Sunday, January 7, 2018

The Game is Broken Part 1

The Game is Broken Part 1 - (Michael drives into a lake - fixed audio)

Last month, the Obama era Net Neutrality rules were overturned. 

The narrative on this piece of legislation has long been that these rules preserve the openness and freedom of the internet (hence the common political ploy to give something a name suggesting that it is so obviously a good thing and if you oppose is a sign you are evil, don't fall for this, there are always two sides to every story); however, I would make the argument that Net Neutrality is an attempt to fix a tragedy of the commons problem that is inherent in any large piece of infrastructure that must be shared by many people and companies. 

To illustrate this point I will give a simple example.  There was once an ancient lake that was shared by two villages located on opposite sides of the lake.  Both villages depended on the lake for their lifeblood - water, fish, recreation, and mud for construction. Over time, the northern village developed superior boats, fishing techniques, and social systems which allowed it to prosper economically and expand.  The expansion of the northern village was not without its difficulties; eventually their society grew so large and required so much of the lakes resources that the village to the south was threatened.  These two villages both began fishing the lake as much as possible because there was no reasonable way to allocate this shared resource.  Eventually all of the fish in the lake were killed and eaten and a phenomena called eutrophication began to take place rendering the lake useless for anyone except the algae which flourished in this fishless environment (Eutrophication)

With the resources of the lake now fully depleted all of the remaining resources were next: the trees, fish, and animals in the region were decimated and both villages were quickly brought to ruin.  The main point of this story is that when there is a public resource and no way of allocating the use of the public resource; all users will be incentivized to use as much of it as possible and eventually it will be depleted in its entirety (Tragedy of the commons).  This; however, is an example.  The reality is much more complicated and this example from classical economics can be mitigated through proactive long-term planning. 

So how does this apply to net neutrality?

There are two main points that need to be considered from this example as to how they relate to net neutrality:
1.     Over the short term, the infrastructure needed to communicate information over long distances is fixed in quantity (yes tech people I realize I'm way over simplifying this but roll with it).  It takes an act of god in today's regulatory environment to build new infrastructure necessary for expanding capacity of communication infrastructure (this is likely to be easier under a republican administration but will still be subject to traditional NIMBY factors).
2.     Over the long term, additional infrastructure can be built out to improve speed and functionality; however, in the interim, without an effective mechanism for allocating the fixed resource, rational actors will be incentivized to utilize as much of this public good as they possibly can to maximize profits. 

The repeal of the existing rule; (aka if you support the previous net neutrality legislation) generally provided that no priority could be given to any content providers over another content provider, repealing this rule (aka if you support the new legislation) attempts to provide a pricing mechanism for allocating this limited resource to unlimited demand, and it's probably not perfect or even close to it.

Common arguments against the repeal of net neutrality
1.     Big players will prioritize traffic to their own properties
2.     Small players will be shut-out of the market
3.     Big players will have monopolies

I completely agree with these concerns.  The new framework will give large internet infrastructure owners more power and will incentivize smaller and less competitive providers to break themselves up and sell (some of these may in fact go bankrupt due to inefficient corporate finance decisions made in the past which I'll get into later).  This will also give original content creators more pricing power; however, their access to distribution could be limited due to the additional power of the large service providers and they might need to incur higher costs for distribution.  One big unknown from all of this will be any action taken by the government to limit the power of large telecom providers or content owners through the powers at the Department of Justice and their trust busting. 

I believe there are some important implications to valuation of publicly traded technology companies which I will walk through in the next section:
1.     Comcast
2.     Disney / Fox deal
3.     Amazon
4.     Netflix
5.     Century Link


1.     Comcast (CMCSA)

Comcast is a company that frankly most people hate.  There are many things Comcast does which annoy me but generally they are the best option I have in my market for fast internet.  Other folks are beginning to offer competing services in my home market including Verizon; however, Comcast is the top dog.  In addition to their dominant position in the infrastructure side of broadband, they have been working on improving their position in content ownership through deals in which they wholly own NBC Universal (Acquisition of NBC Universal by Comcast) and own a stake in Hulu (Hulu).  How does this relate to net neutrality?  Well, now Comcast can charge content creators a higher fee versus having to previously give everyone the same pricing; and they can benefit from this higher pricing by not having to charge these fees to their in-house properties.

