Technology

American Society / Banking / Business / Financial / Technology — 0 Comments
27
Oct 09

Can You Lend for Thirty Years?

Financial news from CNBC and Fox Business focuses investors on the micro picture while overlooking the macro picture.  When I started investing in the early 1970’s as a graduate student the world looked quite linear.  It seemed reasonable to look at a 30-year investment horizon.  Banks, insurance companies and governments assumed they could either loan or borrow money with a 30 year investment horizon.  Conversely, employees could look forward to 30 year careers and generous pensions from the iconic companies of the time: GM, AT&T, Sears and others.  What changed?

The Financial World Becomes Non-Linear

There is no longer a linear 30 year path for either investors or employees.  Look back to the early 80’s and the Route 128 research highway around Boston.  Revolutionary companies were spawned at the time that threatened the old IBM order:  Prime Computer, Digital Equipment, Wang, Data General, Bowmar and others.  Where are these companies today?  Either out of business or subsidiaries of giant technology conglomerates. Even outside the technology arena, look at traditional manufacturing companies that previously dominated the economic landscape: GM, Chrysler, Bethlehem Steel, and National Steel, to name a few.  Where are they now?  Bankrupt! My own career exceeded 30 years with a Fortune 25 company.  My former company has laid off employees each and every year since 1981 and has frozen its traditional defined benefit pension plan.

Oh To Be A Long Term Investor in Early Twentieth Century!

If we go back to the early twentieth century, an investment banker surveying the financial landscape would feel pretty confident about loaning money for 30 years to a large American company.  For example, a US Steel or General Motors had formidable barriers to competition:  large plants with sophisticated machinery needing large numbers of workers, plentiful and cheap local natural resources such as oil, iron ore and coal, two oceans as barriers to imports, proprietary technology and the ability to attract capital.  Lending for 30 years in a burgeoning American consumer market was like shooting fish in a barrel.

The Investment Landscape Today

A 2009 investment banker surveys an entirely different scene.  Technology and freely available capital have democratized business formation.  Anyone with an idea can go into business. Until the current recession business seed money gushed from pension funds and venture capitalists.  Technology has made it easier to establish a virtual company. You no longer need large plants with heavy machinery and thousands of employees to produce goods. Regulatory barriers have been reduced so anyone with capital and some ingenuity can start a telephone company, bank or airline.  But the inverse side of this phenomenon is that businesses and careers are unlikely to be around for 30 years.  Technology has the capability to destroy companies as well and at the speed of light. see Why All Irrational Structures Fail? Would you want to lend money to Dell or Cisco over a 30 year period and bet they will be the survivors?

Implications

To those who started investing more than 30 years ago the implications of the new landscape are pretty radical:

  • investors should invest in equity rather than debt and expect higher returns over a shorter period of time
  • debt of any duration should carry a higher risk premium than is now being accorded in the credit markets
  • pension funds and insurance companies that have written annuities are going to have a hard time matching long lived liabilities with suitably safe and predictable long term investment vehicles
  • concomitantly shortfalls in pension plans will be a drag on corporations and governments
  • employees can no longer count on 30 year careers and a guaranteed pension at the end
  • employees will have to save more for their own retirement and reduce consumption
  • the government is being unrealistic in thinking that there will be a recall of large numbers of workers to their jobs as employers have learned to substitute technological capital  for labor.

In short, all of our time horizons have become much shorter and the expendable factor in all of this is human labor.

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American Society / Economics / Technology — 0 Comments
7
Oct 09

Is the Internet Deflationary?

In the early-1990’s Arthur Andersen Consulting visited our company and put on a small demonstration of the power of the internet.  This was at the beginning of the browser era.  Netscape had simplified the ability to go online and Yahoo had started its search engine.  For demonstration purposes, Arthur Andersen created a search program to find the lowest price for the Top 50 compact discs.  Brick and mortar stores and Tower Records, one of my favorite locations for music shopping, were selling the Top 50 CDs for about $14.  As I remember we searched online for a 1993 Mariah Carey Album, Music Box, and the search engine came back with prices ranging from $8.95 to $16.  CDs are the ultimate commodity; that is, they are uniform, shrink wrapped and need little service (just return the CD for an exact replica if it arrives damaged).  The winning bidder on the search was a no-name distributor in Nevada who was cheapest, even including shipping.

The Internet as a Deflationary Force

I had an “Aha!” moment.  The internet was the ultimate force of deflation.  In economics, price is a function of information. The internet made price information available to everyone simultaneously and in real time.  Why would I spend more than $8.95 for the CD?  Do I care who sells me this CD? Am I going to need a lot of after care for the CD?  Do I care if the seller is in Nevada or India?  All I want is the CD at the lowest price.

On the retailing side, the game changed as well.  I don’t want a large brick and mortar store, too expensive.  How do I win the new retailing game?  I need to buy in bulk from the record company to obtain the lowest wholesale price. I need the lowest cost warehouse space, the cheapest packing and shipping and little or no returned merchandise.

