Wednesday, July 30, 2008

Ridiculous is as Ridiculous does

The US government and media obsess over a lotta ridiculous stuff ... unfortunately to the preclusion of solving some of our major issues. Whether or not this is intentional (as I supposed recently) doesn't matter. The consequence is the same: the nation gets distracted and divided with trivialities and victim-less issues while the major issues continue to grow ... and to quietly bleed us all dry.

Happily (?) we're in good company. The news recently has carried a bevy of similar symptoms from across the globe. Here are some ridiculous things that ridiculous people are wasting our time on:

Turkey has banned the AK party which is currently running the government. This makes it illegal for their current PM (Gul) to be PM. Great idea, dumbasses! What better way to show that a Muslim country can be stable and progressive and modern than to disregard the will of the majority in a military quasi-coup on the fear-mongering premise that Gul is imposing Sharia law. Evidence? He wants women to have the freedom (not the requirement, mind you) to wear headscarfs at university. I'm sure the EU is ecstatic that they let you in now. I guarantee this has single-handedly cost the entire country several percentage points of GDP over the next few years.
Meanwhile, the Kurd question looms, ignored, as a true threat to Turkish sovereignty.

South Koreans have spent half their summer protesting and rioting over the government's decision to allow imports of US beef. The sharpest of these tacks has suggested the PM should be fired and the government recalled in a no-confidence vote. That would be a great way to spend taxpayer dollars. Dude - if you're bored, there are better hobbies than getting water-cannoned or arrested. All of this because they're afraid of the sliver-thin chance of importing mad cow ... and the rhetoric that Korean ranchers (oh, yes - they even wear cowboy hats!) would lose money.
Meanwhile, North Korea shows it's just a misfit teenager who needs a little love and attention to keep it from going Columbine on the World's ass. Oh, and the billionaire patriarch of Samsung Lee Kun Hee is finally convicted for his 60 years of tax evasion and market manipulation ... but nobody's rioting over the destruction of the rule of law ... the fact that the Korean judicial branch dragged their feet for decades until he was old enough for them to justify handing down a suspended sentence ... Nobody wants to say anything about the 60 years of too-cozy relations between the government and chaebols (national champion conglomerates) which allows this kind of bad behavior.

Italy has contributed to the decline of the rule of law by passing a law which gives the senior-most politicians (particularly PM Berlusconi) immunity from prosecution. Great. This guy's been raping (financially and um ... otherwise) the country for 25 years with no concern for the law. Even the famously "make love not war" Italians took a break from cigs, espressos, and whistling at girls to mount massive protests.
Meanwhile the Italian economy is toppling into recession. If it makes you feel any better, guys, the rest of Europe is right behind you ... although you're the country Nouriel Roubini singled out at Davos "unfortunately, the lack of serious economic reforms in Italy implies that there is a growing risk that Italy may end up like Argentina" and fall out of the EMU. Ouch. Oh, and maybe you guys should get off the Vespas and into bed ... the Italian fertility rate is half what it was in your grandparents' day.

And the whopper: Russia and China showed they were willing to go bat for moral rectitude by refusing to allow even the weakest of penalties against Mugabe and his pack of animals in the UN security council.
Meanwhile ... the international organization which is supposed to save us all from ourselves proves once again how useless it is. The world seems satisfied to do nothing in the face of the most heinous treatment of the world's most down-trodden.

Don't think this behavior is confined to these countries. It's in everyone's backyard.

Saturday, July 26, 2008

Having Faith Enough to State the Obvious

Reader's Note: Click play below if you'd like a little background music while you read.

I did it. I blame myself. I've been feeling the slowly increasing tension of a rubber band about to snap. Yes, I let myself get caught up in this year's election. I let myself try to sort out the information overload in order to make a good decision. In order to do my civic duty. In order to make a difference. In order to have the right to complain if I don't get my way. Or something.

Humans started our world domination when one of our little jellied ancestors got tired of beig a complete victim to the random whims of his world. "Gosh darnit!" He said. "I'm gonna fix some things around here and live a better life!" And with that we started exerting influence in our little worlds, a long march of perpetual struggle that has gotten us where we are today.

