PR en Washington - Mas de lo mismo

Nuevamente los gobernantes puetorriquenos se dieron a la tarea de ir a hablar en el Congreso sobre el futuro del status de Puerto Rico. Esta vez, le toco a un joven, dinamico y progresista gobernador ir a dar el mensaje, mas sin embargo, se quedo hablando solo. Este contraste es para mi una prueba mas y espero la ultima (aunque no creo que asi sea) de que tratar el tema del status es en vano, es una perdida de tiempo y por ultimo es tambien el principal causante del atraso economico que viene viendo PR por los ultimos 45 anios.

Mucha gente dice que hasta que no se resuelva el status, no se puede tener un modelo economico y politico y mirar al futuro; les contesto que el modelo economico nada tiene que ver con el status, y que el modelo politico se desprende de los resultados economicos. Hasta que no nos demos cuenta de que una division 50/50 nunca abrira la puerta a una eventual "resolucion" de status, y de que esa realidad 50/50 no va a cambiar, no dejaremos de hablar de status.

El progreso economico de PR es la unica meta que debemos tener y esta nada tiene que ver con el status -> la productividad, la innovacion, la capacidad de crear bienes y servicios que sean competitivos en el mundo, tiene que ver con nuestra gente y para nada tienen que ver con el tema del status -> la estadidad no aniadiria nada en estos terminos que no tenga hoy el ELA, y un ELA "soberano" tampoco aniadiria nada sustancial a nuestra capacidad productiva.

El mundo esta abierto -> esta en nosotros volver a tener la voluntad que tuvimos hace 57 anios, y ponernos a trabajar - sectores publicos y privados - por nuestro propio beneficio, que de manera colectiva sera el beneficio de PR.

Tenia esperanzas de que la juventud de este nuevo gobiernos llevara a estos pensamientos; viendo tan lamentables imagenes (de lo que hacian nuestros lideres la semana pasada), me dejo con mucha desilucion.

Myopic Definition of Industries

Just came across this comment on a panel:
“The TV and movie industries have a value chain—grips, actors, screenwriters, etc. What do we do in our industry so it doesn’t get decimated like it has with newspapers or music?” asked Steve Robinson, president of video ad firm Panache.

The TV industry is not tied to a device called "TV" in the same way that the Movie industry was not tied to a cinema or the Music industry was not tied to an LP, cassette, or a CD. The product being consumed by the consumer will not go away by the disruption of the delivery channel or mechanism. This is simply wrong framing of an industry and a lack of understanding of value and competitive dynamics.
The best example is the news industry which for many years was confused with the newspaper industry -> the news industry is more alive than ever - "news" might not be delivered via a physical paper that requires a printing press, delivery trucks, and delivery boys - but the need, the hunger for reading news on a daily basis will only grow. What this means is that the corporations that invested capital in the presses, trucks and to pay delivery boys, (and thus had built huge barriers to entry and in essence created what's called wrongly above "the newspaper" industry) will die, but, the "news" industry that existed before there were printing presses, will also exist afterward.
The "TV Industry" will go along the same lines -> we should start referring to it as the "Video Content Industry" that is composed of professional and less professional creators. Aggregators of content (just like newspapers were) will slowly lose power against the ability of the true content owners to reach their audiences in a more democratic manner. The "TV Industry" will be disrupted in the long-run just like the "Newspaper" industry was.
Having said that, the TV (and its high-quality graphics) distribution channel combined with top-notch streaming video, in my opinion is not only long-ways from dying but, will probably stay forever. Look at cinemas as a distribution outlet for movies -> they provide a totally different product consumption experience no matter where you make those movies available - and people will be willing to pay for that.
Think coffee or dining out -> the fact that you can have Starbucks branded coffee at home doesnt mean that you are not willing to have a different experience by buying it at a store (and significantly overpaying for it).
I am for one somebody who doesnt see himself not willing to pay for a physical newspaper in the future (as i do today, especially for weekends editions) - and I know there would be thousands like me. If the newspaper companies can find a way to satisfy that demand in a sustainable and lean manner they will certainly tap into pockets of sustainable money.

