Learning to code
Here is an interesting conversation about codeacademy and the investment round
Questions for economists
(Not intended as investment advice)
1) If there is fear of inflation, why are long-term treasury rates lower than say even the 90′s?
2) If the equity and commodity market was inflated because of Quantative Easing, now that fed has announced the decision, more or less, to stop it what is supporting the bubble.
3) With the big run-up in oil and commodity and inflation creeping up world-wide leading to monetary tigthening, why is the CPI still so low.
On 2, here is a theses which needs to be looked into in historical context. Low interest rates leads to asset inflation. But the money was mostly coming in from professional investors. Of course, the retail investor was shell-shocked and stood on the sidelines. Now because of all this buzz, money is beginning to flow in mutual funds from retail investors even as the professional support starts backing off. If you are fed you are hoping that equities will get support long enough to spur investment and jump start the economy. But what about commodities? Of course, precious metal are following their own logic which has to be some combination of money chasing returns away from fixed income and inflation fears.
Absolute gem
Thanks to Abhijit Sahay for posting it on faceboook
Investment outlook
(For three people who are reading this, this is not intended to be investment advice. )
Because of weak growth, Federal Reserve wants money to go towards riskier investments to jump-start the economy. Since it doesn’t directly buy equities or given loans to people to start their small businesses, it tries to significantly reduce the incentive to put money in fixed income. It directly controls short-term rates but when that was not enough, it started buying long-term bonds to reduce long-term rates.
Wall-Street dutifully pushes money towards stuff like equities and commodities and is really afraid of bonds because their primary purpose is to show improvement on total return. And that is going fine. You could make the case that valley beginning to see signs of growth is a consequence of the loose monetary policy.
Size of government debt has created another under-current of fear of massive inflation, not just what you would expect in normal recovery but people are worried that governments would lose ability to do something about it because of the size of debt. Or because since the employment is so weak, political pressure would keep fed from tigthening at the right time.
I’m not sure about this point but maybe what is different about this cycle is the inflation-hawks have an ability to do something easily, i.e. put money in precious metals through ETF which was not available in earlier.
I am going to start diving into inflation a bit more to learn how the big (hyper) inflationary cycles had happened. I believe Argentina had pegged its currency to the dollar when it went through its big crisis. Need to learn how the oil-shock caused that big inflation here in US.
What do we do as investors who should be more on the conservative side because principal protection is way more important than generating return? On a side note you have to really feel bad for people who are faced with this choice for their retirement savings.
Paved with good intentions
Another remarkable article about education http://www.nytimes.com/2011/01/09/business/09law.htm
Velocity of money
One of the fundamental tenets of capitalism is that pricing signal directs economic activity to the most efficient place. In the new world though money can be redeployed with a click of the mouse whereas the rest of the components of economic activity, e.g. labor, can’t be diverted as easily. I wonder if there has been research done to see if this diversion in the rate of redeployment of different elements is creating anomalies.
Here are some possibilities -
- As suspected by most, most famously by Warren Buffet, all the innovation in financial products has probably had very little effect on creating value. It certainly diverted a lot of resources to creating profit for Wall Street as the share of profit earned by financial industry rose dramatically. It is much harder to know if this capital which was being cycled through endless derivatives and hedge funds and proprietary trading desks could have been deployed to more productive use.
- One place where velocity of money might have helped is accelerate creative destruction by making junk bonds available for LBOs. This has probably helped companies being restructured when they had ceased to be efficient..
Conventional wisdom in education
Mark sent the following link http://techcrunch.com/2011/04/10/peter-thiel-were-in-a-bubble-and-its-not-the-internet-its-higher-education/
Here are some of the conventional wisdom which are being challenged in education -
- Is the return on higher education worth the investment?
- What are the right trade-off’s for having lower teacher-student ratio?
- Can we have a meaningful dialog about how to improve education without articulating the goals of the education system? One possible goal is that taxpayers need to care about creating a work-force which will maximize GDP in their most productive years. Of course, that has a direct benefit to the current tax-payers because that means higher tax base to continue the social safety net, etc. But then why all this discussion about need for arts in school? There is certainly a predominant thought that maybe schools need to have goals beyond satisfying the societal need for a productive work-force.
- If you believe that everyone has their own individual optimal learning process, are “schools” even the right structure when discussing education? Schools immediately mean certain constraints that a student is limited to learn from a fixed set of teachers, with a fixed set of fellow students, in often a fixed physical environment. Maybe all that was essential a few thousand years ago!
