciates in value -- >> that's bad for that -- >> -- it does make it more difficult for their export companies to ship goods abroad. so, when we think about some of the capital goods that they produce, some of the office products that they produce, some of the automobiles that they produce, all those will become relatively more expensive to the u.s. competitor. so, we may see an interesting shift over the next three to six months -- we certainly will see a shift the next three to six months in terms of auto sales and the domestic versus the foreign components of those auto sales. >> to what extent are you changing your projections for economic growth, both here in the u.s. and in japan? and if you haven't adjusted those numbers, what do you need to know before you can make those adjustments as far as your expectations on gdp, et cetera? >> well, you have to adjust that, and we are adjusting them right away because we realize

japan will now become a more insular country. they are going to have to focus more on their own infrastructure and a lot of rebuilding. and so, that's going to shift their growth. but what they're going to do is look less towards the export market. and so, not only does the domestic growth changes, but the composition of the growth, especially exports, start to shift. and so, we may see additional growth in the united states relative to what you might have expected otherwise, because now our u.s. firms are going to have to produce more machines, more automobiles, a lot more turbines to produce energy. so generally, we're going to be a little bit on the positive side, japan will be a little bit on the negative side. >> how well equipped is u.s. industry right now to absorb the extra demand? i mean, we've had challenges in the auto industry for a long time, and there does seem to be some rebound there, but are we ready? >> we are ready. this has got to be serendipity for a lot of u.s. companies who

have large excess capacity in terms of producing goods and services. and now, all of a sudden, you've got this handed to you where you know at least for the next three to nine months you're going to have an increase in demand in producing whatever those goods are or those services. so, yes, we're ready. we've got a lot of excess capacity. like i said, it's actually going to be a short-run boom to u.s. firms who now can get the scale that they may need to be longer-term, competitive firms. >> so, you see an impact on unemployment? >> again, i would suspect yes. you're going to pick up a lot of college graduates who are computer literate, who are going to have to get into those businesses, absolutely. so, that will be good. it will still be a challenge for those who worked in the construction industry, because we're not really building the houses, as you were talking about earlier. >> let me break in for a second, john. >> sure. >> i know you're a nice man. when you say good, you mean from an economic standpoint. we're not in any way underplaying the human cost in japan.

>> no. >> and i'm going to vouch for you on that. >> thank you. >> just to the viewers who say, wait a minute, good. but from an economics, from a mathematical point of view, it is good in the sense that there is growth. go ahead. >> i was wondering if you could talk more about specific impacts on unemployment in california, which is still quite high, over 12%. >> once again, california is the west coast of the united states. >> yeah. >> and so, here you have an economy with a lot of high tech. that's got to be beneficial. education and health care, definitely. demand for those kind of students, that kind of employment skills, definitely going up as well. so, california will, on average, benefit. i mean, we do have the ports. we can ship this stuff. >> we're going to take a quick commercial break, but when we come back, let's talk more about california and wheth it's a special case. "press:here" will be back in just a minute.

welcome back to "press:here." we're talking with john silvia, one of the top economists in the world, about all kinds of things. let me move a bit locally, and that is california. >> sure. >> as we watch unemployment rates, i always have to tell my viewer, now remember, in california, much higher. as we watch washington debate this, we have to say, now remember, in california, it's much worse. is california just its own separate case? can we judge what's going to happen here based on what's happening in the rest of the country? >> no. california, to me, has always been a special case, since world war ii. i think with world war ii, you opened up the reality that the pacific basin was incredibly important to america. and so, for california, at that time, the military presence became incredible important. at that time, people also realized that you could look at california, it had very inexpensive land, had a great agricultural industry, and so,

it attracted a lot of people, even more than what we saw in the gold rush. now, for the next 50 years, california always had lots of available land, an excellent secondary educational system. and the combination of those two, plus a very, very unique, as far as america goes, ethnic mix, suggests that you had a lot of innovation, a lot of growth, a lot of thinking people coming here, and a lot of opportunity. and then california just took off, and it took off as many growing nations do. but then you got to the point where the traffic was really bad, you didn't have a lot of inexpensive land, and all of a sudden, the west coast of the united states was not only california, it was the pacific basin, and that's the challenge california has. you had tremendous trajectory for a long time, but now you have structural issues to deal with. >> the structural issues, i guess my question is more as america recovers, as we see recovery, do we always have to say, well, we'll always lag

behind? it seems like we're just a special, odd case, in which we cannot -- well, i guess michigan is much the same way -- but a special, odd case where it just somehow doesn't count for us. >> michigan doesn't have the positive demographics california has. i think california's probably going through a three to five-year adjustment period where they're going to define their new legs, they're going to look at opportunities, and then they'll be off and racing again, but it just takes that time to down shift. you have in california -- again, referring to an earlier comment you made -- the construction industry was very important. and so, you had a lot of workers in that industry, in the construction industry. i think construction's going to be less important going forward. now, high tech is going to be as, and in fact, more important. so, what you're going to have is a lot of workers in construction who can't really move into the high-tech area. >> sure. >> but you still have a shortage of good high-tech workers. that's an adjustment that you're going to have to make. >> what about green jobs, or the green area, do you see that helping california? >> oh, absolutely. i mean, because you've got the