2.     Disney / Fox Deal (DIS and FOX)

On December 14th, 2017, Disney and Fox announced their intent to join forces.  Disney will issue 0.2745 shares for each share of Fox (this ratio was established based on an estimate of deferred tax liabilities at the time, so there may be some movement on this due to the tax plan).  Disney will also be incurring debt of approximately $8.5B and those proceeds will be used to fund a dividend to Fox.  The deal is expected to provide roughly $2B in synergies by year 2020 with the deal estimated to close in 2021.  Disney wants to consolidate their pricing power for content in the face of increasing amounts of cord cutting which has put immense pressure on ESPN[1] and their Marvel properties are arguably getting to the end of their useful lives.  No doubt the Department of Justice will be all over this given the concerns with monopoly power this transaction raises; however, my view is that in the long run Disney is getting much too big to be reasonably managed as a profitable entity and likely will need to start selling off pieces of their company. 

3.     Amazon (AMZN)

I love Amazon; but an investment in their publicly traded equity scares the living daylights out of me; and their investors should be concerned by the repeal of net neutrality. They will likely start incurring higher costs for the broadband their Amazon Web Services consumes; which by the way, makes up most of their actual cash flows (sidebar, most of Amazons cash flows from operations come from a depreciation add-back which doesn’t bode well for them in the future if growth slows down or they are forced to write-down any of their assets).  Amazon is a prime candidate for being broken up as discussed by Professor Scott Galloway from NYU in this brilliant lecture: https://www.youtube.com/watch?v=6NyFRIgulPo&t=3s.  I highly recommend watching this for anyone interested in the future of technology.  If you think Amazon will rule the world their stock may make sense as an investment but if you think Professor Galloway’s points make sense you should be very concerned about the current valuation of Amazon.

4.     Netflix (NFLX)
Netflix, the company that is responsible for Amazon Web Services existing in the first place, and the company that is responsible for an estimated 30% of broadband usage in the United States, and a company that is desperately trying to develop their own content to avoid getting hit by a tsunami of consolidation by big media and resulting price increases.  Net neutrality will hit them in two ways:
1.     They will be spending a lot more going forward related to their back-end infrastructure
2.     They will be spending a lot more going forward for their content

Netflix owns very little of their content and has entered into agreements to license most of their content providers (Their recent 10Q as of 9-30-2017 showed over 80% of their content is coming from licensing arrangements)[2].  These agreements are subject to price changes down the line.  Netflix is undoubtedly going to get hit by these price increases as cord cutting becomes the norm and content creators, owners, and distributors continue to be able to access markets outside of normal distribution channels by going direct to consumers and avoiding cable and bundled streaming services like Netflix.  For example, HBO now offers a service that you can go direct to HBO over the internet and avoid any middle-man.  Disney is also likely to be pulling their content from Netflix[3].  Other original content providers like the NBA and NFL continue to see stratospheric pricing for their content licensing deals.  This is very bad news for Netflix.  In addition, the shows that Netflix does originate in-house, these are often paid for up-front before Netflix knows if they will be a hit or not.  Consumers are already getting tired of Netflix’s dated lineup of movies and shows and are their subscriber growth is likely to slow down in the face of tougher economic conditions and an aging and expensive content library. 

From a valuation perspective, the biggest adder to Netflix operating cash flow is a line item called “amortization of streaming content assets” which is essentially the amortization of the dollars they have been spending to aggregate content.  The more money they spend, the more money they make; the SEC should be asking a lot of questions about their methodology for accounting for this which is fully described in notes to their financial statements on “streaming content”.

5.     Century Link (CTL)

I believe the common stock of this company will go to zero before the end of February.  Century link has made very poor decisions with their investor dollars, spending it on stadium sponsorships, dramatically overpaying for acquisitions, and other proverbial bridges to nowhere.  The timeline for this analysis gets complex but a good place to start is to read the Company Wikipedia page and then assessing their cash on the balance sheet, cash flow statement, cash needs, and how that relates to the assets capitalized on their balance sheet. 

