Bobbleheads

Dear Malcolm Gladwell,

Please stop talking.

Thanks,

Motown Lowdown

As far as I'm concerned, city bankruptcies are good with one possible exception.

The exception is pension funds. If the city changes the pension payments they promised to retirees, that strikes me as pretty evil. People plan their whole life for retirement based on the assumption that they will get certain pension benefits. These should be preserved. If Detroit had been smart, they would have insured or offloaded this liability long ago. It's simple math and stochastics. Let the experts in the financial world make it work.

Bondholders should be aware of the risks of lending money to cities with large deficits, so it shouldn't be any surprise that they'll get a "haircut" meaning less than 100% of their value back. In the mean time, they got interest on the bonds.

Aside from that, city bankruptcies allow cities to renegotiate every contract - suppliers, vendors, unions in a public way (as opposed to back-room deals). I guarantee you that there's plenty of fat to be cut here.

What is sadly missing from most municipal bankruptcies is austerity. Bondholders should really pressure Detroit to not only pay less for what they buy (my prior point) but also to buy less, cut services or at least make them cheaper, privatize or close inefficient departments, etc. These are tough decisions, of course, and can create a negative-reinforcement cycle where the city gets worse and more people move out. Ideally, they offset this by improving the economy and thus increasing revenues.

What Will Tomorrow Bring: Is it a Bubble?

Stock market indexes have broken records multiple times in past weeks. Yes, this is a stock bubble.

It will likely turn into a more general bubble on the price of everything  ... which is another way of describing .... inflation. This is just the mathematical result of the very-very-very low interest rates. 

On the other hand, the Fed (or Congress) can reverse the inflation in a couple of ways, all of which are like hitting the brakes on the Titanic ... the effect takes a long time to be felt, by which time the facts on the ground have largely changed. They can:

• Threaten to change interest rate policy and people would  immediately change their behavior. People would borrow a lot and buy a few big items in the short term, but would reduce spending in the longer term
• Increase interest rates or bank reserve requirements. Both would have the effect of reducing new borrowing, which would in turn reduce industrial production as well as family consumption. People don't buy cars as often when car payment interest rates are high.
• Increase tax rates without increasing spending ... or reduce spending without changing tax rates
• Toy with the exchange rate of the dollar (for example, through tariffs or WTO complaints)
• Continue to be unclear about future US taxation and regulation policy. People are more conservative when they don't know what the future holds
• Impose uncomfortable (or unknown) rules on future taxation and/or regulation of borrowing, buying, selling, and/or profits. 
• "Prick" the stock market bubble either through taxes/rules or by convincing big investors that the world is scarier than they thought it was

However, all of the above will also reduce GDP and growth, which will increase unemployment.

The tougher question is how can we avoid getting drowned by the inflation if it happens. Options would include:

