Yeah! What HE Said: Fareed Z on the 9-9-9 Plan

You have to understand: complexity equals corruption. Americas corruption is institutionalized and legal. The US tax system is not just corrupt. It is corrupt in a deceptive manner that has degraded the entire system of American government. Congress is able to funnel vast sums of money in perpetuity to its favored founders through the tax code without anyone realizing it. The simplest way to get the corruption out of Washington is to remove the prize that members of Congress give away. A flatter tax code with almost no exemptions does that The simplest fix to our tax code would be to lower the income tax dramatically, lower the corporate tax, and instead tie revenues through a national sales tax or value added tax. The US is the only rich country in the world without a national sales tax What is the appeal of a consumption tax? First, it's efficient. Lower fraud. More stable. Reduces consumption and borrowing at the household level.

Goldman needs Privacy

At one point this week, the headline was:

Roiled by op-ed, Goldman loses $2.15 bn m-cap

Goldman didn't get where it was by being a public company. It was a partnership for the first 130 years before going public only 13 years ago. Those have been a pretty awful 13 years for the firm.

The latest round of headline-generators and talking head fodder would have never happened if Goldman were still private. The dude wouldn't have even had the motivation to publish the op-ed. The Times wouldn't have cared to print it. Nobody outside the firm would care to read it.

Instead, over the course of a few hours of stock trading, value was "destroyed" to the tune of ... well, more money than 99.999% of the world's population will see in their lifetimes. Actually, add a few more 9's after the decimal. Billions. With a "B." As in Buffett-sized.

Or was it? If a whiny Dear John to a former employer full of news (which, as Forbes pointed out, everybody already knew) can destroy billions of bucks, then maybe that value didn't really exist to begin with. Stepping back from the greater fool theory, perhaps GS should be valued based on the discounted cash flows it can generate. Novel concept, eh? Maybe I should write a book and teach at Wharton.

Then again, maybe my book should take a different approach. Perhaps Goldman should never have become GS in the first place. Perhaps a financial firm with ridiculous leverage ratios, a wacky capital structure, a penchant for mercenary dealings (AIG collateral call ring a bell?)  needs a small, concentrated, captive based of owners rather than a whole "street" of busybodies to answer to.

The only way Goldman's stock has impressed is in its volatility. It hasn't even doubled over the past 10 years. Hardly a good investment. The management has never been able to find an acceptable balance between staff incentives and shareholder value. Perhaps no such balance can exist for more than a few microseconds. Perhaps GS is an unstable element with a short halflife. Maybe they're in a constant state of containing the meltdown, hoping it wont Fukushima on them tomorrow ... or the next day. Perhaps this is distracting them from their "day jobs" of making deals with and on behalf of clients.

Nice adventure, guys, but it's time to take your marbles and go home. Cash in the chips and go private.

Woah, China!

Forget The Vest ... fear THIS:

On Monday, China's premier Wen Jiabao lowered the economy's growth target to 7.5 percent from 8 percent, where it has stood for years.  - AP

Early, of course, to sing a dirge but China's "golden era" of ridiculous growth at all costs seems to be getting a bit more expensive these days. Expect to SLOWLY see:

• Reduction in expenditures for extravagant infrastructure projects
• Asset management shift from their current stance (overweight US Treasuries) to something more akin to Singapore's Temasek
• A review of the commercial tax and licensing structure (hopefully not a Chinese Raj)
• A harder line on international trade, both in terms of limitations and in terms of tariffs
• An attempt to diversify labor-intensive businesses across labor pools (inner-China manufacturing zones, African investment zones) 
• Industrialization deeper into inner-China
• All of which will help pay for increased, but highly-targeted social support funding including medical care and pensions, as well as their continued military build-up
• Targeted efforts to increase enforcement, probably with a focus on IP law, financial regulation, governance (as the Economist said a few weeks back, the Chinese government is the only group that has actually read the entire Dodd-Frank act)
• Maybe even some efforts to address environmental sustainability issues

2020 Sports Car Concept

I am a massive admirer of Jason Castriota and his design work. He is the future of automotive design. Inspired by his vision, I offer this, my own design for the sports car of 2020.

Alternate soundtrack version here for the unblocked.

Getting the Most out of Education

Last week, on TED Conversations, (look it up and thank me later) the question was posed:

Should public schools in the United States eliminate the traditional A to F grading scale? And if so, what assessment do we replace it with?

YES YES YES it should be replaced.

We should instill some standards of quality in the culture of our too-often-lackadaisical education system. There should only be one acceptable grade: "A"

If a student does not perform up to an "A" grade, they should have to repeat, repeat, repeat the test/paper/project/class until they can DEMONSTRATE competency.

No more pushing kids along just because the class schedule dictates. One of the most common curriculum structures is to progressively introduce new concepts which are built on previously-introduced concepts. A student who demonstrates an inadequate command of a concept gains little by getting a "D" or "F" and then continuing on with the class to the next concept. This is REALLY how we leave children behind.

Getting the Most out of Youth

This week, on TED Conversations, (look it up and thank me later) the question was posed:

Roughly 52% of the world's population is under 30. What is best way to harness the energy and ideas of youth?

 To me, step one would be to make sure that energy and creativity are informed. Some background:

I certainly recall formulating incredibly strong opinions in my teens and 20's which later, based on a broader understanding, were dead wrong. I suspect I'm not the only one.

Furthermore, nothing helps me really "gel" or solidify my opinion on something like trying to explain it to someone. Kinda like posting here on Ted Conversations!