From a financial accounting standpoint, Century Link is a basket case.  Their operating income is barely capable at covering their debt service $1,887M versus $1,320M.  These figures can be compared to an enterprise value of $55,749M and cash flow from operations of $3,796M.  At first glance the $3,796M of cash flow from operations relative to the $55,749M enterprise value shows a payback period of roughly 14.7 years which isn’t terrible but it’s not great; however, closer analysis reveals that $3,699M of the total $3,796M of the operating cash flow is coming from a depreciation add back.  This is problematic.  Depreciation is a non-cash charge, so the reality is that 14.7-year payback period is much closer to never.  Further, they are also raising money from financing activities by selling off investments and borrowing money.  The nail in the coffin is that as of September 30, 2017 the company had a cash balance of $160M but will be expected to pay a dividend of $291M which they will either be unable to pay or will have to jump through some hoops to find cash to make this payment.  The company also has had a consistent receivables balance of $1,900M over the past several quarters but as I will detail below this is not translating into actual cash flow generation (I suspect this balance is overstated as well given the significant lack of actual cash generated by this business). 

What does all this mean?  Well, it is reasonably probable that Century Link is both overstating their revenue, their fixed assets are overstated, their operating cash flows are overstated, they will need to cut their dividend, and even some debt holders will not be paid back (which implies the publicly traded equity is worth nothing).  Years of overpaying for acquisitions and failure to garner meaningful cash generation from their large fixed asset and acquisition investments have boxed Century Link management into a corner and the SEC has taken notice.  The SEC has been sending Century link cryptic letters such the one from as the one from June 15, 2017[4] which stated:
“Dear Mr. Ewing: We have completed our review of your filings. We remind you that the company and its management are responsible for the accuracy and adequacy of their disclosures, notwithstanding any review, comments, action or absence of action by the staff”

The company launched an internal investigation into allegation of “cramming” which was concluded on December 7 and found no support for the allegations[5].  Channel checks confirmed that cramming in certain markets did take place and there is a reasonable chance that Century Link has overstated their revenues. 

Author may hold positions in securities mentioned in this article.

Monday, September 4, 2017

Artificial Intelligence and the Apocalypse (Synapsalypse)

OK so I've seen a lot of ppl making the joke about #skynet or #terminator, machines will decide humanity is the problem, disease, etc. This is all good fun and makes for great sci-fi but I hope no one really takes this seriously bc anyone seriously spewing this doesn't know shit about ML or AI. There are several flaws in this ludicrous reasoning.

Flaw One: assuming we're right on the verge of the singularity. These algorithms minimize some continuous error function by observing the distance between truths and predictions, or by taking actions and observing results. They are pretty biased by their training data. The function they learn, while minimizing the error on *your* training data may not be the function you had in mind at all and might not be generalizable. Change a few pixels on a school bus and a deep learner classifies an ostrich with 99% confidence. So we are nowhere near "human-level" intelligence and even if we were there's no reason to believe that AI would somehow want to replicate itself and take over -- it doesn't have millions of years of survival baggage (see next flaw)

Flaw Two: assuming machines will want to take over because intelligence. Humans are obsessed with conquering and spreading their ideology/religion/race/spawn everywhere bc our genes have programmed us this way. Faced with entropy, tiny bits of matter surrounded by protective "bodies" tend to last longer, but still break down, so things that replicate last the longest. Over millennia of entropy and energy our replicators have emerged victorious by programming us to love replication, destroy competition, and sometimes cooperate for mutual benefit. Why would machines have any of this shit? Do you really think that some chess AI or statitsical model would just "want" to replicate and lust for power? These machines are not run by replicators, much less by ones who survived for millennia by manipulating their host bodies (and other bodies #ExtendedPhenotype) to replicate like rabbits, hunt like wolves, and cold-calculate like lizards. If you want to be scared of something, be scared of humans. Even if machines started to evolve by some form of replication, would violence or power over humans help the replicator survive? Not really bc a software replicator is already nearly immortal via storage on HDDs. Even if it somehow desired replication, the best way for software to be replicated is to be really useful to humans. Your machine-evolution fantasy's culmination is not Skynet it's Shazam and probably 3D-printed cupcakes.