high-tech, well-educated talent. but the challenge with the green jobs is not -- most of those well-paid jobs in the green jobs are going to be in the engineering and science area, which requires the better education. you're not mass producing steel or automobiles, so you're not producing a lot of manufacturing jobs in the green sector. >> but aren't you concerned about the movement of jobs overseas? are you concerned about some of that high-tech talent maybe not wanting to come to california so much right now because for one reason or another, whether it's the h1 bv situation wlaez this isn't the best place for some of the engineers from overseas, they're heading back to their home countries, for instance, a lack of innovation coming from sill vicon valley. do those enter your model? >> they have to. because as i would say,

pre-nafta, california was the west coast. once nafta came through, once wto, the world trade organization, came through, the west coast was no longer california or arizona or seattle. we are in a global economy and we have to compete globally, and california has to compete globally in a way it never did for the first 50 years after world war ii. so, that's going to be a unique challenge to this state to realize they've got to compete globally. they're no longer competing against kansas, all right, or the midwest or michigan. they're competing globally. >> from an economics point of view, does it make more sense to open a market to workers just in general? the best worker comes to california -- i'm not asking you politically, although i realize economics and politics are sort of -- can be the same thing sometimes. does it make sense to just say this is our market, come work in it if you have the best talent, just from a purely economic standpoint? >> from an overall welfare point of view, for the overall economy, scott, the answer is

yes. we want the best workers to come here, no matter what nation they're coming from, if they have the skills that we really desire in terms of technology and science, and referring, i think, indirectly back to your comment. i think that's absolutely true. now, there are workers domestically who feel that, well, you know, if you let these workers in, they're going to compete for our jobs. >> sure. >> yeah, maybe, maybe not, because in many areas, we are really short of a high-tech talent. >> there's a tremendous disparity in the job market in silicon valley now, where companies like google and facebook are competing for engineers and paying $150,000. you know, where engineers with certain skills have multiple job choices. >> absolutely. >> then there are people who have been out of work for a year and a half, two years. >> and we've got budget cuts coming down the pike that people say are also going to affect, you know, the system's ability to produce these engineers that google and facebook so desperately need. >> oh, there's no doubt about it in terms of the challenge in terms of education and the skill

disparity. much economic data suggests that income disparity really reflects educational differences. and if you look at the unemployment data that comes out, the unemployment rate for our college graduates is less than 5%. those for high school and high school dropouts, it's over 15%. i mean, that's a huge disparity in terms of those jobs. >> how much longer does california have to put up with these unusually high levels of unemployment? what are your predictions s saying? >> i've seen this pessimism about orange county before, and i've seen the pessimism about california before. probably within two to three years, it will be, again, another challenge for us, but i think in those two or three years, we will get the job numbers down. the unemployment rate will come down except for pockets of areas in california that are highly related to construction. those are the areas that are going to continue to have the high unemployment. >> because there's so much surplus already? >> so much surplus already. >> okay. if you're just joining us, we're talking with john silvia, chief economist for all of wells fargo

bank. >> yes, sir. >> and if my neighbors found out i was talking to the chief economist from wells fargo bank and didn't ask about house prices. >> yes. >> so, we're going to ask about house prices. people come to me and say when do you think housing will recover? and i say what do you mean recover? and they say, well, you know, get back to normal. what they mean is the highest price they ever had their house at. and i tell them, it's not going to. this is the new reality. is that a fair assessment? >> it's a very fair assessment, because what has happened, scott, is we're changing the terms of getting the mortgage. many of those high home prices in some out of the way suburban areas only were achieved because there were little or no down payments and very little credit scoring. on top of that, price of gas was cheap. now you're talking about buying a home 30 or 40 or 50 miles outside of the city. the commuting costs go up dramatically, but the credit standards haven't elevated as well. >> you're not going to get the loan. >> so you have to put down 20%

down, 10% down when you could put down zero? >> jonathan sylvia, chief economist of wells fargo bank. thanks for being here. up next, silicon valley is not afraid of failure, but that tolerance can be taken too far. our failure expert when "press:here" continues.