• Horde stuff now which will rise in value faster than the coming inflation ... tough to know what this would be. You have to look at supply and demand (SnD) forecasts
• Gold is one option, but as recent history shows, the SnD situation is sketchy. The majority of the supply is held by basically a cartel of central banks (US, Germany, Italy, France, China, Switzerland, Russia, Japan in descending order ... google "world gold holdings" for details) who keep threatening to dump it. If this happens, then individuals who own gold would get screwed. Recently, the ECB has tried to make countries sell their gold prior to getting a bailout. If Italy or Japan decided to do this, gold value would fall steeply. I prefer to protect my money from politics as much as possible.
• Other commodities are another option (metals, minerals)
• Oil is another option, but the recently-found supplies and the alternative energy investments may mess up supply as well as demand, and the mideast can always be annoying. Politics and money again.
• Real estate is another one. The US SnD situation is pretty predictable, but the possibility of a change to the mortgage-interest-tax-deductibility rules might screw things up. Real estate abroad is often subject to politics.
• Other limited-supply and high-demand valuables. Fancy cars. Wines. Jewelry. Industrial metals. Bubaru. Whatever.
• Move money into assets in a foreign currency which is not going to have as much inflation. For example, if it's $1 per 1 EUR today ... and you think that USD will inflate faster than EUR for the next 10 years ... then you might want to convert your money to EUR today. Then, in 10 years, when it's $2 per 1 EUR, you could convert it back to dollars and buy stuff here. The key to this is finding assets in that foreign currency which will appreciate at an acceptable rate vs. what you could get in $.
  For example, assume you have $1000. You can:
• keep it in dollars and buy something like IBM stock which will increase in value. Assume USD inflation is 10% and IBM stock increases at 15% per year. This would mean that over time you would neutralize inflation PLUS gain an extra +5% of appreciation each year. The net impact on your purchasing power (=what you can buy with your money) would be an increase of+5% per year. At the end of the first year you'd have $1050
• OR you could convert it to EUR1000 and buy something like BNPP stock.  Assume that the USD/EUR exchange rate depreciates by 5% per year due to the US inflation situation. Also assume BNPP stock increases  7% per year. This would mean that over time your total appreciation in USD terms would be 5%+7% = 12%. This would neutralize USD inflation plus an extra +2% per year. At the end of the first year, you'd have $1020 if you converted back to USD, so it wouldn't be worth all the trouble. There's also the possibility of paying double-taxes on foreign income once you bring it back to the US.
• Which brings us to inflation-proof profit-generating assets. Owning companies (or investment properties) creates a cash flow. Some companies/properties will "float" like a boat meaning that they can increase their prices at the same rate their costs increase (at least). These "inflation proof" companies would be good investments assuming they:
• Have an innovation/growth/improvement/efficiency plan which will allow them to expand their market share and/or charge higher prices than competitors, 
• Are in good financial health
• Are not vulnerable to other inflation-related issues like floating interest rates on loans (or short-term loans that they have to frequently roll over)
• Or you can just ignore it and hope that Social Security increases with inflation ... which it historically hasn't

As always, a "portfolio" approach is probably best, rather than putting all your eggs in one basket. 

An alternative is to outsource the decision to somebody you think is super smart. Obviously, an investment advisor is one way to do this, but another way is to invest in a company that you think will be smart about maximizing value in the face of inflation. For example, Warren Buffett has survived several periods of inflation and is very watchful of inflation. His Berkshire Hathaway would ... probably ... maybe ... figure out the smartest  way to preserve value. Buying shares in that company lets you ride his coattails.

Yeah, What HE Said: Obama on Israel and Palestine

Per the Guardian:

"In what was billed as the most important public speech ever made by an American leader on the issue, Obama delivered a tough message to Israel."

Which basically was :

"Put yourself in their shoes - look at the world through their eyes. "

Which is what I've tried to advocate in countless debates on the issue. Understand your opponent's motivation. Find common ground. What seems self-evident to me, and I dare say most Americans, is all too frequently mocked and dismissed as psychobabble by people close to the issue. This makes me struggle to put myself in their shoes. I just don't get it. Mutually-assured misery seems like the least-best alternative, yet it is the de-facto choice by virtue of inaction. 

Obama is just as guilty as the leaders in the region and the lobbyists on the Hill. As I argued in a prior blog, lack of leadership is akin to murder in this situation. 

"Hey Bibi, Hill, Abu! Hey nationalists! Hey settlers! Hey martyrs! Hey donors-to-the-cause! Hey talking heads! You're all wrong. You're all culpable. You're all criminally negligent. Let history reflect that as your true legacy."