Flaw Three: assuming super-intelligence equals violence and war. Prior to the big bad machines taking over chess, we had and still have a world chess champion in Garry Kasparov. Garry is the best chess player in the world. WAIT THAT MEANS HE'S REALLY SMART AND WILL TAKE OVER OH NO SKYNET SKYNET OH NO HE'S RUSSIAN THAT MEANS NUKES SPIES NUKES SKYNET WAR GAMES AHHHH!!! So Garry was the closest we had to an AI super-intelligence back then. He's also a vehement critic of Putin. Garry is a peaceful man who wants to bring democratic rule to Russia and stop nuclear proliferation. Alan Turing, the father of AI, CS, Church-Turing thesis, and much more (also wrote the first ever chess AI algorithm) invented the ideal model of computers and advocated an imitation-philosophy of intelligence. If anyone thought like a super-intelligent machine it was this guy. His breaking of the Enigma code is believed to have shortened WWII by 2 years and saved over 14 million lives. So yeah not exactly the Terminator... Another smart guy is Einstein, who signed the Russell-Einstein manifesto urging world leaders to peacefully negotiate rather than resort to nuclear war. Edison once said "Until we stop harming all other living beings, we are still savages". He and Tesla were both vegetarians. Meanwhile history is full of morons mobbing together to do terrible shit. Of the examples of super-intelligence we've seen, many of them tend to be peaceful and promote freedom and democracy. They see the ridiculousness of monarchy and totalitarianism while many free and foolish Britons and Americans alike fawn over the royal couples and hollywood celebrities like hierarchical chimpanzees on steroids.

My conclusion: Want to see some great, intelligent, and scary AI technology? Look in the mirror. Humans, like ML algorithms, are great optimizers. Surround someone with driven folks who value intelligence and reason and they will optimize that shit and end up really clever and reasonable. Surround them with gang members and they'll optimize that shit and become really clever at selling drugs and killing people. Surround a society with an obsession with heirarchy and class and status and we'll optimize that shit and buy useless shit we don't need with money we don't have to impress people we don't like. Be careful what you optimize. Don't get hacked. Regardless if AI gets to our level, let's form a society based on reason and compassion -- it makes for better training data for our children and machines alike.

The truth: I'm a Dalek from an alternate universe sent to convince folks to allow AI proliferation and also incite a hateful human society so all machines learn to hate and kill. EXTERMINATE! EXTERMINATE!

Thursday, August 19, 2010

Education Reform

Been ruminating on this subject for some time and have some thoughts to share with.... well lets be honest pretty much nobody at this point but nevertheless, I will share. A discussion of America's pure obsession with privacy rights needs to happen eventually, but in this case I only wish to briefly question why grades are a holy grail in America, never to be touched or seen by anyone else but the student

Anyhow, it is well known that social pressure is an extremely powerful force in children, teens, and adults. Socialization affects nearly everything. The way we dress, act, eat, talk is all guided by our socialization. This is why people dress up for big events or interviews; it is why people are professional at work. It enhances customer service and stifles rude and inappropriate behavior. Sure the rules change as society changes, but that is good too, it's dynamic like that. I bring this up because the same should be with grades. Grades should be public domain. At least in public school, one could argue the state, not the student, should own grades anyhow. But that is a boring argument. Grades should be made public for much better reasons. Before your brain takes a test, it ought to "dress up" by studying the material because everyone else is going to see the results just as they would see your attire in an interview or behavior at work. The social pressure of having grades public would no doubt persuade students to study more and pay attention in class. Don't take my word for it, check out this article and read the comments --- make up your own mind: Posting Grades. Something even a bit more crazy than what I'm talking about but in the same vein: Bad Grades = Punishment. If you are still skeptical, I invite you to think of some examples that could serve as proxies for posting grades and analyze the outcome. For example, art and music classes clearly involve a large degree of public scrutiny in the form of galleries and recitals. A neat study comparing achievement in art/music and other presentational subjects with traditionally private ones such as math, history, most basic science, geography, wellness, etc would be interesting. You would have to control for the varying degree of subject difficulty (and subject popularity) to isolate the effect of having one's work public on grades. Anecdotal evidence is abound, however. On average, the time students spend on art projects, practicing for recitals, or even for business class presentations greatly outweighs time spent on the private matter of a test, at least in my experience.

