Entries from November 2008 ↓

Those of us in software understand the concept of fragmentation all too well. But can the same concept apply to ownership of resources like real estate, wireless spectrum and patents ? Yes, says Professor Michael Heller of Columbia University.

And from Ethan Zuckerman comes an interesting book summary/review of Michael Heller’s new book “The Gridlock Economy“.

Heller believes that a common thread in all of these cases is the disappearance of a tight linkage between ownershpi and use. In the past, there was little distance between the patent and the product, the land ownership and the property development. But innovation these days is about assembing resources. You need multiple pieces of protected property to achieve innovation in semiconductors, drug discovery, software or telecoms. It’s true in the arts as well, with the rise of the maship, and illustrated by the difficulty of releasing documentary films. See the difficulties regarding the docmentary Eyes on the Prize, due to copyright issues.

To describe this situation, Heller has coined the phrase, “The Tragedy of the Anticommons”. This is in contrast to the tragedy of the commons: when anyone can use a resource, it’s likely to get overused. With too few owners, overuse is a common outcome, because rational individuals will prioritize their needs over collective goods. This was a critical insight for environmentalists in the 1960s, helping unite a large number of environmental problems into a common phenomenon. Private property was often prescribed as a solution to tragedy of the commons solutions, assuming that a property owner would consider long-term implications of development for her property rather than permitting overuse.

Heller argues that, in many cases, we’ve skated right past private property and into anti-commons, characterized by underuse. If we’ve got too many owners, there can be too little use of a resource. We don’t see the anti-commons tragedy as clearly, as it’s characterized by the absence of innovation. “Where do you go to protest that a drug didn’t come to market or to complain that your cellphone is so poor?” With this new concept, Heller hopes to rope together a set of disparate problems with a similar set of ownership structures.

…My heart’s in Accra.

When I heard that Sun was planning to lay off 6,000, the first question that popped up in my head was - Does Sun even have 6,000 employees? (Actually 6000 is just 15% of their workforce.)

Sun is a company of extremes - they produce some of the most accessible and usable open source software in the world. But their hardware products are far from accessible and affordable for most small and mid-sized companies. Most of the startups I interact with (including my own) use Sun’s open source OpenOffice and also Java extensively. But sadly for Sun none of those startups uses Sun hardware.

So in many ways Java and OpenOffice seem to have a bigger brand than Sun itself (Of course, Sun admitted as much when they decided to change their stock ticker from SUNW to JAVA).

But Dana Blankenhorn asks a more important question - what will be the impact of Sun’s woes on open source ?

Dave Rosenberg is worried about Sun, a question discussed here last week.

“If it fails,” he writes, “Sun will be the harbinger of sorrow for the rest of the open source world.”

The open source business, yes. The open source world? Not so much.

Open source is a fact of life. Gartner Group estimates all large businesses will be deploying it within a year. Linux is extending its reach from the server to the client. Open source applications like Firefox are highly competitive.

On the other hand, the open source business model is not doing so well. It’s not bringing in the green. When given something for free and then asked to buy support, most customers say “thanks, but no thanks” especially when times get tough.

Open source is not all about the money | Open Source | ZDNet.com

I have a slightly different take on open source. I submit that there is an excess of software talent in the world - and that this talent cannot be soaked up by the corporate world. This “excess” talent manifests itself in the form of open source. Anecdotally I might even suggest that 30% of the developers that I have worked with are underemployed relative to their ability.

Writers write because they can’t help it - and developers code because they must. So while the open source business model will be cyclical along with the rest of the economy, the torrent of software will prove to be resilient.

And as for Sun - its days as an independent company might be coming to a close. And that will be a big loss to the open source world, because it is hard to imagine that any new owner of Sun will be as sympathetic and inspirational to open source as Sun was.

Image credit: jvetterli (license)

(Originally written for VentureWoods - India’s leading venture capital and startup blog)

The following paragraph jumped out from something I wrote in 2005.

U.S. real-estate slowdown will have global consequences: Interest rates, U.S. bond prices, U.S. consumer confidence, dollar exchange rates (and hence the offshoring business), combined with the huge (and increasing) U.S. trade deficit are all pieces of a fragile domino game. This game could easily turn ugly if the U.S. real estate market accelerates its slowdown, or even worse, turns out to be a bubble. Bad news in the U.S. housing market could trigger a global recession.

(From Predictions for 2006 from an Indian perspective on VentureWoods, emphasis added)

This seems all remarkably prescient and oracle-y now, and I almost made a suitably massive upgrade to my ego. But like recent Sensex rallies my ego quickly came crashing down when I read some of my other predictions - e.g. Yahoo will start catching up with Google (Hope is eternal, and I might yet come back to gloat).

But lets get back to more important things:

There seems to be a tendency amongst many to regard a recession as a finite event, associated with a numerical reduction in GDP or stock market values. Business writers seem to compare a recession with a winter, where you hunker down (”cash is king”) and hibernate on minimal life support - after all, spring is just around the corner.