True Economic Growth Starts with the Right Education and Incentives

We are finally getting rid of a culture where our best and brightest were going into activities that were directed at creating fake-non-long-term economic growth….
Is financial engineering fake economic growth? Not to the extent that it finances real economic growth (i.e. expand the possibilities of real growth to occur)… however, most of the financial engineering we experienced during the last number of years wasn’t really directed to productive economic growth, but, rather incented to provide quick intermediation fees (and augment the % of profits that the financial industry had in our economy) regardless of the economic outcome… this is/was deplorable and I hope it stays in the mind of various generations to come (although I also believe that financial memory is rather short)… None of this would have happened if we had not allowed “Economic Intermediation” (be it in the financial industry, in the real estate industry, any industry to be paid on a fee-based, no-skin in the game, I’ll be gone and I-would-have –spent-all-the-money-by-the-time-you-go-bust-and-realize”)…
If an intermediary is wise enough to recommend the purchase of a particular asset, they should be paid the majority of their work based on the results of that recommendation (why is this so crazy!!)…
Here is a recommendation: Create a payment structure where they make a killing when they recommend something that works out, but, they don't earn anything when they recommend something that flops (perhaps something to cover basic costs).
Now, don't lock them for too long of a time for this payment structure to work (i.e. if the recommendation goes bust after a “rational” period of time, they should have already cashed out under the assumption that there were other forces beyond the recommendation itself that brought the asset down).
Last point - we should always look at performace / profits / growth over a 10 years period - financial industry profits never were what they were back then - if we subtract all the losses today, we see that just like everything - there is always reversion to the mean.

Nature Costs are Costs Too

There is a lot of discussion today about our impact on the planet. As we manufacture goods, and consume natural resources, we are using a “free good” – our resources, our bodies of water, our soil, our forests, our sky and who happen to have no “owner” and thus no consumption cost or tax. Should we ask ourselves what the cost of using all these resources is? How so? What if we damage these in such a manner that it will cost our children more to “consume/use/clean” them than it cost us? What if we damage them to a point that our children can’t use them anymore? What if we use them to a point that have side-effects: like hurting other natural habitats that are used by living creatures, that at the same time are at the bottom of the food pyramid of some other ecosystem that could very well be us?
It’s very encouraging that the US is moving forward with its plans to recognize the costs involved in our economic development via the cap and trade system proposed. It’s only fair to our children, to the next generation that we recognize and pay for those costs, and not simply “steal” from them or impose those costs on them. I say we will all be better and our economy not only will not suffer but become stronger (through forced innovation).

Spain - the new Argentina

Its always the same - pegged, fixed, converted currencies - people/countries want the benefits and not the downside, people/countries believe the hype, don't think about the consequences.

Argentina dollarized its economy in the early 90's in an effort to defeat inflation and start a new wave of liberal economic policies with the intenation of modernizing its economy. Inflation was defeated, capital flowed in, the economy grew, etc.... and people believed the hype, the country enjoyed the benefits.... but, with all those capital inflows, new credit to individuals, AND rising prices/purchasing power (standard of living) comes a responsibility; the country requires to create something with that and invest the money (not spend it), become more productive (to produce more with the same tomorrow), and save for bad times... Argentina spent a lot of money (albeit there was significant investment), did not become more productive (albeit technology modernized various industries), and did not save much money... this is a simplification of the problem - but I simply want to make a point and a comparison to Spain...

Spain went through its own dollarization (its Euroization) -> a country that was running large country risk spreads, with lack of credit (on a relative basis) suddenly found itself in a miracle - just by changing its currency, money started flowing into the country, there wasn't a currency spread anymore, credit to individuals started flowing -> it was a new beginning for Spain -> prices for assets increased, salaries increased, there was a newfound purchasing power -> what a miracle! why didnt they do it before?... the country did create many things with that though -> today Spain is a very competitive country in a number of industries (even outside Spain), including banking, infrastructure, and green energy... however, I am not sure they did everything they had to do -> did they save enough?, did they become more productive?... I am nobody to judge, maybe they did... but, I think they are in real trouble now - a la Argentina... the economy and their wealth grew in a currency that can't adjust now via a devaluation or monetary policy (just like Argentina's price level/economy could not adjust via their currency or monetary policy) - so, it neeeds to adjust via the price level itself and unemployment... its a choice Argentina had -> devalue and shatter asset values/credit or maintain the currency and suffer deflation, and send the country into a deep recession with very high unemployment..
What could Spain had done? Don't believe the hype -> you become richer by truly producing more goods and services that (1) are a necessity at home or (2) that are needed/wanted elsewhere in the world... you don't become richer by borrowing against higher value assets and then spending in non-productive things...
The basic point of this writing is this: The adoption of a more stable, more respected non-national currency brings very valuable beneifts to a country - it allows foreign capital to trust the unit of account/store of wealth/medium of exchange in that country more (so more capital can flow in), it allows for longer-term credit to flow (because the threat of devaluation, inflation is decreased (never eliminated, because there is always the risk that the country would need to abandon the currency altogether)), and because of that new capital -> asset prices will increase, which then allows for more credit (and you get the idea)... there is no new wealth created solely by this -> the nationals of that country need to use that opportunity to invest the funds in productive assets, they need to become more productive relative to the world, they need to understand they need to save because bad times will always arrive... Its all too common for countries throughout history to not get this (or to not have their leaders (during good times) emphasize this enough.
Based on my experiences in Argentina, I'm not liking the current situation in Spain and the choices ahead of it (albeit with more influence with the European Central Bank than Argentina had with the Fed).