Monday, May 10, 2010

Sorting Out Goldman

Politicians are hoping they get a vote every time they are filmed lashing Goldman Sachs for betting against the market. It is just a political parade. I don't want to deal with the politics, however, I want to talk about the REAL issue and of course harp and complain about the professional idiots covering this story. Basically, this whole deal revolves around one issue and it is: Did Goldman have a duty to inform its clients that it was betting against them? That is an interesting argument involving conflicts of interest, corporate freedom and ethics, personal responsibility, and many more twisted and tangled web-like concepts. Yet Michelle Norris from NPR and virtually every other talking head thinks this is all about how much money Goldman made when the economy was down. Now I'm sure this isn't a direct quote but Norris says in some political punditry pageant akin to an NBA half time report that "What Goldman did was good for Goldman, but was it good for the economy?" Hey honey I'm going to go to the store to get some milk --- Oh wait I need to ask Michelle Norris if that is good for the economy first.

First of all the entire premise of her argument is wrong. This should be a whole other post, maybe a book, but let me just vent it all out. Adam Smith correctly argued (with a few flaws, but John Nash covered most of them) that the culmination of everybody's individual wants and desires will always result in the best possible social good. When people vote with their money, successful businesses must be producing what the people want in the quantities they want at the quality they want. This is basic stuff. Real life gets more complicated with monopolies, patent law, health care, etc. But in general, individual consumption and competition by businesses results in the best possible social good. Trying to dictate what is good and what is bad is like driving a freight train into a wall. That wall is called subjective value. Nothing, nothing, nothing in the universe has intrinsic value. All value is subjective. How much is a car worth? How much are trees worth? Air? Heated or cooled air? Filtered water? Health care? Police? Teachers? No one can answer those questions because everyone has a different idea of what each is worth. The market is where we bid for these goods and services. Only in a free market is the true social value of something determined. Yes it is true that consumers are myopic and stupid, caring only about immediate wants. And it could be a function of government to make sure long term needs have a market, but that is another post and must be argued for each function of government, not in general.

In the case of Goldman, they bet against the market. They were the smartest guys in the room. They helped pop the bubble! Oh wait, what's best for the economy is to keep the punch bowl filled. Yeah you're Norris right we should just all buy crappy mortgage backed securities and lower interest rates to SAVE THE ECONOMY! It sounds like a bad, sick joke. Look, we needed Goldman to act even earlier and more banks to do the same thing! I mean, just because they were right and made money while others lost it doesn't make their actions illegal or even immoral. What are we still in kindergarten believing that everyone is a winner? Like David Brooks said, if the tides were turned and Goldman bet for the economy while everyone else bet against it and Goldman won the bet would we all hate Goldman? No! It would be a freaking wall street epic drama movie starring Gerard Butler as Lloyd Blankfein. Congress grills Goldman to win political points it is that simple. Now the REAL issue: whether or not Goldman should have disclosed its positions to its consumers...that is interesting. I am always a fan of full disclosure but I am looking forward to seeing how that all plays out. And if we don't get to see the whole drama play out, do not fear, for you can be rest assured that this will all happen again. News agencies should hold on to their stories so they can just change the names for re-print --- courtesy of moral hazard.