Perhaps he finally read my blog, because what Obama said this week was real leadership:

"You can be the generation that permanently secures the Zionist dream, or you can face growing challenges to its future … The only way for Israel to endure and thrive as a Jewish and democratic state is through the realisation of an independent and viable Palestine ... Israelis must recognise that continued settlement activity is counterproductive to the cause of peace"

Follow Up: Taking Care of Our Heroes

A couple of years ago, dumbass Dunta Robinson lowered his head and changed the game of football. Watching his hit on DeSean Jackson was nauseating, but what really made me lose my appetite was the voice over "I don't know how you take this out of the game of football." And thus the tone was set. The rest of the season was a parade of whiny soundbites like "if you take those hits out of the game, you have to rename it 'coz it's not football anymore."

At the time, I blogged:

We can't stop talking about players who achieve super-human heroic feats, or coaches who execute strategies to snatch victory from the clutches of defeat...Football is nothing without it's heroes. We have to let them show off ... but not at the expense of knocking other heroes out of the game...menacing hits call attention to the embarrassing base nature of the hitters. These are not heroes. Their lack of humanity exposes that

Dunta got penalized 15 yards and $50k. In response, he did it again. And again. And again. Fast forward 2 years. Alex Smith will not be leading his team to a Superbowl victory after yet another helmet-on-helmet hit, this one by Jo-Lonn "Dumbass" Dunbar. One could lament that nothing has changed.

Things are about to. The conversation has changed. Football as an industry has come to realize they are in the midst of an existential crisis. Two thousand former NFL players have sued the league over head injuries. An NFL survey of players found that only 3% trust the medical staff. Goddell is clamoring to get on the right side of history. So should Dunta. After all, the players are both the creators and victims of this MMA-style turn the game has taken over the past few years. Football was football before helmets gave players the (false?) sense of security to launch themselves headfirst into human brick walls. It will be football after MMA stuff is gone. It might even be better.

Football is not getting ruined any more than a rebellious teen gets ruined by turning into a responsible adult.

Leadership is being a first-mover on public sentiment

20 years from now, when Washington is dominated by a Hispanic agenda, Romney will wonder why he didn't put the Republicans squarely in front of that movement by uttering one word: "amnesty."

That he failed that assignment is proof enough he was unqualified to be president. As long as the Republicans insist on backing milktoast candidates hamstrung by idealistic, arrogant, and ignorant agendas, the Democrats will own the new Washington. 

What Will Tomorrow Bring: The Future of Music

A 14-year-old french kid posted a youtube video a few years ago. Some folks noticed that he had effectively redefined the way music is made using free software and an 8x8 button pad, total cost under $500. By placing clips of "39 songs I like" at his fingertips, ready to be triggered on his command, he created   music from music. Goodbye to medieval mixing and scratching. Hello to the mashup renaissance. Trigger groundswell, millions of views, sensation, fame, and of course a record contract.

What he did was just an evolution on widely-used electronic music methods, but it kicked the art to a higher playing field. Perhaps less acknowledged than the "holy shit he looks 14" aspect or the "woah, his buttons light up like Star Trek" reaction is the fact that he showed the world how this Novation Launchpad could be used to drastically lower barriers to entry in music creation. Yes, you still need artists and instruments. Yes, you still need talent and creativity. Just like remixers needed a song to ... well ... remix, music mashuppers (mashers-up?) start with existing music. The difference is that they deconstruct it more thoroughly into tinier components, extract the most amazing and juicy bits, blend them with other ingredients (including original compositions), and make the old music into something fundamentally different. The entire corpus of human music has become raw material for a slow and quiet teenage-bedroom democratization of music creation. When this spills out onto the popular music scene, things will never be the same.

Lone bards used to travel and sing a capella. Something big started when one picked up an instrument to create harmony and melody to augment his voice. One thing led to another and ... Beethoven's Symphony Number 9.