Which is a pretty cool place ... But we all know it's not quite right. I agree with Bill Gates, who recently said the following at the WEF in Davos:
I am an optimist. But I am an impatient optimist. The world is getting better, but it’s not getting better fast enough, and it's not getting better for everyone.
Just going about my daily business, not an hour goes by that I'm not confronted with with something that need fixing. If I had a zillion-man army, the Cup of Christ, and Deep Thought I'm quite sure I'd still never get around to fixing it all. That rubber-band feeling is what happens when I forget this fact. I try to figure out how to fix everything and I get stretched.

Take the election, for example. I believe in people's ability to fix things that they care about. I believe in decentralization of the authority and means necessary to do so. As such, I have to conclude that politicians and government are no better than necessary evils for those cases when one man can't fix it alone. If they must exist, though, they should be made to do it right. Unfortunately, to do something about it, one must get elected. To get elected, pols necessarily must give up those goals. They must promise everything to everyone ... and then water it down enough not to scare away a single voter ... and then hope nobody holds them accoutable for the 90% that they never actually follow through with.

"One of the many major problems with governing people is that of whom you get to do it; or rather of who manages to get people to let them do it to them. To summarize: it is a well-known fact that those people who most want to rule people are, ipso facto, those least suited to do it. To summarize the summary: anyone who is capable of getting themselves made President should on no account be allowed to do the job. To summarize the summary of the summary: people are a problem."
--Douglas Adams, The Restaurant at the End of the Universe

Clearly, our two current candidates share the same distrust of people. In their mission to avoid scaring anyone away, they try not to say anything at all. These guys go around saying nothing. Their surrogates then follow behind twisting and turning the facts to fit their current audience. "Oh, he talks about leaving NAFTA, but that would never REALLY happen" wink wink.

Their actions belie their belief that people just can't handle the truth, and this explains why each candidate is in a mad dash toward the milk-toast center. The truth is, they're nearly interchangable. I'm still waiting for the day McCain announces Joe as his running mate or Secretary of State. Our irri-tainment channels have propigated a rumor that Obama might mimic this by picking a GOP Veep.

I challenge these guys to actually take a stand on a few issues and trust the people enough to actually say what they mean. I have faith enough in people to let them choose my leader ... assuming they're informed. Cut out the doublespeak and I have full confidence they'd make the right choice for us all.

Follow Up #4: Power

Recently I saw the following chart (left) in the Economist's special report on The Future of Energy. Last year I did some research and drew up these charts in support of my Power blog (right 2 charts). Thanks, Economist for painting this interesting historical picture to queue up my forecasts.

In their chart, what strikes me as most interesting is the speed with which we have been able to switch from one source of energy to another. The shift from wood to coal was halfway complete within 3 decades. We shifted from 3/4 of energy from coal to 1/4 in a single generation (thanks to the increase in oil demand from the exploding popularity of cars).

There's plenty of hard evidence that the rate of technological progress continues to accelerate unabated and with no end in sight. To me, this lends credibility to the argument I've been trying to make of late: the current media hand-wringing is largely misdirected angst. I'm quite confident will be able to shift our energy sources even in the face of unstoppable and dramatic increases in demand ... all before Armageddon is upon us. No, $5 gas is not Armageddon. Jeez.

The Economist seems equally confident that we'll make the necessary changes in the appropriate (yes, "measured and responsible" is an appropriate pace for things) way and time frame. To paraphrase: Don't look now but it's already happening. One of the main sources for their special report, Geoffrey Carr, said it best in a blog at "Alternative energy technologies are proliferating rapidly. And it is big bad business that is making it happen."

Chalk up another one for capitalism to save the day. The Watermelons (aka Green Party) and their type have been thrashing for half a century to absolutely zero effect, save giving environmentalism a bad name.