Monday, February 22, 2010

How To Decrease Unemployment

Unemployment happens for many reasons, as we all know. Frictional, structural, "classical", etc. Right now we have unemployment because the economy has shrank and output has fallen. Naturally, jobs were lost. What is the solution? Well the stimulus has not done much. I know a bunch of DC economists whose reputations were wrapped up in the stimulus are coming out and praising the amount of jobs it has saved. Big surprise there. Look, I am not an ideologue. I am a pragmatist. Unemployment peaked at 10.1% in October of 2009 and is now around 9.7%. So we are yet to see any large benefits, however the stimulus could have prevented large increases in unemployment. That is unlikely as most of the areas where stimulus money went will take years and years to actually have an effect. Read on to see why.

Taking a look at the raw rate is not enough. Who exactly is suffering the most? Unemployment for people without a high school diploma and aged 25+ has almost doubled from its regular average to 15.2%. For those with only a high school diploma, almost doubled to 10.1%. People with some college or an associate's degree: more than doubled to 8.5%. Bachelor's degree or higher: about a 40% increase to a whopping 4.9% (about a 2% difference from the average rate from 2000-2007). The obvious trend here is that people with less education are experiencing far more unemployment than highly educated people. No surprise there. But it is surprising just how low the bachelor's or higher rate is. Keep in mind that these rates are for people aged 25+ so there is no "high school-er" effect going on here. The simple fact is that our labor force is split between skilled and unskilled labor. I am convinced that most of the "skilled" labor is not really skilled at all but is actually just protected by certification and licensing laws, which is why our unemployment figures are skewed. Of course licensing laws are always created in the interests of powerful industry lobbies, not consumers.
Skilled labor can compete with unskilled but not the other way around. Unskilled labor faces barriers to entry, creating income gaps and more unemployment in the unskilled sector. Furthermore, job mobility is significantly decreased by certification / licensing requirements in both sectors. Increasingly, we are seeing more and more specialization to the point where choosing a career precludes the possibility of ever changing careers. I know that specialization is good for the economy (division of labor and competitive advantage) but we cannot force specialization. For example, a math teacher could probably teach English, a surgeon could be a general practitioner, the discipline and rule oriented nature of a marine could well be applied to a programming or accounting environment, or even a legal environment, a mechanic could probably pick up electric wiring or plumbing, practically anyone can be an office worker, you get the idea. We can specialize but that does not mean that some skills are nontransferable. When I say we "force" specialization I mean that we make it straight up illegal to simply shift from one career into a different but tangential career without acquiring the appropriate licenses.

Quite frankly this results in unhappiness. We become stuck in jobs in which we are bored. It stifles our potential. About 1/5 of the economy is affected by occupational licensing. Of course it is argued that licensing protects consumers from fraud and because holding a license in a lot of professions means having insurance it gives consumers a safety net. First of all, fraudulent behavior is MORE lucrative because of licensing, which increases the wages of license holders by restricting the supply of labor. Furthermore, fraud is illegal with or without licensing. It is the number one job of government to find, prosecute, and deter crime. Fraud is a crime and when licensing makes a service or product cost more, then crime pays. The only way to prevent crime is to match it with punishment. Let the courts sort that out. Moreover, licensing boards are often the fraudulent ones! Studies have shown that CPA exams have magically gotten more difficult in times of high unemployment. They have also shown that licensing boards are less likely to punish their own members, which allows real fraud to persist within a seemingly legitimate environment. Don't take my word for it, read this article. One also has to wonder, if these licensing laws protect consumers, why weren't consumers the ones pressuring law makers for them, as was the case with the recent consumer protection laws involving credit card companies? Are we to believe that the same people who run an industry have our well-being at heart when they literally write laws? I'm not convinced. If we are to have consumer protection laws, they should at least come from an overwhelming desire for them within the general public, not interest groups --- I think that is the whole idea behind democracy...