Content vs. Technology

Without going into the details of the objectives of above the line advertising and below the line and taking things "on the margin" (everything else being equal).

The economics of any ad transaction will be disproportionately skewed to those players that are best able to 1) demonstrate cause/effect of the transaction, and 2) be closest to the product purchase decision. We are witnessing this with the astronomical rise in market value (revenues/cash flow) of a company like Google.

Google doesn't own content, its a technology company that has located itself right between online content and the advertiser, at a position that provides the best proxy for cause-effect and closest to the purchase decision (i.e. the "product" it offers is search - and presumably, when people search proactively for something (as opposed to consuming content passively on the TV at the other extreme), they should be interested in that product or service).

So, Google can let other companies be the ones that make the investments in "content", in that highly contested/hit or miss area and then through technology enable the advertising transaction in a very scalable manner, and thus, be able to extract a high % of the investment - a lot more companies will compete for eyeballs/content online than will investing in the technology to control that middle space that provides signficant functions to advertisers.

Strong content owners will always be able to fully monetize its content - premium content will always be a scarce product and they will always be able to do things that less powerful content companies or the technologies companies can't do: product integration or customized sales - having strong brands/powerful content will always be a high return game...but it has been really impressive to watch Google, well after the blow-up of the Internet bubble come in (with survivors of the first such as Yahoo and AOL, not to mention MSFT) and basically grow the industry and grab a disproportionate share of the dollars that are coming in (or better said perhaps driving a lot of money online) by simply being an intermediary (albeit a very special kind of intermediary)....so, I pose the question - how can content companies learn from Google and try to 1) become more data-driven results oriented, and 2) demonstrate how they impact purchase decisions... what is clear is that the click is not a perfect indicator of cause/effect and it doesn't necessarily carry the biggest load on a purchase decision (in most instances)... having said that, its the closest proxy created today for both...

Internet kills industries? Not really... it disrupts industries

We hear more and more about how the Internet puts on a real challenge to some industries (to the point that some of them might disappear). Print media (newspapers, magazines) or Music industry (Record Labels, Retailers) come to mind...

I'm sure this is obvious to a lot of people (but potentially not) - but, industries do not die, they get disrupted (C Christensen's term), or more simply said - the structure of the industry changes and the players who extract economic returns also change.

Lets take media as an example: be it entertainment, information, sports, or even music - there are two basic concepts: Content creators and Consumers... and that reality will never change - for any industry to exist, there needs to be a product or service that satisfies a need... and the Internet has not changed that reality for any industry... it has simply made it easier/cheaper/more efficient for the manufacturer of a product or service to reach its consumption point...

The Internet economic model is the antithesis of the physical economic model... at a first level, it provides instant and seamless information to the consumer - the physical world required an investment close to consumption to provide that information (think any product or service you can research today on the Internet and think how you used to get information 15 years ago - think travel for example - a good amt of the service travel agents were providing was information)... at a second level, it provides the ability to transact without a physical presence, again, the physical world required physical contact (think Amazon for everything it sells vs. how you would acquire any product you today acquire on Amazon 15 years ago)... and at a third level it provides the ability to consume without a physical presence (think music for example)... when something reaches that third level (ability to consume without any physical presence - aka without the need for any middle person), then its pretty clear that unless you provide something that the content creator can't do by him/herself or something the consumer can't do by him/herself, then there isn't a need for middle person... in a very simplistic way - musicians can create music, post it on the Internet to be consumed or an author could theoretically publish a book online (if a software existed for them to do that) - who needs labels or a publisher or anybody else in the middle? (of course, labels and publishers do provide value - as a new artist or author would find it very difficult to be discovered without the investments and knowledge that labels and publishers put on the table).

Ultimately, the Internet disrupts, and takes away profits from "physical players" or i call them "friction players" (as they benefit from a friction-full environment) and either gives them back to manufacturers or end up in consumer surplus.