Phon:  Greek root meaning "sound"
Sym: Greek root meaning "together"

Mashups and symphonies are both the musical equivalent of molecular gastronomy. This is not looking at a goose and thinking "I'll fatten that up and roast it." This is looking at a goose and thinking "foie gras and boysenberry mousse on dehydrated Rogue River blue cheese chips with a garnish of chateauneuf-du-pape pearls." This is meta-meta-meta cooking. It takes a set of skills to run a dairy farm. It takes a different set of skills to create amazing blue cheese. It takes yet another skillset to make blue cheese chips. To achieve the foie dish above, a chef must abstract from all that and take finished products (cheese chips, fois gras, wine, etc) as raw ingredients which he transforms into something new and even more sophisticated. In doing, he breathes new life into old flavors.

Beethoven needed a mind-boggling array of talents and skills to formulate his symphony, but he didn't need to be able to play every instrument perfectly. He was a genius mashup artist, just like Madeon.

All I want for Christmas is ...

Shamelessly borrowed from Monica Trasandes ... but I couldn't have said it better myself.

The ability to unitask | by Monica Trasandes

"Recently I found myself walking toward the kitchen with a load of laundry in my arms, two empty coffee cups dangling from my fingers, and car keys tucked between my chin and the clothes.
Oh, and I stopped to clean up a spill, using a fallen sock, which I then kicked into the kitchen. Forty minutes later, as I pulled my fresh-smelling, shiny keys from the wash, I realized I had reached unhealthy levels of multitasking.
This problem has dogged me for years. For example, I never just make pasta for dinner: I put on the spaghetti sauce while cleaning the bathroom, opening and shredding mail and watering the plants. This means I end up with a very clean apartment that smells like scorched tomatoes. I never seem to just drive, either: I simultaneously peel and eat a banana and listen to the news while returning calls for my media-director job (on my hands-free phone, of course).
A man I admire has called multitasking "the enemy of intimacy"—and for me that's certainly true. Often I do dishes or clear my desk while chatting on the phone with friends. I can't seem to help myself.
The problem: I've always felt guilty about doing one thing at a time. On those occasions when I have, say, carried laundry and dirty dishes on separate trips, my evil inner critic has sneered at me: "Hmm, taking it slow today, aren't we, unitasker? I guess some of us don't want to succeed." To which I should reply: "I want to succeed, evil inner critic! I just don't want to have to achieve all my goals at the same time." But I rarely succeed. Usually I give in, reluctantly, to that bullying voice.
So, for Christmas this year, I want to make a change. At long last, I would like to embrace a slower way of life: I'll read and only read. Drive and only drive. I'll be fully present when talking to my friends. Because with all the multitasking, I know that I'm missing so much."

What Will Tomorrow Bring: Retro Fashion in Organizations

The organization, whether group, tribe, team, corporation, or government represents the ugly, bloody edge of our evolution as social animals. It's complicated ... and we're not NEARLY done yet. Perhaps a few millennia down the pike we will get it right.

At the moment, I feel safe in saying that we are all collectively burnt and battered into pessimism about our ability to get it right. Look left. Look right. Share your booze with your neighbor. Their loosened lips will start to tell you how anti-government, anti-bank, anti-corporate, or anti-politics they are. 

I can't purport to foresee the best master plan. But I am an organization-man. Based on daily frustrations, I can highlight a few very very VERY simple things which will ever-so-slightly evolve us. These things were once fashionable in organizations, but have gone out of style. It's time to go retro.

• Meeting agendas and minutes
• Documentation of decision taken and justification thereof
• Reading materials prior to meetings
• Discussing and understanding issues prior to meetings
• Taking time to give the context of a discussion beforehand
• Following up on your OWN To Dos
• Speaking in simple sentences which directly respond to the question at hand
• Making decisions based on informed analysis and then EXPLAINING your decision-drivers to anyone who will listen. Rinse and repeat until you have consensus.
• Saying you were wrong. And knowing why.
• Building objective business cases for investments
• Viewing man/hours as a valuable asset you are investing
• Overtly recognizing and funding innovation time at all levels (except at Google, of course)
• Having a secretary to keep the high-priced execs from spending hours formatting documents and finding conference rooms for meetings. (talk about inefficient division of labor)

Greasy Thinking

I love to hate Krugman's one-size-fits-all big-government answers to every problem but today through clenched teeth I have to agree with his op-ed yesterday (partially). Europe and the Euro need to put their big boy pants on and learn some bladder control. Fast. Diapers just aren't appropriate anymore. As he said in the NY Times today:

For the past two-and-a-half years, European leaders have responded to crisis with half-measures that buy time, yet they have made no use of that time.