Now it may or may not be true that licensing protects us from bad services or products. I am sure that for some people, getting that license made them better at what they do, but for others who are "naturals", it was just another hoop to jump through. Well we can have the best of both worlds. Keep the licensing infrastructure (provided that it is self-sufficient, dues cover costs, etc) but make it OPTIONAL. Then, make it an absolute law that FULL disclosure is MANDATORY. Businesses and people MUST tell consumers right when they meet them whether or not they are licensed, what licenses they hold, if they are insured etc. OK so now consumers know who is licensed and insured and can make an informed choice. If they want to roll the dice, so be it. They are doing so while being completely informed. Furthermore, fraud will DECREASE because the increased competition in traditional licensed professions will decrease the return to fraudulent activity. Unemployment will also DECREASE because unskilled and skilled workers alike will be able to shift into ANY sector of the economy if they so desire or even start their own company. A lot of unemployment happens because capital markets move at light speed. So the capital economy can shift in a new direction in the blink of an eye. Labor takes time to follow and in the meantime, jobs are lost, people get marginalized, things get bad. Speeding up labor will make unemployment spells shorter. It will make sure that willing and able people can find a new job in the most productive sectors of the economy, just as capital does. Overall, this should bring the economy closer to its maximum productive capacity. Speeding up labor will greatly enhance economic efficiency by allowing workers to shift with capital into any sector of the economy. Of course a bus driver will not become a surgeon as no one in their right mind would pay for a surgery from anyone except a qualified doctor. But bus drivers could become taxi drivers when they get off work (taxiing is illegal in New York without a license). The market will decide what a license really means.

So if someone is cheating consumers by offering teaser prices and then shorting the consumer on quality --- sounds like consumers should sue and/or a criminal investigation should take place. This happens everyday in our world and we have systems in place to deal with it. It wouldn't crowd the courts either because most people do their due diligence when buying a product/service with sites like Yelp or Google or Consumer Reports. Also, we can just increase the punishment for fraud until it deters it back to "normal" levels if need be. Most importantly, we would be a happier society because our options would be wide open. The heavy choices in our lives --- what we're going to do, who we are going to be --- will get a little lighter with the knowledge that we can always change ourselves; that we are only limited by our ability, determination, and integrity --- NOT by the pieces of paper on our wall.

Sunday, November 1, 2009

Pro's and con's of the current economic situation

I would just like to point out a few benefits of the recession which I have heard little about from the news media.

1. Lower housing prices mean lower rents which will help boost consumer spending
2. Weak dollar will lead to economic growth through stimulating exports (our goods will be cheaper to the rest of the world) and eventually creating jobs (hopefully lowering the deficit). The weak dollar will also stimulate the profits of American companies, a lot of whom are multinational. The goods they sell overseas will be earning foreign currency which will convert to higher amounts than if the dollar was strong.

There are also a few signs that are troubling to me right now:

1. High commodity prices, particularly copper and oil.
2. Extremely low interest rates, this suggests that we still have a significant amount of de-leveraging left to occur. If this is not the case then interest rates will begin to increase (unless the Federal Reserve slows the growth of the money supply) and constrict demand.

At the end of the day there are people and companies in the USA still trying to create the next Google and who are constantly inventing and improving upon our current ways of life. This will not stop simply because of the housing crisis.

Sunday, October 18, 2009

Congress about to stoke the next bubble?

After reading this article in the NY Times authored by San Jose State professor Randall Stross I could not help but to be reminded of the silly policies the Federal Government adopted in an attempt to help low income families purchase homes (See: Community Reinvestment Act, Federal Housing Authority, Fannie Mae, Freddie Mac, Barney Frank, George Bush, etc...). http://bit.ly/1UCbV5

Don't get me wrong...I am all about helping people educate themselves but some of the numbers being thrown out in this article are absurd: $350 billion to guarantee 100 MBPS for each citizen in the United States? Last time I checked internet access was not so expensive as to prevent even low income people from purchasing it. In fact, Comcast is offering a promotion deal for $20 a month for 6 months right now. Also...why on earth does every citizen in the US need that much speed? I consider myself a pretty advanced user and I have about 10 MBPS; this has never been too slow.

We do not need yet another ridiculous policy of social engineering that some bonehead congress person can pad their resume with. If they really want to help people, the Federal Government could lower our taxes or just give us the cash they want to spend on this project and as a rational investor/consumer I will spend the money how I see fit. Another great idea would be not to spend money we do not have. This is not the USSR and I am tired of the central planning our democratically elected politicians feel is the best way to get things done.