That might be a useful survival strategy, but it misses the bigger point - recessions (and especially this one) are discontinuities with totally unpredictable consequences (gosh I sound like a Nassim Taleb fanboy). To continue my useful but terribly flawed nature analogy, recessions are not like winters, but more like the Ice age that made the dinosaurs extinct. Like the Ice Age, this recession has already essentially destroyed the US Investment Bank business model.

What other changes will this Ice Age bring? I see a few possibilities:

1. Currency changes - The hegemony of the US financial industry (and the financial industry in general) is over. As I write this, the G-20 is meeting to discuss what could very well be the birth of Bretton-Woods II. A covert agreement to safely achieve a massive devaluation of the US Dollar is not out of the question (what will the Rupee do ?). Nor is it impossible to envision the emergence of an alternate reserve currency (or more likely a basket).

2. Consumer changes - We have lived, learned and grown up in a world where the world (now mostly China) manufactures and the US consumes. That world has changed. The US consumer is now on life support. She might live for a long while more, but that vitality and voracious appetite is unlikely to return. For the sake of my mental well-being I prefer to not imagine the consequences of this to the Chinese economy.

3. Fiscal policy changes - The ghost of Keynes is stirring - World governments will unleash the mother of all fiscal (deficit) spending rather than allow deflation to take hold. This sort of worldwide government stimulus is unprecedented, and its implications (or even its effectiveness) are unknown at this point. Will all the stimulus go into productive areas of the economy or will it be gambled away ?

4. Political landscape changes - The current bonhomie between nations and “global co-operation to solve the crisis” is very fragile and based on mutual fear. The Doha talks fiasco shows that developing nations are no pushovers now. There is a real chance that this “united in fear” sentiment could morph into a very ugly blame game. The parallels of the current situation to the Nixon Shock (when the French demanded gold from the US in return for dollars) are eerie and very scary.

So my question to the readership of this blog is this - does anyone see these changes too ? And more importantly, what other seismic shifts do you see occurring in our economic and business landscape ?

(Originally written for VentureWoods - India’s leading venture capital and startup blog)

In a world where government statistics seem to come from an alternate universe, regular folk like us are left grasping for honest anecdotal evidence of the times we live in. From Terri Lonier comes a classic - the haircut index.

As a microbusiness owner, however, I’ve found one reliable index that won’t show up on most economic forecasts, one I’m calling the Haircut Index. Let me explain.

In my small town in New York’s Hudson Valley, there’s a hair stylist who is known for his impressive talent with haircutting shears. Walk in with a shaggy head and after a brief time with Sean’s nimble work using scissors or razor, you’ll leave crisply styled. As a result, his appointment book is always full, often months in advance. While I’m delighted every time he cuts my hair, I’m usually too disorganized or haven’t planned far enough in advance to get a spot on Sean’s calendar.

The other day I called his salon, hoping to snag one of his rare cancellations (self-employment does have its scheduling benefits). Imagine my surprise when the receptionist said, “Terri, next week Sean has an opening on Wednesday at 11, and two on Thursday at 2 and 4. Which do you prefer?”

It was then that it hit me: the economy had truly changed. For Sean to have three openings in the coming week signaled a major shift in demand.

Sitting in his chair the following week, I chatted with Sean about the rarity of his availability. Was this a fluke, or a significant economic signal? “It’s a reflection of the economy,” he said. “When things get tough, people will forego buying a pair of jeans or going out to eat, but still invest in a good haircut, because it’s something they live with every day.” But the recent instability in the overall market has brought a whole new level of uncertainty, he added. “When I see this many openings in my appointment book, I know the financial concerns are deeper than usual.”

One-Person Business

Image credit: malias (license)

From the “Report on Business” comes this interesting tidbit:

Mr. Saji noted that 65 per cent of China’s bank lending is secured by real estate, and that long-term leaseholds represent up to 20 per cent of revenues for many regional governments - leaving both at risk in the slumping real estate market. On top of that, he said, many Chinese have borrowed money from banks “under the pretense of buying a home” but spent the money on cars and stocks instead. “This suggests that China actually has its own brand of subprime loan problem,” he said.

reportonbusiness.com: China positioned to unleash global deflation

It was all very well to be for the Chinese government to support free markets on the way up. But now that loan defaults, deflation and a possible depression is upon us, will the Chinese government stay committed to the free market ? Or will we see a “reversion to the mean”?

Image credit: paogao (license)

Deflation has been on my mind since 2006, when it became clear that credit could not expand forever, and indeed would likely shrink. As usual, I was way too early.

But I was curious to know when deflation hit mainstream public consciousness, so I plotted a graph of the S&P 500 vs the search volume for “deflation” on Google search.

Graph of searches for “deflation” vs S&P 500. Click on graph to zoom

For much of 2006 and 2007 (as shown in the yellow and orange lines in the graph above), deflation was not really a topic of curiosity on Google. Then suddenly around September 2008 (blue line), interest surged in deflation, and the S&P 500 “correction” (to put it mildly) soon followed.