Source of first chart: BP via

Friday, July 25, 2008

Buy!/Sell! #2: Energy

Merging my WWTB series on Energy with my new series on prediction market model portfolios, here's my recommendation on a few upcoming (or envisioned) technologies:

+ Direct Heat Solar
+ Smart Grids with minute-by-minute moving-avereaged demand-based pricing.
+ Instant-On Electronics
+ Nuke power in cold/distant locales with ultra-long distance DC transmission lines (DC grid:
+ Natural Gas Cars, especially for fleet vehicles (maybe evenhydrides?) (watch for a tax credit)
+ Sugar Ethanol in the US (HUGE risk: rainforest decimation)
+ Tesla Autombiles go mass market
+ Drive toward closed-system energy recycling
+ Geothermal

- Photovoltaic Solar (too much is lost in translation)
- Corn Ethanol
- Carbon Sequestration (to much volume and no end-game)

Tuesday, July 22, 2008

Buy! Sell! #1: Prediction Markets Intro

Back in the Nineties while we were still undergrad pimple-poppers, I came to know a coke-laced gambling-addicted, insomniac who traded junk bonds at night while the rest of us studied, drank, and slept. Then there was my roommate who bounced back and forth between joining the Freemen, the FBI, and the Kosovo Jihad.

Who am I kidding ... it was NYU ... everyone was popping pills. But I digress.

The 3 of us could hardly come from more different backgrounds and had our own wacky ideas but had remarkably arrived at the same spot (philosophically, geographically, and temporally) on many levels. I've always appreciated the reassurance of their conviction, even when we were all leaning against a heady wind. Not immaterially, we all shared a deep and long-standing respect for Reagan.

It was the insomniac who first introduced me to prediction markets. What started as a nighttime obsession became a side job became a career, but from day one he never could leave work at the office. Between the office elevator and the subway station he'd be on his cell placing bets on anything and everything that the future might hold. Watching sports with these guys was mentally exhausting. With every point or foul, there was a flurry of cell phones as they all speed-dialled their brokers with a new futures order. Ten thousand at niner and an eighth on Shaq to drink water instead of Gatorade in the fourth! Hedge that with a short on Schumacher to pit before lap 30 at seventy-five spot naught! Rah! Lift that offer you cocksucker! How's the wife? Did she recover from last night yet? Remind me to buy you a drink next time we're in Vegas!

As is the tragedy of evolution, humans hardly even make trading decisions anymore (thanks a mil, modellers!), much less have a broker on speed dial for such interaction. Going going gone the way of the Yellow River dolphin and the open-outcry pits.

I don't think these guys knew that the academics had not fully conceptualized prediction markets yet. I know they didn't give a rat's ass. But intellectualized it was; then automated; then commercialized; then specialized. Corporations (especially HP and GE) started to steal the idea to help them in their sales prediction, as well as new product and marketing campaign creation. Who needs employees at all anymore? But I digress.

Now come vanity markets such as Bet2Give where you put real money in, but any winnings are automatically donated to charity. This conveniently avoids the legality question of betting on the future. As their FAQ says If you bet wrong and lose, your money will still go to worthy causes... but chosen by others. Hmm... I wonder if I can place a bet on how long it'll take the IRS to figure all this out?

Will bets on future events become an asset class in the same way bets on future cash streams or future prices have?

So I'm in. I'll be trading the future and reporting back on my riches ... all of which will be routed to the Ronald Reagan Presidential Foundation for this first round.

There's a twist. Prediction markets are still young, and as such, they're very thin. Not a lot of activity, and not a lot of options available to reflect the nuances or breadth of one's comprehensive view of the future ... aka one's portfolio (of bets on future events) in market lingo. As such, I'll be publishing several "model portfolios" here from time to time under the "Buy!/Sell!" series title.

Friday, July 18, 2008

What Type of Investors are SWFs

News today that QIA and another Qatari SWF will become Barclay's largest shareholder. Close behind are the SWFs of Singapore and China.

This really represents the nexus between my latest Idle Shareholders blog; my recent discussion about SWFs in Follow Up #3: You've heard of the Illuminati, right? and my coverage of Boone Pickens' concern in Follow Up #3: Power. Perhaps we've found the epicenter of my own personal blogosphere.

The action, itself is nothing earth-shattering. SWFs have been on the prowl for quite some time. The intensity of their hunt has grown just as rapidly as the price of oil. Banks have been on the rocks for over a year. Not surprising, but it calls our attention to interesting questions:

What type of investors are SWFs? Will the QIA be absentee like your average mutual fund manager? Will they be politically activist? Will they quietly drive the company? If so, toward what goals? Stability? Sharia Law? Profitability? Long-term or short?