If this model works for CDs, it works for all standardized manufactured goods from cars, televisions and home goods to running shoes and clothing.  This puts enormous pressure on the entire supply chain to produce the lowest price goods.  FedEx and UPS and high speed telecommunications via the internet enable manufacturing and shipping from anywhere in the world.  Labor and capital are now squeezed in totally new ways.

This natural evolution of the internet unmasked true price information in services, as well.  With the click of a mouse, consumers can now see the real and hidden pricing on everything from travel (Priceline, Travelocity, Expedia) to mortgages (Quicken Loans, Lending Tree) to insurance (IntelliQuote, Insure.com).   The consumer can also utilize online professional or customized services such as law, medicine and tax preparation.

Deflation is Inevitable

The Federal Reserve and Treasury’s attempts to offset the deflationary effects of massive credit destruction are sailing straight into the headwinds of the new internet driven deflationary force.  Despite the cheerleading on CNBC, many consumers and retailers are suffering their own personal Great Depression.  Every consumer dollar counts and consumers now must avoid impulse purchases and become savers.   Inevitably, they need to migrate from the pleasant surroundings of the local shopping center to lower cost, no frills internet commerce.  Judging by the growth in Amazon sales and the decline in traditional shopping centered retailers’ sales this trend is well under way.

Implications

Do you want to hold a 30 year mortgage on the Mall of America or the Garden State Plaza?  Do you want your law or medical practice in an expensive office building in mid-town Manhattan?  Do you want to be a pension fund holding signature shopping malls and expensive office space? The specter of declining real estate values and lower profit margins for traditional retailers does not bode well for the equity markets or the chimerical economic recovery.

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American Society / Religion / Technology — 0 Comments
25
Sep 09

Are There Too Many People?

The population of the earth is now approaching 7 billion with projections for 2.5 billion more people by 2050.  With rapidly depleting natural resources, there is a general recognition that the planet cannot support its current population, let alone future growth.  A dichotomy exists between the Western world with its declining birth rates and the burgeoning populations in the developing world.  The recognition of the limits of population growth has occurred in the Western world first. The response has been a change from societal support for procreation to one of indifference.

Radical Societal Changes

Post World War II, radical societal changes have occurred in America.  We have shifted from an agricultural to an urban and suburban culture.  Rapid advances in computer technology, communications, and pharmaceuticals have lengthened life. The population has increased and the need for labor has decreased.  The subconscious societal response has been a shift away from supporting procreation.

Thus, what do euthanasia, feminism, no fault divorce, legalized birth control, abortion, pornography, and gay marriage have in common?  Through legislation and case law we recognize that procreation no longer needs protection.  Why? It is unnecessary.

History and Evolution

In agrarian and early industrial societies large numbers of people performed work to sustain themselves and the economy.  Large farming families provided a cheap source of labor for planting and harvesting.  High levels of infant mortality and early death from wars, injuries and disease buttressed the need for large families.   Observe pictures of a 19th century factory and notice that it teems with workers, especially large numbers of women and children.  Society put a large premium on reproduction and intact, monogamous families with large numbers of children.

The early Abrahamic religions supported the family and reproduction.  In the Five Books of Moses there are prohibitions against killing (in virtually any form), homosexuality, bestiality, harlotry and strictures limiting divorce. These religious proscriptions have been imported into modern legal codes; the state has a monopoly on marriage and divorce.  Until recently, divorce was difficult to obtain and “no fault divorce” did not exist. In most states, bans against homosexuality, oral sex, bestiality, adultery and euthanasia are still on the books but rarely enforced.

Why now have we accepted or contemplated radical changes in our legal codes to accommodate gay marriage, abortion or euthanasia?  We are no longer a society that promotes procreation.  Are we now a society of death?  We no longer care whether couples marry or divorce. Women enter the workforce in large numbers, and gay couples marry because we no longer value reproduction.  Below the collective consciousness we recognize our burgeoning population and shrinking resources.

Economic 101: Supply and Demand

Reduce all of the above to Economics 101, that is, supply and demand.  Right now the supply of people is too high.  How has this happened?  Medical technology has slowed infant mortality.  Better medical care and pharmaceuticals lengthen lives.  Women can control their own reproduction.  They can enter the workforce rather than tend to large families.

On the demand side, technology has dramatically changed the nature of work. A modern factory no longer has thousands of people producing cars or steel.  Gone are the Dickensian portraits of 19th century factory life. Computers, robotics and other labor saving devices allow smaller factories to produce cheaper and better products.  Brains have trumped brawn, but the result is a surplus of labor.  Combine improved productivity with a surplus of people and large scale unemployment ensues.  To offset declining incomes households piled on debt over the last 20 years. Income can no longer can support the ever expanding amount of debt in society

Implications

Since there is no longer an economic mandate to produce large families, American society will tolerate, if not accept, living arrangements which do not support procreation.  More states will recognize gay marriage and alternative domestic partner arrangements.  Going forward we will also face higher rates of unemployment and declining tax revenues.  The “green shoots” that the current US administration trumpets will not include a return to full employment, because there are just too many people.

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