But when I compared searches for inflation, deflation and hyperinflation - inflation came out WAY ahead. Of course, inflation is a much more commonly used word, so that probably accounts for a large volume of searches - but still, it is interesting to see how, even now, inflation is much more on our collective minds than deflation.

Graph of searches for deflation, hyperinflation, inflation in 2008. Click to zoom

Data sources:

1. Google Insights
2. Yahoo finance

Here are 5 questions about the US economy that I would love for the new administration to answer directly:

1. Do you agree that for a large number of people,  walking away from their home and being foreclosed upon is to their financial advantage ?

(In many cases they will be able to rent an equivalent or better home at a far lower price than even the most generously re-negotiated mortgage!)

2. Do you support the idea that an average, middle-income American family should be able to afford the average home in their neighborhood ?

(If so, you should be cheering on house price declines, not trying to prevent them.)

3. Do you feel that America needs to save more and consume less ?

(If yes, why not increase interest rates to reward savers and punish debtors ?)

4. What specific steps will you take to curb the immense moral hazards created by the indiscriminate bailing out of financial and auto companies ?

(Or will future MBA students be taught to “go all in”, since the government will always backstop them if they get large enough ?)

5. You promised to not raise taxes for most of us. Isn’t deficit spending and the resulting inflation simply another way of taxation ?

(Is it not better to get Paul Volcker in as the new Treasury Secretary with the simple mandate - design a set of incentives that will reward the sorts of behavior we would like to see in the future, and punish the ones that we dont ?)

(Image credit: mike9alive, original image here licensed under Creative Commons)

Many opinions are being expressed over whether we are at the beginning, middle or end of this economic crisis. But what seems much more important (and obvious) is the fact that the Federal Reserve has already reached the limit of it’s monetary policy, namely zero interest rates. So when Mr. Obama does take over the reins, his focus is much more likely to be on what seems to be accepted as the “next step” - Keynesian economics.

You could spend a good weekend reading “The General Theory of Employment, Interest, and Money”, or you could read this 2 line summary by Paul Krugman:

Until The General Theory, sensible people regarded mass unemployment as a problem with complex causes, and no easy solution other than the replacement of markets with government control. Keynes showed that the opposite was true: mass unemployment had a simple cause, inadequate demand, and an easy solution, expansionary fiscal policy.
The Unofficial Paul Krugman Web Page

To those prudent savers/renters who did not gamble away their money on the real-estate market, it seems only fair to let deflation take hold so that excesses can be worked off, and the guilty get punished. But when it comes to investing our money (as investors) and planning our business (as enterpreneurs) - it is more prudent to think in terms of what is “likely” to happen rather than what “should”.

So rather than fret about whether inflation, stagflation or hyperinflation is in our future,  its more productive for our investments and businesses to speculate on what the Obama presidency might choose as its vehicle for a massive Keynesian push.

Lastly, and most importantly, its worth noting that there is a good chance that a Keynesian policy will not work.

Paulson and the Keynesian fools want banks to lend. For what? What is it we need more of? Houses? Condos? Pizza Huts? Home Depots? Lowes? Nail salons? Strip Malls? Walmarts? And if by some miracle banks did lend that money and new stores were built, who is there to buy? What would happen then? Is the amount of money that can be thrown at problem unlimited? What about the problems that will create? Can problems be postponed forever? Is there a Keynesian on the planet who can think more than one second ahead?

Keynesian Claptrap From PIMCO

Today we celebrate.

But from tomorrow, I have a sinking feeling that we’ve already seen the high point of the Obama presidency.

Barack and Michelle Obama

You can learn more from listening to John Bogle for 30 minutes than you can get from CNBC in a lifetime.

Click to listen to Chris’s conversation with John Bogle (30 minutes, 14 mb mp3)

Bogle is an insider who thinks, writes and invests like an outsider. At 78, he is a prolific, incisive, often philosophic observer who has written eight (8) books, best-sellers among them, since his heart transplant 11 years ago. He has always spoken as a common-sense sort of common man and often a very tough scold of his own industry.

We were looking for nest-egg advice and the broadest brushstrokes on the crisis. If Warren Buffett can get a guaranteed 10-percent return on his investment in Goldman Sachs, what stake should the taxpayers get for the companies they will bail out? Where, as Ralph Nader asks, is the shareholder uprising? If this is the end of market capitalism as we’ve known it, what is the common-sense name for the alternative system we are backing into?

I’ll tell you something about capitalism — and I somehow remember this, I don’t know how, from the first edition of Paul Samuelson’s textbook ‘Economics: an Introductory Analysis’ — my first taste of economics at Princeton University in 1951 — and what Paul Samuelson said in his introduction was, ‘The problem with capitalism, like the problem with Christianity, is that it’s never been tried.’

John Bogle, in conversation with Christopher Lydon, September 26, 2008.

Open Source » Blog Archive » Candid Capitalist: John Bogle