Will the US be the next England or Rome? If $5/gallon gas isn't enough incentive for us to get off foreign oil, how about the realization that we're giving other countries the money they're using to buy up our (economic) treasures. Middle Eastern and Central Asian countries are getting rich off our insatiable demand for oil. They're awash in Dollars and Euro and must find a productive place to invest. Hence the SWF boom. Happy serendipity for them: US stocks are all on fire sale. If they own our most productive enterprises ... they own the future revenue streams which those enterprises produce. We labor and they profit. Meanwhile we exhaust our remaining wealth to maintain our world influence. One day we wake up as England circa 1950: Broke and Inconsequential.

Will we be able to respond? Hopefully, arguments like mine above will scare many people into looking for a solution. I'm chronically optimistic about the US and our ability to respond in the face of challenge. We have resources of all kinds ample for the effort. Being a democracy, though, we have to go through a period of cacophony and debate where suggestions are raised, debated, and informally voted on.

One popular inclination will be to suggest we take our toys and go home ... hiding behind a wall of protectionism and xenophobia. Prevent them from coming here. Prevent them from owning our shares. Unilaterally refuse to recognize their ownership of our assets. This is Iran's favorite trick. Only if we want to end up like them in 50 years should we pursue such an option.

Another popular inclination will be to hand the whole problem over to governments. Socialism for everyone. In fact, let's make a single worldwide communist state so that we can steal China's and Qatar's wealth to feed our starving faces.

Surely many will say "that's capitalism!" and roll over on their backs to show subservience to the inevitability of the markets. This would be nothing more than an excuse. Capitalism is not Imperialism. Empires fail when freedom is removed (more on this coming soon to a blog near you!). Capitalism is survival of the fittest ideas; it's a framework for making decisions (another blog coming attraction!). The true capitalistic response to a challenge like this is counter-attack with better ideas. This shouldn't be hard. Countries like Qatar, Saudi, Russia, Iran, and even Chile are not becoming wealthy on the backs of a million citizen-entrepreneurs with a hundred million value-creating ideas. To the contrary - their wealth comes from the lucky happenstance of living atop a commodity we all want.

As I am wont to do, I'll leave you to cogitate on these for a bit. I'll be back shortly to share my thoughts.

Thursday, July 17, 2008

Idle Shareholders

"How can we have these levels of fiction in financials after Sarbanes-Oxley? How do people get away with this? How do they live with themselves?" - Jim Cramer getting emotional about the mortgage investment insurance industry 8/5/07

Readers note: I apologize in advance for the length of this one. A lot of background is necessary in order to fully deliver the punch line. Bear with me. It's important.

The mass-market emergence of Mutual Funds democratized equities. Suddenly everyone was in the market. This influx of funds automatically pushed up prices of just about every equity. Over time, the continued influx of dollars was largely counterbalanced by a tidal wave of new equity issuance which continues to this day.

The results? We have the biggest, deepest, most liquid equity markets on the planet. They're far more resilient than they were a few decades ago. A huge percentage of Americans experience the wealth creation of owning a little slice piece of American ingenuity, yet their downside risk is limited by the portfolio effects of the funds.

Super-duper, but not without negative side-effects.

Let's roll back the clock to the heady days of industrialization 100 years ago. Back then, and for the first half of the 20th century, it was quite common for a corporation's stock to be held by a few powerful shareholders. Nutty Howard Hughes held nearly all the stock of Hughes Aircraft, TWA, and other firms. John D.Rockefeller and his descendants owned the majority of Standard Oil. HJ Heinz owned and ran the eponymous company. These people's lives, reputations, and fortunes were inexorably inter-twined with the companies they owned. As such, if something started to smell funny at any of these concerns, the primary owner had a very clear interest in stepping in to set it straight.

Fast forward to today. In many industrializing nations, that ownership structure still predominates, but here in the US, financial engineering (especially funds) and competition-driven conglomeration have torn this cozy relationship apart. Who's GE's biggest shareholder? It changes frequently, but all the top 5 are funds, none of which owns more than 10% of the company. Same thing at Google, Heinz, and most others you can think of.