Not sure how that jives with this first sentence, but anyway I agree with him: The Greece problem is not new. The Economist summarizes well this week:

Greece really has suffered: between 2007 and 2012 its economy is expected to have shrunk by almost a fifth. The economy is being strangled by a severe credit and liquidity crunch, with more budget cuts and tax rises to come. Even if all goes well, Greece’s debt will be 161% of GDP next year.

The Spanish, Portuguese, Italian and Irisih problems are not new either.

The facts about Europe (and especially these retarded countries) which have created the current situation are not new. The EC, the EU, the EMU, the European Parliament, the European Presidency - all impotent, except for farm policy (huh?). National governments, all ineffective, focused on pandering, philandering, scandal (either chasing or running away from). Citizens feel emasculated (at best), despondent and dependent (especially those just out of school), and generally pessimistic. Employers are hamstrung on everything from employment/firing to compensation to innovation to outsourcing. Consequently, employees are lazy (not dumb) and inefficient. The governments have pissed away more than enough livelihoods. They need to get busy.

As Reagan put it,

There are no easy answers but there are simple answers. We must have the courage to do what we know is morally right.

The answer to Europe's issues is simple. It may seem odd to use the phrase "morally right" in this case, but it IS a moral issue for Europeans. It should be if they care about their children, their nation, their place in the world. 

Krugman's focus yesterday was on inflation, but the price level is not the core problem, nor is inflating your way out of debt a silver bullet. Happily, it will make European products less expensive. Here's to more Bordeaux and aged Gouda and European vacations! This, however, just corrects an existing price misalignment. A croissant and coffee shouldn't cost the equivalent of $20. That's just nuts. The reason Krugman is wrong is simple:  prices go up, but productivity per worker doesn't change. Every European becomes poorer. Fewer car/house/consumer loans/credit cards are available. House prices go down. Companies can't as easily justify borrowing to invest or launch new products. Which means less innovation and growth.

And that's exactly what Europe needs, particularly in the south: GROWTH. Even Krugman will agree with that usually. 

The only ways to get there are through INNOVATION, PRODUCTIVITY, and/or DEBT.

The last one is Europe's current favorite: beg, borrow, and steal. From the rich. From the companies. From each other. From the future. Money flows from northern countries through the EU/ECB to southern countries without compensation or realistic ability to earn enough to pay it back. Money flows out of companies' profits and employees' income through high taxes but is not set aside for their own social welfare. Instead, it is used to buy votes from those without jobs and/or those with political power. Quoting Krugman again:

Europe’s central bank is, in effect, financing this bank run by lending Greece the necessary euros; if and (probably) when the central bank decides it can lend no more, Greece will be forced to abandon the euro and issue its own currency again ... This demonstration that the euro is, in fact, reversible would lead, in turn, to runs on Spanish and Italian banks

It's just not sustainable. History is littered with examples of failed currencies and governments who thought they could just borrow their way to success. 

Instead, the core issues of low productivity, low innovation, and perverse incentives need to be addressed. Europe needs to start acting like a single community rather than a bunch of clans of grumpy neighbors. Europe needs to recognize the limits of socialism in the face of globalization. Europe needs to acknowledge global realpolitik. Protectionism and nationalism are luxuries they can no longer afford. The Euro cannot be a fiat currency - it needs backing based on the power of taxation and reserves.