In a sense the newspaper industry was never an industry - it was a segment of the "news industry" - it was the "paper news industry"... and with the internet, it has allowed that the segment within the news industry called the "digital news industry" to become a bigger portion of the news industry... and the digital news industry is one that is more democratic, fragmented, just in time that brings the news (the product) closer to consumption by consumer... so while in the "written news industry" most of the economics were extracted by a middleperson (newspapers) that provided technology, guidance, buildings, etc. to the actual creators of the news (news writers)... the digital age has allowed the content creators to not need those middle men (supply and demand not decided by middleperson) and the economics to change as well - the billions of dollars that were supporting those middlemen (Newspapers) will now flow to the content creators or end up as extra savings for consumers to spend elsewhere (Starbucks coffee, iTunes, etc.)... The NEWS industry is as alive as ever, its consumed more than ever, and its more participatory than ever... just like the MUSIC industry is.

Why are we protecting creditors? We are creating moral hazard.

I've been writing about this mortgage situation for close to 18 months now (and probably thinking about it for 24 months). Something that i've been asking myself since all these bailouts started is about the lack of questioning of the implied protection the government has given creditors.

There has been a lot written on those "bailouts" that basically protected shareholders (who rightfully were taking risks). However, there hasn't been enough written on the fact that all those capital injections are basically making creditors whole.

Maybe I am being naive (in that it probably doesn't really work that way), but, why don't we simply let the market run its course (with the banks?). In other words, if a bank is to fail, its shareholders lose, and its creditors lose... the government takes over and in a very fast transaction it puts it back into the market - there will obviously be a bid for the assets of that bank... here's the caveat - the bid will have two concepts: 1) how much debt would they be willing to take on and 2) how much capital will they put in.... the highest bidder takes the institution... and bingo, by default... the new debt level is known...

I am guessing it can't be that easy - creditors would have the right to sue (claiming that through a bankruptcy process they would've taken control of the bank (rather than unilaterally having to cede control)...

Regardless, the point here is that we talk about moral hazard on the equity side, but, one of the biggest moral hazards we might be creating happens to be on the credit side.

The changing face of content and value capturing

At a high level, there are content creators, content aggregators, and content distributors - no matter the medium. For example, in TV -> there are content creators (various), content aggregators (media companies, who can also be content creators, and who build brand value), and content distributors (PayTV operators).

The internet changes the dynamics in media, just like it did in the traditional retailing model (cuttting out middlement and getting manufacturers closer to consumers). So, in media, content creators don't need (as desperately) content aggregators in order to reach an audience - at least the barriers to entry are a lot lower, and content distributors have no distribution limits (there is unlimited capacity to distribute (albeit the pipes do have a capacity).

Lastly, a new entrant in the online distribution medium I will name content organizers or finders -> these are the technology companies of the world who enable people to get to content in such a disorganized world. These content finders, in a way, work against content aggregators value online -> if you could find anything that would be of value to you via a Google search, for example, you would never need to go to a popular brand you know will be aggregating the type of content you like. Lastly, companies like Hulu seek to aggregate content, but, in a very horizontal manner, so in a way they are also like technology companies.

This brings very interesting elements for those businesses involved in pure content aggregation (like PayTV programmers), where as in the past, content creators had limited options to get to audiences (and consumers had limited options to find their interests), this is not necessarily true for either end of the spectrum when we talk about online distribution/consumption of content.

As such, only those content aggregators that do invest in content or strike the right partnerships with other content creators will be able to survive in an online-only world (we may be years away from having such a world, but, the fragmentation of entertainment can't be ignored). As they garner traffic and consumption, then they do exert brand value and ignite other creator's interest to be part of such network.

The Chinese complain... are you serious?

The Chinese Premier is asking the US to comment on the quality of the more than $1Tr US Government Bonds that the Chinese own. He is worried that the US won't make good on the paper, and they can be left holding the bag. Worse yet, as the largest owner of US securities, the Chinese's alternative of selling (before they fall) looks like an impossible task (as they would crash the market themselves before they can get out).

What's pretty foolish about his comments is the fact that the reason the US is precisely in this predicament is that the whole world was willing to lend it money (all its savings) for a really long-time, thus creating the conundrum so referred to by Greenspan. All this capital that was flowing in financed huge current account deficits - basically it supported our building of homes and high-level of unproductive consumption (until it reached the limit last year).

At a very high level -> it did also benefit places like China -> a significant amount of our trade deficit was with China, so in essence, they were sending us money (USD to purchase US IOU's) that we then recycled back to them by importing even more, which they then sent back to us for more IOU's. Essentially, China lent us $1Tr so that we could buy its goods, so that their people can be employed, their industry can grow, they can get more competitive, etc.