These funds are run by a fund manager who's sole goal is to maximize his own compensation. He (or she) typically gets his (or her) Scooby Snacks by maximizing the per-share market value of the fund, usually measured comparatively (when his fund's share price grows faster than some standard index like the S&P 500). If, on the other hand, the fund has a bad quarter or two, it's a piece of cake for investors to switch their money to another fund. If too many people leave the fund, it gets closed and the FM is likely out of a job for a long while. Who wants to hire a loser?

Each fund has rules, but generally, for the above reasons, the FM has a strong incentive to move in and out of stocks rapidly based on the latest news, forecasts and earnings reports, lest he end up holding the bag (of a stock in meltdown due to some headline). Buy-and-hold is a tough proposition. Patience is in very short supply. FMs just can't afford to stop watching every market twitch and rumor long enough to really partner with, police, or even deeply understand companies they own.

A whole sea of Wall Street analysts make a comfy living supposedly "getting inside the heads" of companies and then reporting out their insights and secrets. I say supposedly because they, like the FMs really only have one interest: near-term stock price movements ... and only one avenue of predicting them: Quarterly Earnings. Earnings. Earnings!

Here's a hint for them: earnings are not the end-all, be-all indicator of a company's health and prospects.

Of course, there are still some family-run businesses that aren't subject to this. There are some value-investors (Buffet comes to mind) who believe in extremely long investment horizons. There are activist investors and private equity houses which take an (often overbearingly) active role in management. There are so-called "responsible" funds. But beneath the clamor of these is a vast ocean of shareholder indifference.

Yesteryear's shareholders were often active members of the board of directors. These guys insisted on voting on any significant business decision. They were tightwads always; clubby when possible; ballsy when needed; patient in the face of adversity.

By contrast, today's impatient FMs don't even sit on the board, nor do the owners of the fund's shares. Instead, they vote with their feet (by selling) ... or not at all.

Granted, every one of today's S&P 500 companies is a lot more complex than the biggest company was 50 years ago. A member of the board of directors today would have to be extremely experienced in the industry, highly astute, and have no other preoccupations in his life in order to be as deeply informed and involved in the decision-making as people were "back in the day." This just doesn't happen. Board members suffer from info overload just as you and I do. Most have corporate ADHD as a result. Few, if any see fit to invest in a staff of analysts who could keep them informed enough to be deeply involved.

Even if an issue is put to a shareholder vote, the common shareholder (either direct or via mutual fund) has no idea what's going on and thus votes randomly ... or more often, doesn't vote at all, in effect deferring to the execs. Moreover, most modern CEOs insist on a privileged seat on the board, total control of the "messaging" to the board, as well as broad-ranging control over the business.

What's wrong with that, you may ask. Execs are all Harvard-educated, Mensa members who have no need to sleep ... right? Who better to make decisions for the company? Doesn't every army need a strong general? Well, a modern exec can anticipate spending less than 5 years at any single job or company. In that time, he has to milk out every cent of compensation he can, because there's a decent chance something ugly will happen to the company on his watch. The analysts will wail. The fund managers will flee. The share price will tank. The exec will lose his job. Once that happens, his future job prospects are shaky at best. Even if he retains his job, he'll be in for a tough road fighting for the uncertain future of a company that's on the ropes. Often his best financial and career move is to step off that painfully slow local train in favor of an approaching express. Moreover, these days you have to be a salesman of eternal optimism to qualify for the job. In that context, preventing said unlikely but nasty event seems to be unworthy of a CEO's time. (P.S. these dudes are lightening rods for corporate ADHD. I ran across a good podcast on the subject here).

Clearly, the interests of the execs are not perfectly aligned with those of the company. The interests of the shareholders are not perfectly aligned with those of the company. Even the employees are not in it for life. Something goes wrong? Everyone jumps ship.

Perfect capitalism theory might argue that this is better. Schumpeter's creative destruction ensures that capital naturally flees a sinking ship in search of maximum returns elsewhere, ensuring that dysfunctional enterprises wither away.

Then there's the reality: Since the execs play fox, hen, farmer, hunter, butcher, chef, and diner, there are no checks or balances. In short, they run amok with remarkable frequency. This isn't to suggest that all execs are fraudsters (well, some are) or even that they're grossly incompetent (well, some are) and only hold on to their job through political connections (well, some do). No, what it means is that they are just as human and infallible as the rest of us. They generally respond to the incentive structure they face ... and sometimes they just respond irrationally. Absent a strong incentive to care about the long-term success of the company, they don't bother to.

