Wednesday, September 25, 2013

Did the Spreadsheet Kill Capitalism?

Clay Christensen seems to think so, or if it hasn't killed capitalism then it might have accidentally hastened its demise. His recent talk at the RSA on The Capitalist's Dilemma is magnificent. All the more so since he disarmingly mentions at the beginning of his talk that he suffered a stroke just a few years ago and had to learn how to speak again with the help of his wife and therapist. The fact that he then proceeds to deliver an enthralling, fascinating and deeply original talk on why innovation isn't working any more is testimony indeed to his recovery.

Christensen has written extensively about innovation before, and delineates three types of innovation:
Empowering innovations create jobs, because they require more and more people who can build, distribute, sell and service these products. Empowering investments also use capital — to expand capacity and to finance receivables and inventory. 
The second type are “sustaining” innovations. These replace old products with new models. For example, the Toyota Prius hybrid is a marvelous product. But it’s not as if every time Toyota sells a Prius, the same customer also buys a Camry. There is a zero-sum aspect to sustaining innovations: They replace yesterday’s products with today’s products and create few jobs. They keep our economy vibrant — and, in dollars, they account for the most innovation. But they have a neutral effect on economic activity and on capital. 
The third type are “efficiency” innovations. These reduce the cost of making and distributing existing products and services. Examples are minimills in steel and Geico in online insurance underwriting. Taken together in an industry, such innovations almost always reduce the net number of jobs, because they streamline processes. 
But here's the crucial thing:
Efficiency innovations also emancipate capital. Without them, much of an economy’s capital is held captive on balance sheets, with no way to redeploy it as fuel for new, empowering innovations. For example, Toyota’s just-in-time production system is an efficiency innovation, letting manufacturers operate with much less capital invested in inventory.
The problem as Christensen sees it is that the financialisation of the global economy (with 'money making money' taking over from 'money making stuff') has replaced the virtuous cycle of empowering-sustaining-efficiency innovations with a straight line of efficiency-efficiency-efficiency innovations that throw off more capital to boost corporate balance sheets, while eroding the employment creating capacity of the economy. It's what happens when spreadsheets take over and the job of management simply becomes one of managing numbers and ratios, not real flesh and blood businesses that create wealth and jobs. Hence balance sheets have never been healthier, the share of profits has never been higher, and the capacity for job creation has never been weaker...

Christensen's really intriguing insight is that the old capitalist assumption that capital is scare (hence the need for spreadsheets to manage its allocation) is simply not true any more, but businesses, investors and even governments act as if it still is. In fact, we live in a world awash in a glut of capital - QE, fiat currencies and all that - and yet small businesses can't get loans from banks because the payback period for real, empowering innovations is too long and too uncertain for spreadsheet obsessed financial analysts.

The problem for Ireland is that our 'innovation agenda' is focused on sustaining/efficiency innovations which have a net negative impact on employment, other things being equal. And we are well and truly in the grip of the spreadsheets, in both the private and the public sectors.

But there may be a bigger problem. Christensen assumes there are more empowering innovations out there. And maybe he's right - 3D printing is certainly one to watch. But what if he's wrong? Robert Gordon thinks we're past the peak of really impactful innovation, And John Kay has recently been channelling Peter Thiel: “We wanted flying cars, and they gave us 140 characters.”

The message to Irish entrepreneurs? First kill the spreadsheets...

Saturday, September 21, 2013

We Are All Ossis Now

I took this photo yesterday in Potsdamer Platz. It's part of a memorial to the Berlin Wall at the site of the original East/West division. The graffiti caught my eye, and it struck me that we are all 'Ossis' now, the nickname given to former occupants of East Berlin and East Germany. Only the wall locking us in is one made of debt rather than concrete.

The (over)reaction to the Fed's on-again-off-again QE taper in the past week tells us that the bubble of all bubbles is upon us. Total public and private debt is now 30 percent higher as a share of GDP in the advanced economies than it was prior to Lehman Brother's collapsing. Guy Haselmann has looked ahead to what will happen when the debt wall falls (funny video at the end, btw):

Once tapering actually occurs, the discount re-adjustment equation will rise away from zero, making stock and bond valuations less attractive. Prices will ultimately have to be supported by their fundamental values, so a large price adjustment process will almost certainly occur. More importantly, a volatile over-shoot in equity and fixed income markets is likely, because investors will shift current positions from one of accepting the Fed’s ‘easy candy’ toward pricing in the Fed’s new final destination.
Doesn't sound like quite the same cause for celebration as the fall of Berlin's Wall in November 1989.

Thursday, September 12, 2013

Lehman Bothers

I've an article in today's Irish Times on the changes in Irish sentiment since the collapse of Lehman Brothers five years ago.

Unedited version below:

Resilience is like a battery. In the good times it gets ‘charged’ as we store up the resources, habits and relations that will see us through the bad times. It’s the ability to bounce back from disturbance and to cope with adversity. Today, after five years of bad times, it would seem our resilience battery sorely needs recharging.

Nevertheless, on some measures we Irish are still a resilient lot. At the end of 2008 - just months after the collapse of Lehman Brothers - my company asked a representative sample of 1,500 adults whether they had experienced any of a range of emotions or feelings ‘the previous day’. Five years ago, the top two emotions or feelings experienced by the majority of Irish people were ‘happiness’ and ‘enjoyment’. Fast forward five years to a new survey and the top two emotions are... happiness and enjoyment! Negative emotions are there too of course - stress and worry, for example - though for a minority of people. While the emotions experienced least are fear and anger.