Meeting Austan Goolsbee
I am supposed to meet Austan Goolsbee who is the Chairman of President’s Council Of Economic Advisors. I have watched him on Sunday morning shows and he certainly comes across as someone who would be fun to engage with if you really got an opportunity.
I don’ t have high expectations given the this will be a breakfast with 15-20 people. The topic is something to the effect that what are the barriers to growth. Presumably I am supposed to bring Denali experience.
I thought it would be a good excuse to write down what I would really recommend if there was time to engage. I have two perspectives – one from before the acquisition and one from after.
From before acquisition the biggest issue was clearly healthcare. Fortunately, we were doing well enough so it never became a crisis but having to stare at 15% increase in premium while the inflation was almost nothing and the industry as a whole was flat was really painful to deal with every year. Purely from job creation perspective we are going off a cliff if we don’t do something. This is a bigger issue for smaller companies with smaller purchasing power and maybe more need to be prudent with cash.
But there is another interesting question which is worth thinking about. Under what conditions would Denali have been a bigger engine for job growth. Some companies, which have a big first product, Facebook being the most recent one, can punch through and become viable independent companies. Others create something meaingful and then are absorbed by large organization. Larger organizations are supposed to provide “scale” for deploying the product to a wider audience but are more suited to providing this scale by taking the cost out rather than creating jobs.
The macro question before us is that if we are better off creating policy condition such that more companies are incentivized to not only create but also scale their products. Andy Grove talked about it in much discussed opinion piece but in a different context.
How about a policy which lower the capital gains tax down even further, maybe to zero, if you held the stock for at least 10 years and created at least 200 US jobs?
In case of Denali, in retrospect it is hard to have made a different financial choice. Scaling would have meant going public and then waiting for a decade to sell the stock. On a risk-adjusted basis it is hard to see why the intelligent decision was not to enable quicker scaling inside a large company.
There are probably other thoughts but I believe at this stage that incentivizing more “owners” to stay in the game and build large companies is probably one place to look for stimulating growth. I am sure in older economies job growth can come from large oligapolies because access to captial can mask lots of likely inefficiencies in organic growth in large organization. Access to venture capial has created a whole new economic engine for creation of ideas and products which are then scaled by large companies. The IPO path was available to very few. Facebook and Twitter are trying new approaches for accessing capital markets and maybe it will lead to some more innovation. But maybe a policy response is needed to look for more ways for good ideas and good products to become large engine for job growth.
Sanjay
Driving change in large organizations
John Kotter in “A sense of urgency” talks about how to drive sense of urgency in an organization. I can’t really recommend the book because it is mostly fairly banal, cliched, stuff.
Here is a hypotheses on what sort of change you should even attempt to drive in an organization. Change should take one of the following two forms -
1) Continuous improvement in clearly defined metrics which everyone agrees on. There should always be a financial component like operating margin, ROE, etc. and others like customer satisfaction, pace of innovation, etc which define cultural foundations of an organization.
2) An effort, product or organizations, can be declared a failure which gives the change-agent mandate to re-build it.
What is not included above are “changes” which fit neither. Without a clear declaration of “failure” organizations have large inertia to resist change. It is very likely a large effort will be spent by management on how to respond to the mandate of the specific change. It will lead to the false sense of urgency that Kotter talks about. And the end result is likely to be organizational cynicism and unproductive use of money and attention.
You are much better off “improving” an organization rather than “changing” it. Of course, it means an open mind to adapt the strategy to the organization rather than attempting to force a change in the organization to deliver to the strategy that you seek to put in place.
There were moments like Lou Gerstner taking over IBM or, more recently at Nokia or Motorola, where the mandate to change is very unclear given the dire circumstance in the organization. Other moments call for twin approach of improvement and addition.
The above hypotheses is neither supported by any research or detailed analysis but merely an attempt to document something that should be considered if you are asking the question why the organization seems to have a lot of activity but not sure about what meaningful change is being implemented.
Mortgage crisis
Just finished the book “The big short” by Michael Lewis. Highly recommended. Amazing story about the mortgage crisis. There are no good guys in the entire story. Everyone is either greedy, evil, or incompetent – often more than one of the above. In SIEPR conference there was a session on Dodd-Frank. Despite the two thousand pages everyone is focusing on the Whistleblower provision. It is easy to pick to attack any regulation regime. After the depression, we got Glass Steagall which mostly held the financial industry in check. After the Great Recession we have Dodd-Frank with no control on too-big-to-fail or doing anything meaningful about derivative, same derivative that Warren Buffett called the weapon of mass destruction.