As a result you have a culture of negligence in nearly every public company in the country. Books get cooked. Decision-making gets farmed out to lawyers (often with no business acumen). Long-term problems go untended to and fester. Capital projects go underfunded or interminably postponed. Opportunities pass unexploited. Short-sighted incentives create unanticipatedly adverse results. People end up wasting a ton of time playing political games and mis-communicating. Good employees are not properly developed but rather are promoted to their level of incompetence and fall victim to the Peter principle.

You get the picture: companies never buckle down and deal with their tough, long-term issues. Everyone from employee to CEO to Board to investor to competitor to banker to media, even to politician sees the problems and the impending consequences, but nobody seems to have the power or muster (read: incentive) to avert disaster.

The endgame is that once-titans like MCI and Bear Stearns implode when we least expect it. The execs jump out the nearest window with their golden parachutes on. Employees get canned. Those absentee FMs and mutual fund investors (like you and me) unlucky to have been holding the stock when the music stopped ... they get burned.

Meanwhile, the mass-irritainment talking heads whip up public fervor; the politicians talk and try (but fail) to legislate the problem away (like SOX); the public gets a bad taste for corporate America; the whole economy is dragged down by a million tiny inefficiencies.

On the bright side, American corporations have ample opportunity to grow more productive and resilient by remedying these ills. Could someone figure out a better way to run these businesses, it could spark the next virtuous cycle of equity gains and investor confidence.

And there's the challenge. Any ideas? Stay tuned for mine!

Cartoon credit:

Wednesday, July 16, 2008

Nik's Laws

If Murphy and Confucius can do it, so can I.

  • Nik's Law On Duration: Task duration will expand to fill the time allotted, plus 15%.
  • Nik's Law on Productivity: 49% of the work is completed in the first 10% of the available time. 49% of the work is completed in the last 10% of the available time.
Lesson: Budget accordingly. To manage time consumption, assign aggressive time frames, but only one milestone at a time. These serve as checkpoints where you can adjust the tack and method as necessary. Work should be "mashed up" as rapidly and free-form as possible in the first 10% of the time by creative souls. Then, a new team should take over. They should have a skill set more focused on organization, metrics, and steady implementation. The creative team should step back in for the last 10%.

Tuesday, July 15, 2008

Re: Talk Amongst Yourselves ... Colombia is the new Israel

I just have to laugh about this one. I apparently have a very infamous reader.

On 3/27/2007, I posted a blog saying "Talk Amongst Yourselves ... Colombia is the new Israel"

On 3/2/2008, the unoriginal pig Hugo Chavez stole my line in a press conference, saying "The Colombian government has become the Israel of Latin America."

What should I make of this? Imitation the highest form of flattery? Great minds think alike?

PS: he's not a pig for being unoriginal. It's his populism that gets my goat.

Photo Credit: AP

Iranians vs. Iran ... Rick Steves and the Shahab-3

As I've said before, I really appreciate Rick Steves' European shows on PBS. When I found out he also maintained a blog (who doesn't these days?) I was instantly hooked! He gives hidden insights and sneak previews, but also shows the entertaining soft underbelly of his job (grumpy tourist office in England, stupid rules in Turkey). When he mentioned he would be going to Iran to separate the real from the rhetoric ... well, honestly I was nervous. This has been used frequently by the peaceniks among us as a euphemism for their peace-at-all-costs world view.

All told, it was a courageous and a valuable thing he did. We'll all be better off if we can humanize this conflict a bit. I agree with him that individual-to-individual contact can lead us all to greater understanding of each other. I share his hope that understanding breeds compassion and even solidarity.

But Rick showed his liberal underpants a bit. While his aim was to present an "even view" of the country, his result was to give glibly cursory coverage to the hate-mongering propaganda spewed forth by the insaniac Iranian government. Does he really mean to suggest that "Death to America" is just a cute figure of speech? I give him kudos for covering every smile and "we love America" he observed from the Iranian citizens. However, by over-emphasizing these, he showed he could not resist the temptation to counter-balance the White House's predilection for fear mongering. with opposite-but-unfortunately-equal myopia.