Many curricula, especially in the US, rely too heavily on reading- and lecture-based pedagogy. Similarly, our adulthood self-education relies far too heavily on reading- and talking-head-debate based TV and print media. We sit and stare quietly, deciding to agree or disagree with the point being made. Later, over dinner when we try to explain it to our kids, we are disturbed to discover all the holes in our understanding or logic.

Innovation, dynamism, and human caprice are forcing many of us to continually reinvent ourselves professionally. Yet we still instill in our youth in a concept of "profession" tied to a specific set of skills. ("What do you want to be when you grow up?). As TED speaker Sarah Kay challenged: "How many lives can you live?" In prior centuries, the answer was one, but today's youth will be REQUIRED to reinvent themselves over and over again.

Therefore, I would advocate a two-pronged approach:

1/ further a culture of continual education. Make it socially desirable to question your opinions, to seek to further your understanding. Continued lifelong education is the best way to optimize our chances of continually contributing to (or maybe even disruptively improving) our world and thus achieving our life goals.

2/ make that education participatory and practical. University is great, but it so often misses the important applied education. We thus force our young and educated to take a leap of faith into the market across a chasm of lack of experience in applying their knowledge.

Fear Rick's Vest

No, really. Be afraid!

Buy!/Sell!: Uninformed Stock Picks

Long:

+ Um... Well... There's... No, wait. I know this one ... 

Short:

- Research In Motion. How's this for a losing strategy: Happen onto a temporary natural monopoly. Underinvest for a decade. Let Apple and Google (et al) blow you away in the market. Ignoring your lack of expertise or differentiating value, throw millions at trying to flank these titans. Discover you've created a product nobody wants and sell it at cost (less marketing). Justify this by saying you are going to sell your old products in emerging markets at a high margin. Discover emerging markets are even more sophisticated than mature markets in this industry, with Apple and Google (et al) already dominating.

They will get bought by Google or one of its suppliers for pennies. RIM's customers will be ported over to the buyer's platform and products. The end.

(note: this is not investment advice!)

Yeah! What HE Said: Buying Stuff that Ain't Yours

As Karl says, the following should be self-evident but isn't.

 In economics, leverage is the use of debt to pretend to have more economic surplus (that is, purchasing power) than you really have. - Karl Denninger, market-ticker.org

Follow Up 2: Less is More

The lead story in the August 6, 2011 Economist minces no words in their opinion of US politicians' "current uselessness" which the paper fears will be responsible for a double-dip recession. They specifically highlight the negative impact of the growing US governmental unpredictability:

Any hard decisionshave been given to a commission--a cop-out that condemns workers and firms to more crippling uncertainty about how the country's fiscal mess will be tackled. Would you build a factory today if you knew that taxes had to rise eventually, but had no idea which ones?

Worse, the poisonous politics of the past few weeks have created new sorts of uncertainty.

This was precisely my message in a January 2010, blog post:

Risk is equivalent to unpredictability. The more able one is to predict the future, the lower the risk and the more confidently one can make moves today which create a nice return tomorrow. Conversely, when the rules of the game may significantly change tomorrow or next year, risk is dramatically increased. This raises the risk-vs-reward bar such that fewer investment options are viable.

Its no wonder that corporations and banks are choosing to sit on "piles of cash" instead of launching big, strategic, long-term investments which would support long-term and largely high-skilled job creation ... and hopefully long-term profitability for the investors.

No, US federal policy currently discourages that type of thing. More precisely, it forces such investment offshore. When US businesses choose to NOT use their cash for investment in their own commercial projects, they must find something else to do with the cash. People say that Apple has umpteen-hundred-billion dollars "in the bank" but more accurately, Apple has this cash invested in non-apple projects in that Apple owns shares, CDs, bonds, and IOUs from other banks and companies who are not subject to the unpredictability and caprice of the US government.

As my blog post continued:

Governments can increase or decrease this risk. Those with the discipline to stick to a stable, sensible, transparent industrial policy over a long period build tremendous "trust equity" with investors ... Ideas become businesses become economic value ...Unfortunately, being based entirely on intangibles (consensus expectations), this trust equity is a very fragile thing. Governments can quickly sabotage themselves, their economies, and thus their citizens by giving off even the whiff of erratic or ill-advised behavior.

 The current lot in Washington reek of it. Like Renaissance French nobility, they slather themselves in ever-increasing amounts of perfume to cover it up, but the flies still swarm. Here's David Brooks:

"If you ask people, 'why aren't you investing? Why aren't you lending?' it all comes down to uncertainty ... If bankers and entrepreneurs don't have any sense of certainty, they're just not going to invest ... We've not only got this economic problem, but its compounded by a psychological problem, magnified by the fact that distrust of institutions is at its highest level in history." - David Brooks, Meet the Press 1/31/2010

The answer? Of course, it's complicated but a good start is in the title of this blog. The Economist is concerned that immediate fiscal austerity would thrust the economy deeper into trouble. They suggest that we wait a bit. They're half right. I'd listen to Greenspan, who has been a long proponent of using the economic power of "signalling." Without changing a single regulation or appropriation today, the government can clearly communicate what changes are coming when. If the message is credible, people will respond as though the change had happened today. Markets will rapidly price in the new information, and the trajectory of the whole economy will shift.

IF the government's message is credible. This is the rub, given the extent to which Washington has squandered that intangible "trust equity." Given this situation, I'd suggest Obama and Congress see a psychologist ... to better understand how to psychologically build trust in a population.

I'd suggest follow-though is key.