It happens all around us constantly - however, the digitization of our interactions, mostly facilitated by the Internet, must've had the greatest toll on companies products or their business models. Schumpeter's creative destruction must be at play more today than at any time in society's history and every Company must now (more than ever) be on the lookout for its own demise 3-5 years out.
The latest casualty - which took over 100 years - is Kodak (Started in the 1880's). Being showcased today as almost becoming a penny stock, there is no doubt its days are numbered. What only 20 years ago were synonyms with photos and pictures - are both today non-existent in the ecosystem: Kodak and Polariod (Started in the 1930's). The digitalization of memory / event capturing for the masses has been taken over by other companies who's main business didn't even used to be building cameras or producing film. Most likely, the threat of cannibalizing their major businesses at the time was the major impediment in them fully embracing the newest forms of participating in the industry (which wouldve required full focus), i.e. not making money in the film itself, but, only in the hardware - which probably required the company expanding into other type of hardware. Another interesting element of disruption is how it migrates spending from components of an existing industry (buying film, develping film, for example) to another (hardware, but, most likely increasing disposable income to be spent somewhere else).
Kodak and Polaroid had their time in American industry and innovation, which will be crystallized in history. Its the amazing speed of development that we have seen in the last 50-60 years, and which has really accelerated in the last 15-20, what has consumed companies that are not forever-forward looking. Leaving nostalgia aside for any of these companies, consumers and society are significantly better off by these forces of creative destruction.
Tuesday, September 27, 2011
Tuesday, June 14, 2011
NFLX: A bbuster killer, a cord-cutter, a cord-shaver, or a network?
The advent of Netflix on the media scene has been one of disruption that moves along the value-chain spectrum of video entertainment. Its roots as a DVD distributor via mail showed it as a disruptor of who until then was the biggest distribution channel for DVD's from movie studios: Blockbuster... in a period of less than 10 years it completed its disruption having acquired a market cap of various billions at the time when Bbuster was filing for bankruptcy. A graph of the disruption in play: http://yhoo.it/kZKT0G... since I like the topic on disruption, here's another one of Apple vs. Nokia/BBerry: http://yhoo.it/k8vMBn, which has really hit in the last 24 months: http://yhoo.it/j9GJnO
Even before it completed its BBuster disruption, it was already seen as a potential disruptor to video distributors into the home as it digitized its content and set its sights on distributing via bband ("NET"Flix) - providers via cable or satellite... which made them move aggressively in two main ways: (1) expand themselves as multiplatform providers, and (2) seek additional control over the rights to content... despite all the talk about cord-cutting, the low price and long-tail strategy fit NFLX best as a cord-shaver that could live together with cable as an add-on, thus threatening premium tiers offered by these services... establishing that there are certain things valued by consumers that a NFLX would not be competitive in offering: news, sports, live events, plus the still (and probably ever) valuable elements of a curated list of branded linear channels (content), it situated itself as a basic-services add-on...
Having clearly defined its space and its value proposition within the cabsat space, but with its disruptive juices ever flowing, it then started experimenting along two dimensions: (1) original programming - thus threatening its own suppliers (and thus increasing its power within the value chain), and (the latest) (2) seeking to become a network within bband - arguing that not unlike people pay for cable to get certain channels, people pay for bband to use NFLX.
This last pt has been ridiculed by many arguing that people don't necessarily get bband to get NFLX (true), but, its also true that people don't subscribe to bband to get NFLX any less than they subscribe to cable to get some 2nd or 3rd tier channels... or along the same lines, NFLX might be more of a reason for subscribers to increase their download speeds (and spend more money on bband), than 2nd or 3rd tier channels would be in subscribers paying more for cable.
At the end of the day, NFLX's disruptive power will stop at some pt along the value chain, and I would argue it would never fully compete with networks - companies like Viacom have the knowledge and drive the necessary company culture to create the content that particular targets desire (or don't know they desire), and that's a special skill that not easily disrupted. The kind of disruption that NFLX did - was business first (dvd via mail) and then technological (SVOD via bband), where as talent/creative disruption is something not as accessible... Along the content axis though it will become an enviable competitor to simple "premium movie distributors" who today get a fee by delivering the svc via cabsat.
The NFLX story is one of disruption in our industry that is still being written... that led to the demise of some businesses and led other businesses (that thought they had barriers to entry) to have positive change.... the happy ending is that it has increased the amount of consumption of this great good that we call "branded entertainment"
Even before it completed its BBuster disruption, it was already seen as a potential disruptor to video distributors into the home as it digitized its content and set its sights on distributing via bband ("NET"Flix) - providers via cable or satellite... which made them move aggressively in two main ways: (1) expand themselves as multiplatform providers, and (2) seek additional control over the rights to content... despite all the talk about cord-cutting, the low price and long-tail strategy fit NFLX best as a cord-shaver that could live together with cable as an add-on, thus threatening premium tiers offered by these services... establishing that there are certain things valued by consumers that a NFLX would not be competitive in offering: news, sports, live events, plus the still (and probably ever) valuable elements of a curated list of branded linear channels (content), it situated itself as a basic-services add-on...