Here's my take on the Iran:

  • To quote Reagan, "People do not make wars; governments do." In this context, the meaning is that the conflict does not really involve the common citizens of either country. On both sides, they're more interested in living their lives comfortably and being left alone than geopolitics. He went on to say, "A people free to choose will always choose peace." I saw this firsthand in the early 1990's in the former USSR - the people never did hate Americans. Had no reason to, except the fear preached them by their government. And they were just as afraid of their own government as ours. Rick did a good job of demonstrating that (many) Iranians are no exception.
  • To repeat Reagan: "People do not make wars; governments do." His statement has a second meaning: Governments do, indeed, make wars on behalf of their countries. Acknowledging my first point (and Rick's) does not repudiate the fact that the Ayatollah Insane-y and the rabid Ahmadi-nejad army could cause great harm to life and limb in the US, Iran, and most likely anyone else who has the misfortune of getting their attention. Sanctions, containment, diplomacy, saber rattling, and outright aggression may well be necessary in response to their actions.

The fact that an American can traipse around Iran (with government minders) gathering smiles and hugs from children and grandmas alike calls attention not to the power of peace or the senselessness of war ... but to the tragedy of it. I'm quite sure the average middle-class, non-fundamentalist Iranian (if there are any left in that place) is as anti-war as his American counterpart.

However, that (mythical ?) average Iranian does not have his finger on the "launch" button of the new Shahab-3 nuclear-capable intermediate range missile. Nor does he have the key to the national purse. He has no vote on whether his own dire, hopless, poverty-stricken existence is worth the billions being wasted by the government on their nuclear program.

It is FOR, not AGAINST these people that aggression against their government may be necessary.

I'll let Reagan wrap up my argument: "We can not play innocents abroad in a world that is not innocent." We must engage Iran with respect, but from a position of strength. We don't need to be the world's daddy, but we do need to ensure our own safety.

If we can serve as a global role model of freedom and respectability, we achieve dual success of furthering our own self-interests while at the same time elevating the world's lowliest and most suppressed. To that end, we should be willing to expend our own treasure and flex our own muscle. It's a long-term proposition, which makes it politically dificult. Greatness is not for the short-sighted.

Photo credits:
Rick Steves in Iran: Rick Steves Blog (
Iranian Missiles: Sepah News ( via AFP

Monday, July 14, 2008

Talk Amongst Yourselves ...

The cure for terrorism? A middle class. Jobs. Affluence. Hope. A shift from the current sense of entitlement from the nanny-government to a sense of opportunity, responsibility, and ambition.

Reagan said "The greatest security for Israel is to create new Egypts."

Sunday, July 13, 2008

The Impact of Energy Prices on the Rest of the World

We're all justifiably concerned about increased energy prices. Yeah, it sucks to pay $75 to fill up your car just so you can drive to work every day. Yeah, it sucks to pay $500 for a flight to Vegas for the weekend when it used to be $199.

Yeah, more importantly it's running US businesses into the ground, causing stagflaton, job loss, and a steady leak in our national wealth. It may even lead us into new wars.

It may toss the US, Europe, and Japan into recession and your 401k may look anaemic for a while but there's no reason to worry that either will not come back. Just be thankful you're not in charge of a rapidly-industrializing country like India, China, Indonesia, or Malaysia.

The recent success of these countries relies entirely on the shift from subsistence agriculture to low skill and energy-intensive manufacture for export. As Thomas Friedman says till he's hoarse, the incredibly low cost of long-haul freight enables their success by allowing them to manufacture cheaply and then sell where prices are high (=in the US, Japan, and Europe).

Here in the US, we have used sophisticated financial leverage (=borrowing) to throw fuel on our economic fire. In industrializing countries, they use the more direct means of government subsidy. Via price controls, via controlled exchange rates, or via direct subsidies, all these countries attempt to deliver cheap inputs (especially energy) to their "national champion" businesses.

The most sensical among the subsidizers see it as a temporary way to vault their countries into the league of rich nations. The less admirable do it to retain their political power. For evidence of this look no further than the 12 cent gas in Venezuela.