Under normal circumstances, their currency would have appreciated, and trade would have been less... but, they were managing their currency - they prefer to lower their own citizens standard of living, their purchasing power, in exchange for providing more jobs, more factories, more production as they develop.

The real irony of this post is that the Chinese now want to sound like very serious financial managers who had bought an investment very focused on its return -> whereas we all know that the reason they bought that investment was to allow for a devalued USD vis a vis the Renminbi and to allow us to keep buying their cheap stuff.

They should certainly not be the ones worried nor publicly complaining about the risks on US Debt -> if there is any risk in it, a lot of the blame sits with its largest buyer.

A New Business Model for Music?

Music ownership and distribution is a broken business, its a good product with a broken business model. While we can talk about various flaws, I will concentrate on a couple:

1) Hit or miss dynamics leads to too much risk accumulation -> there is too much risk at every single record label. The music industry is not unlike the oil exploration business - you invest in various assets, with the expectation that the return on a reduced number will outweigh the investment in the losers. Betting on too many losers and you can lose the house. Furthermore, its a little different than oil exploration in the sense that by further investment in a presumably dry oil well can bring actual oil... the problem becomes when the threat of betting the house on losers, actually leads to lack of investment in potential winners, thus eroding any future winners as the current winners age. Potential solution-> create consortiums where various firms or investors spread their risks (investments) over a larger number of potential winners.'

2) Standard pricing for non-standard quality... there is a tendency to look at all music products under the same light - they have the same price, while they don't necessarily have the same value, but, wildly divergent values. From the price charged at the retail point to the idea of pricing the content the same to TV distributors or online distributors, the price is simply not discriminating the value and this could be the wrong formula.

A simple way to understand what we are living

We used money to consume and build houses. (period) What is the problem with that? A lot of the money used for those purposes wasn't ours, it was lent, and when money that is lent is used for things that won't produce future income, there is the risk that we would reach a point where we won't have enough income or production to pay it back. And it was no different at the national level than what it was at the individual level because ultimately the national level is simply the sum of all the individual pieces.

Where was the money coming from? Well, at the individual level, it was obviously coming from financial institutions. At the national level, it was coming from private and public internationals - our capital account supported the huge deficits on our current account for a really long-time. These imbalances usually lead to a drop in the currency value or to less interested internationals in lending to that type of country... or at the individual level to banks simply not lending to the individual, but, that didn't happen.

The US is the reserve market, the reserve economy, and the dollar is the reserve currency of the world and the world has a need to "export" their way to development. So the money kept coming, also supporting the dollar. A huge imbalance was created internatoinally that led to one of the biggest bubbles in history in real estate (Residential mainly, but, also including commercial) and essentially to a bubble economy as well -> consumption (a measure of GDP) was enabled by significant borrowings / cheap credit. If those borrowings/cheap credit had not been there, then GDP would not have increased at the same rate - same for housing if the international money had not been there. This is the "conundrum" that Alan Greenspan was talking about when he was raising rates but rates for long-term borrowing was not increasing (international money kept pouring in).

The other point that I want to make has to do with employment and production. The full-time employed work-force is probably the best measure to understand the health of the economy. Those that work provide for themselves and for those that don't work (just like a one-income generating families have one person providing for all the others).

The economy is measured by the value of all the goods and services produced in a particular year, and these goods and services are generated by the full-time force. Like individual families, there are two healthy ways to consume and one unhealthy -> two healthy: from current income or savings, the unhealthy -> by borrowing. During a long-time we used the unhealthy ones - borrowed to consume and invest in non-productive assets. Its as if a corporation borrows money and then uses it to pay lavish dinners, airplanes, beautiful deks, and others -> none of these would provide the repayment methods necessary to pay the debt back.

How we get out of this mess is a totally different topic, and a very complex one - at a high level, however, we go back to the first point -> we became overlevered -> the borrowings did not go to improve our production capacity but rather to unproductive uses, and it got to a point where our productive assets could not generate enough income to pay for the debt. Something's gotta give - either the debt is reduced to sustainable levels (by production) or the production value (relative to the debt value) has to increase.

Brands and Kids

I was driving today with my son and at his 32 months i became amazed at how powerful brands can be. I am guessing there is significant research and testing behind creating any corporate image out there targeting any consumer, but, I was impressed at how children react to brands at such an early stage.

My child not only associates particular brands with earlier experiences, but, also has the ability to guess/identify brands he doesn't know

I am not judging if there is anything right or wrong with that - I was just impressed at the power of branding and its effect on the human brain from the youngest stages in life