welcome back to "press:here." failure is celebrated in silicon valley. in fact, gordon moore, the founder of intel, once said, "if everything you try works, you are not trying hard enough." >> that freedom to fail gives silicon valley start-ups a lot of room to brainstorm, to think creatively and innovate without

the pressure to perform perfectly every time. a company founder can bomb his first start-up attempt and get funding for the second or even a third. but recent surveys of executives found an abysmal failure rate, high by even silicon valley standards in the consumer products industry. the maker of stuff. in that industry, says a gartner study, 49%, nearly half of all product launches fail. and that failure rate, is it much too much for silicon valley? bryan plug is an expert in product development, a former executive vice president with s.a.p., serial ceo and current ceo of accept corporation. joined by deborah gage of dow jones venture wire, tom giles of "bloomberg business week." how is it possible that 49% of the products that our industry is putting out there, or silicon valley's industry is putting out

there, fail? >> first principle is people don't understand the needs of their market enough. the second one is that they can't align those needs, if they do understand them, with their actual execution. what are their business objectives? what are they trying to achieve? the overarching good that they're trying to bring to market needs to be aligned with the market needs, and then they need to be able to execute rapidly. a lot of times, people have great ideas but get there too late. >> so they build the wrong stuff? >> they build the wrong stuff. >> okay, how do you not build the wrong stuff? >> good question. get intimate with your customers, demand your market's needs. but equally importantly, be hypercollaborative with your entire organization. some of the greatest innovators in the world were guys that were obsessively focused on understanding everything that's going on. thomas edison, henry ford, steve jobs. a lot of companies don't have that ability. a lot of executives think they create the great strategy, and it's fire and forget, but you need to be involved all the way

through. and everybody needs to be lined up, aligned and have visibility on the hundreds of microdecisions that go along the way. >> so, how do you get that visibility if you don't have it, if you're not a steve jobs or one of the people you cited? >> first of all, you want to have systems and processes that align everybody so everybody can understand just what it is you're trying to create, what you're trying to innovate. they can understand the overall objective and then understand their piece. the interesting thing, especially in silicon valley with high tech companies is we are so innovative here and technology creates opportunities. so, if at every microdecision level, people can understand the overall objective and say, hey, i've got an opportunity here to even improve what we're trying to do, and then everybody along the chain can participate in that -- >> you're saying it's a leadership issue, but it's also a communication issue. >> an alignment and communication issue. it's more visibility than communication. leaders communicate, but leaders

will quite often communicate on the big picture, and i mentioned microdecisions a couple of times. it's what do i need to do today to help us create the winning product for tomorrow? >> the one guy in the corner office -- not the corner office, the one guy in the cubicle who knows better but doesn't speak up. >> who does it well? who's got the knack for getting the -- you mentioned apple. >> yeah. >> they're kind of the -- >> they're the gold standard. >> -- poster child. >> yes, that's right. >> who's not doing it well, and why is that? >> well, the classic one of an industry that hasn't done it well is the automotive industry. and you know, they're starting to come back. in fact, the japanese did a lot of innovation when they created this conbon method of manufacturing, which is a demand-driven, pull-driven, and then made their cars, increased their quality, increased their speed. a lot of the consumer products companies have to get it right. otherwise, you're out of business very, very quickly. >> how does a company, whether it's a car company or a

high-tech company, make the wrong product? i mean, the example i use is you go into a movie theater, see a preview, you say nobody's going to see that movie. i don't know anything about hollywood and i know that's going to bomb. how do that many people get that wrong? >> i don't know how they get it wrong in the movie business. i go and i like some and don't like -- >> but you know the same. >> and it surprises me when they're actually right. and that's insightful, because i'm one opinion when i go see the movie, and it's the opinion or combined experiences of all the people that are going to get a movie right. so, if you've got a director or producer that's making a movie and is not going to listen to anybody else, he may be brilliant and get it right more often than not, they're probably not going to. and in business, we see the same thing. if it's one brilliant person but never listening to people along the way at these microdecision points and microopportunity points, they miss it. >> but there's a simple old joke about platypus is just a duck designed by committee.

>> by committee, yes. >> but that's the other danger, you get too many people involved, you get a platypus. >> yes, but if you have knowledgeable, intelligent people involved and they can see the same thing, they are collaborating or they are hypercollaborative around it, and they make data-driven decisions, and data-driven decisions is a key part of it as well. get opinions out, make it data-driven. and if you can capture the community of people around you that have an affinity in what you make or understand the problem you're trying to solve, they're going to be pretty knowledgeable people. >> who else, besides apple, to tom's question, does it right, do you think? >> there are, from time to time, there are lots of different companies that do it right. in the software business, you know, oracle does it right. they continue to innovate with their products, and they've been doing that for a long time. >> or they buy up the companies that -- >> which is a way of doing it right. >> yes. actually, cisco has an innovation strategy or has had

an innovation strategy through acquisition. and looking from the outside in at what they're doing is they're trying to acquire rapid innovation in probably almost these greenhouse environments, where people can be understanding their customers' needs, their market's needs very well and in a smaller environment, can hypercollaborative quickly and easily. >> bryan plug, ceo of accept corporation, and took our pitch of him being our failure expert in good humor. "press:here" will be right back.

that's our show for this week. my thanks to wells fargo chief economist john silvia and accept corporation's ceo bryan plug. a reminder, you can watch this and past episodes at pressheretv.com. i'm scott mcgrew. thank you for making us part of your sunday morning. [ ryan ] i got this new citi thankyou card

and started earning loads of points. you got a weather balloon with points? yes i did. [ ryan ] points i could use for just about anything. ♪ ♪