Regardless of the motivation, these subsidies are quietly bankrupting national governments. India and Malaysia are but two examples of countries who have recently been forced to decrease their subsidy on oil. Malaysia recently raised gasoline prices by 40 percent and plans further increases in the future. The economic impact won't bee seen for a few quarters, even in countries which are not so astute at cooking their books (ahem - China). Eventually, these governments will have to admit that they cannot continue to be the buffer between the world economy and their own. Oil subsidies will not be the end, either. Governments will have to admit they can no longer afford the luxury of other economic accellerants such as tax credits on businesses.

Moreover, businesses which have become successful (but dependent) on the back of cheap energy and favorable fiscal treatment will face a tremendous test. Most of these businesses are only as old as the current boom. They've never felt the pain of an economic downturn, which explains why most never saw the need to put safety nets or buffers in place. These businesses will close. Their entrepreneurial chiefs will be fine, having squirrelled away for a rainy day. The labor force, on the other hand, have also grown up in the boom and will be caught out.

On a macro level, these countries will have to admit that their heady growth is going to dip. I see the current credit/mortgage and energy/inflation crises as a testament to the robust, large, open and free Western economies. We will absorb and we will rebound. Industrializing countries, including India are going to have a much rougher time of it.

Fiscal crises inevitably lead to political crises. People will riot when the price of their heating and cooking oils goes up. They will get violent when increased transport costs cause their food prices to increase. It will be an extreme challenge for leaders in much of Asia and South America to maintain their positions of power. Due to their past propensities, it's safe to assume socialism will present itself as a savior, and many people will take that bait.

The question for countries and businesses is: what can they do about it? Some suggestions:
  • De-industrialize in favor of Western-style virtualization and services
  • Raise prices (at the risk of losing competitiveness)
  • Finally invest in efficiency over volume
  • Liberalize to become more robust
  • Go green. We're seeing hints that China wants to become the greenest country on the planet ... sheesh they have a long way to go!
  • Find closer markets
  • Shift to cheaper, low-friction transport (boats and trains instead of trucks and planes)
  • Ally together in an attempt to gain the necessary economies of scale
  • Ally with nearby developed countries (think NAFTA and EU)

Friday, July 11, 2008

Follow Up #3: Power

The oilman's oilman T. Boone Pickens has got on TV recently to talk about oil from a new perspective: "The largest transfer of wealth [from the US to the Oil Producers] in the history of mankind."

I like his twist. Of course, it's not a transfer in the economic sense of unilateral remittance, it's a transaction of cash for goods at a (very liquid) market-determined price. However, his point is well taken to the extent that the good is not a durable asset. It is converted into energy.

  • A slice of that energy is used to create wealth in the US. This happens when businesses buy the energy and combine it with other resources to produce goods and services more valuable than the price of the raw inputs.
  • However, another slice of that energy is simply expended with no economic return. This takes the form of energy waste (rife in our country) and personal consumption such as driving to a friend's house or heating a home. This slice is truly an example of sending US wealth to Edens like Russia, Nigeria, Venezuela, Iran, Iraq, and Saudi Arabia in exchange for short-term convenience and comfort. Once the energy is expended, we have nothing to show for it except empty wallets.

OK, so that's the problem ... here's his solution:

And if you have some time, here's a longer discussion by my favorite interviewer Charlie Rose:

Thursday, July 03, 2008


No need for me to catalogue Barak's thousand tiny shifts to the center now that the general election is well underway. My contribution is simply to name it:


Wednesday, July 02, 2008

Corporate Newspeak 4

Happy Path: (n) Totally unrealistic sequence of events leading to a business success. Usually becomes the baseline against which reality is measured by project planners and execs. Any discrepancy between Happy Path and reality is considered a failure of doers.

Work a Half Day: (v) Leave at five.

Swamped: (adj) Procrastinating, usu to such an extent that no work can be accomplished.
Usage: "I'm swamped! I can't get to your e until next week."

Showed Great Leadership: (v) Disagreed with everyone.
Usage: "We thank Miss Veyron for her years of service to the firm. She showed great leadership."
Note: can only used in termination announcements, and only in the past tense.

Pelican Manager: (n) A manager who swoops in surreptitiously, shits all over everything, and flies away with much ado.
(note: I don't know where this one started, but I think it's awesome!)