On Productivity and Innovations:

• Ya just gotta free up the labor market, folks, or productivity is never going to get better. People/roles/trades/companies/industries/countries (including those abroad) which are more productive than others should be allowed to crowd out the less-productive. Languages can be a barrier, but to the extent that, for example, a smart and/or ambitious Pole can speak enough Italian or German to work abroad, this should be enabled, not discouraged. Even in "protected" industries. Spanish companies should be able to put callcenters and operations in, for example, Guatemala.
• Extending that point, you also need to accept that people/trades/industries/countries which are less productive are going to be less wealthy. Socialism hates inequality, but if a Finn can produce 4 cars a day while an Italian can only produce 3, the Finn should make more than the Italian. Similarly, if a Greek or Bulgarian (gasp!) is willing to earn EUR10 an hour to grow grapes while an Austrian insists on EUR25, the Greek and Bulgarian grapes should be trucked to Austria, crowding the Austrian farmers out of the business or forcing them to take a pay cut. 
• Extending the above: Learn from the US (both what to do and what NOT to do) about immigration and foreign workers. Let 'em in! Create a controlled and net-positive process (as explained in my prior blog post) and then open the gates. For one thing, allowing younger immigrants into the workforce is the only way you will be able to pay for your pensions and healthcare systems going forward. There should be no prohibitive barriers against Uruguayans moving to and working in Spain, for example. Just make sure you charge them for it.
• Aside from the ability to hire/fire the people they want and the ability to pay a market-clearing wage, companies need the ability to offer both contract and full-time work. They also need to be able to offer various tiers of benefits for interns, new-to-the-workforce, tradespeople, professionals, executives, etc. It can't be just the one-size-fits-all government-dictated (tarnishing) gold-plated package. A hundred years ago, Hayek correctly described where that road leads.
• Moreover, you can't have your cake (of national champion companies in every industry) and eat it too (expecting them to be globally competitive and profitable without being able to scale). Accept that you are a common market and allow Euro-wide champions to arise in whatever Euro country they may. No longer can the Portuguese government spend money it doesn't have to promote and protect their own national paper, airline, or cell phone companies. It's ridiculous for richly-paid Italians, French, and Germans to produce nearly 10% of the world's steel ... at a loss when all governmental supports are factored in. Buy Turkish or even Indian steel!

On Perverse Incentives:

• Government borrowing needs a revamp. Existing sovereign bond markets need to be priced based on country risk, not currency risk. Separately, the ECB should introduce Eurobonds which are guaranteed by all countries in the monetary union. Individual countries would buy SDR-like rights by either depositing collateral at the ECB or by legislating pledges of future tax receipts. They would then be allowed to request that the ECB issue bonds on their behalf, most of the proceeds going to the national government, but with an adequate reserve withheld by the ECB as collateral against future payment. Overall Eurobond issuance would be capped by the ECB based on market conditions and European Parliament votes.
• More radically, impose, by irrevocable treaty, a 5% Eurozone value-added tax. Simultaneously reduce national VATs by the same amount such that there is no impact to consumers or businesses. These funds go to the ECB and are distributed according to agreed rules. In other words, taxes collected in Spain are sent to the ECB but might get sent right back to Spain if all's well. However, if one country is circling the fiscal drain, this provides a cash buffer to protect the ECB and the other Eurozone countries from getting sucked into the vortex. Most importantly, this creates a "lever" of power by the ECB over individual countries. If you don't live up to your commitments, you don't get your 5% back. The bank NEEDS this power to protect and defend the currency. It also needs it to enforce compliance with treaties and commitments.
• Enforcement of the monetary union's and European Parliament's targets (ex. Growth and Stability) must be strict. Greece has NEVER met the very friendly targets they negotiated. Never intended to, I'm sure. They should be fined. They should not get their 5% back. Their voting rights in the European Parliament should be suspended. ECB transfers should be suspended. International remittances and account balances should be frozen.
• While you're at it - fix the banking system's capital adequacy rules. Sovereign debt is NOT risk free.  

All graphics from Economist.com.