I think this signals a number of things, not just psychological resilience but also a curious, Irish combination of ‘public anguish and private contentment’. In the same surveys the vast majority of people tell us how very worried they are about the economy and its prospects. But at the level of their families, friends and colleagues they’re getting by. This might also explain the remarkable quiescence of the Irish in contrast to other parts of Europe experiencing their own recessions.

One indicator of depletion is the trend in consumer spending. Total expenditure is down nearly 20% since its peak in late 2007. In some retail categories, such as pubs, spending is down to levels last seen in the mid-1990s. Irish consumers have voted with their purses and wallets to buy from cheaper suppliers and retailers - or not to buy at all - in order to make their limited resources go further. At the peak, our research was showing that consumers still considered convenience more important than price when buying groceries. But in 2008, price overtook convenience as the number one consideration, and it has remained that way since. In the past five years we have gone from a nation for whom shopping around looked ‘cheap’ to one for whom it now looks ‘clever’.

Our priorities have changed in other ways as well. In 2008 just 6 in 10 adults used the internet - today 8 in 10 are online. In 2008, fewer than 10% had a smartphone (the iPhone had only been launched in 2007) - today nearly 6 in 10 have smartphones. We’ll spend nearly €4 billion online this year - up from less than €1 billion five years ago.

A more cautious approach to spending also means we are still able to save, despite higher taxes and lower incomes. This year, Irish consumers will save nearly 6% of their after tax income, quite close to the 7% we saved in 2008, and well up from the 1% we put away in 2007.  As a result, the value of Irish private household deposits in Irish banks has risen from €79 billion in September 2008 to €86 billion in June 2013.

However, such general economic statistics hide the fact that the recession has not been evenly distributed. Our research has identified a number of segments in the population who are relatively insulated from the worst of the recession. Though it’s fair to say their share of the total population has declined in recent year. Here are a few indicators:

- five years ago, a large majority - 61% - of Irish adults felt that the recession was affecting other people more than them: that’s down to 43% today

- five years ago, nearly half - 48% - felt financially comfortable enough to make it through the recession: that’s down to 38% today

- five years ago, a large majority - 60% - were optimistic in spite of the economic situation: today the optimists are a minority - 44% - of all adults

- today, three in ten Irish adults have nothing left at the end of the month before their next wage or salary payment is due, while 55% don’t save regularly

- over a third - 35% - have recently borrowed money from friends or family to make ends meet

- only 21% of adults could cope easily with a €50 reduction in their disposable income due to tax increases and/or higher bills

Still, about two in five adults are having ‘a good recession’. Who are they? In our research they tend to be people with fewer debts than average (the youngest and the oldest age groups), as well as those who still have ‘options’ thanks to fewer commitments (e.g.: renting, smaller families etc) or more resources than average (e.g.: a higher savings capacity, two incomes etc).

As for the rest, one of the biggest issues is debt. Over the past five years we have learned the hard lesson that debt is a fact, wealth is an opinion. Not surprisingly, the main financial priority for the vast majority of people in recent years has been paying off their debts as quickly as possible. Our research shows that 30% of people with mortgages reckon they are now in negative equity (i.e.: the value of their home is worth less than what they owe on it). This jumps to 55% of home owners in their thirties. Furthermore, a quarter of all mortgage holders have missed one or more mortgage payment in the recent past.

Five years on and many Irish consumers are running out of road. Their resilience battery is flat. Yes, there are a few signs of improvement: in parts of Dublin, for example, or in some sectors of the economy such as IT and dairy farming. But it’s patchy at best, and woefully inadequate at worst. Irish consumers spent €94 billion in 2008; this year they’ll struggle to spend €83 billion. It’ll be a long time before we see a return to the spending levels of just five years ago.

The good news is that the younger generation that has come of age during Ireland’s recession doesn’t intend to let it get in their way. The vast majority of 18-30 year olds we surveyed recently intend to buy their own house by the time they’re 35; the majority expect to be married by the time they’re 30; and almost all expect to be a parent by 35 as well. We need our youth to be optimists.

The Irish are looking for new ways of dealing with recession, and new resources to restore their capacity to cope and persevere. In another survey we asked “who is making your life easier at the moment, and who is making life harder”? For the vast majority of Irish people, family, friends and colleagues at work are their biggest source of support nowadays. Even services like Facebook and technologies like smartphones are deemed to be making life easier in 2013. As for who is making life harder, utilities, banks and politicians rank the least supportive.

Five years after Lehman, people are finding new sources of resilience - new ways of recharging the battery - in our moribund economy. And that is a good thing. For it means that no matter what happens to our economy over the next five years, we won’t let the demands of the present starve the needs of the future. Not only will be able to bounce back, but our resilient spirit will enable us to bounce forward with hope and purpose.

Friday, September 6, 2013

Shooting the Elephant

One of the advantages of being a small, unimportant country like Ireland is that we don't have to make silly threats about invading other countries. Anyway, nobody would take us seriously even if we did. America's misfortune is that it has to see through its threats, otherwise nobody would take it seriously either.

As David Betz explains, America is in the same situation as recalled by George Orwell in his essay Shooting an Elephant - damned if they do, damned if they don't:
My personal favourite, however, has long been his short essay ‘Shooting an Elephant’, which is an account of an incident in his time as an imperial policeman in Burma in the 1930s. I always ask my insurgency class to read it–not that Orwell mentions ‘counterinsurgency’ directly but it tells us much about that subject. As Orwell puts it, ‘One day something happened which in a roundabout way was enlightening. It was a tiny incident in itself, but it gave me a better glimpse than I had had before of the real nature of imperialism—the real motives for which despotic governments act.’
Orwell's short essay is at the end of David's post - do read the whole thing.

Syria is the white man's burden all over again, only the Syrian 'elephant' has friends. A whole herd of them, in fact.

ht: Zero Hedge

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