Having clearly defined its space and its value proposition within the cabsat space, but with its disruptive juices ever flowing, it then started experimenting along two dimensions: (1) original programming - thus threatening its own suppliers (and thus increasing its power within the value chain), and (the latest) (2) seeking to become a network within bband - arguing that not unlike people pay for cable to get certain channels, people pay for bband to use NFLX.
This last pt has been ridiculed by many arguing that people don't necessarily get bband to get NFLX (true), but, its also true that people don't subscribe to bband to get NFLX any less than they subscribe to cable to get some 2nd or 3rd tier channels... or along the same lines, NFLX might be more of a reason for subscribers to increase their download speeds (and spend more money on bband), than 2nd or 3rd tier channels would be in subscribers paying more for cable.
At the end of the day, NFLX's disruptive power will stop at some pt along the value chain, and I would argue it would never fully compete with networks - companies like Viacom have the knowledge and drive the necessary company culture to create the content that particular targets desire (or don't know they desire), and that's a special skill that not easily disrupted. The kind of disruption that NFLX did - was business first (dvd via mail) and then technological (SVOD via bband), where as talent/creative disruption is something not as accessible... Along the content axis though it will become an enviable competitor to simple "premium movie distributors" who today get a fee by delivering the svc via cabsat.
The NFLX story is one of disruption in our industry that is still being written... that led to the demise of some businesses and led other businesses (that thought they had barriers to entry) to have positive change.... the happy ending is that it has increased the amount of consumption of this great good that we call "branded entertainment"
The Euro - the beginning and end of it
A currency union can't survive by combining less competitive, smaller economies with more competitive, larger economies without a common fiscal/borrowing system and/or labor mobility across the territories. Before long, the currency follows the bigger more competitive countries, and the smaller less competitive ones are left with an ever decreasing ability to produce/compete/grow, thus resulting in employment loss, decreasing growth and ultimately stagnation. The only way out for these countries is to: (1) catch-up in competitiveness (not possible in the short-term), (2) for the smaller countries to coordinate salary deflation across public and private sectors at the same time (not possible outside of a brutal dictatorship), or (3) to devalue and adjust prices via the currency mechanism. In summary, the competitive adjustment needs to happen via the relative prices (if currency is fixed) or via the currency if its floating.
As such, the Euro's survival looks very bleak, unless Greece, Portugal, Ireland and Spain (And Italy) can catch-up in competitiveness... or most likely - they'll get out of the German straight-jacket.
I wrote two posts earlier on this:
http://jtolosa.blogspot.com/2010/05/euro-clock-is-ticking.html
http://jtolosa.blogspot.com/2009/04/spain-new-argentina.html
and its surprising to me how long it takes for the general consensus to agree to the above reality - which has been lived over and over again during the last 40 years.
The European dilemma was exacerbated because so much credit flowed into these weak countries which was put to work in unproductive assets, thus creating debt that was ultimately not able to be repaid (due to the asset bubble and the reality of the lack of competitiveness), thus, advancing the day of reckoning.
No matter how far the can is kicked, these countries will need to get out of the Euro because we were not all created equally competitive... and the difference in competitiveness needs to be reflected in relative wealth at some point... and the only democratic and equitative way of pushing through the difference in wealth (without people noticing) happens to be an exchange rate.... let exchange rates float, and the market dictate how rich or poor countries become... fixing currencies with larger and more competitive countries is like creating a vision of an oasis in the middle of the very dry desert...
As such, the Euro's survival looks very bleak, unless Greece, Portugal, Ireland and Spain (And Italy) can catch-up in competitiveness... or most likely - they'll get out of the German straight-jacket.
I wrote two posts earlier on this:
http://jtolosa.blogspot.com/2010/05/euro-clock-is-ticking.html
http://jtolosa.blogspot.com/2009/04/spain-new-argentina.html
and its surprising to me how long it takes for the general consensus to agree to the above reality - which has been lived over and over again during the last 40 years.
The European dilemma was exacerbated because so much credit flowed into these weak countries which was put to work in unproductive assets, thus creating debt that was ultimately not able to be repaid (due to the asset bubble and the reality of the lack of competitiveness), thus, advancing the day of reckoning.
No matter how far the can is kicked, these countries will need to get out of the Euro because we were not all created equally competitive... and the difference in competitiveness needs to be reflected in relative wealth at some point... and the only democratic and equitative way of pushing through the difference in wealth (without people noticing) happens to be an exchange rate.... let exchange rates float, and the market dictate how rich or poor countries become... fixing currencies with larger and more competitive countries is like creating a vision of an oasis in the middle of the very dry desert...
Monday, September 6, 2010
Housing: The Decision - Government or No Government
Finally somebody has said it like it is - Home Prices in this country are supported by the government and if government were to leave the mortgage market to private enterprise, the availability of credit to buy homes would suffer significantly and thus (like for any other asset) prices would fall in tandem with the adjusting of the credit availability.
This is what Bill Gross said after visiting Washington DC last week:
"The private market was nowhere to be found because they charged too much (during the last 12 months, when gov't has been responsible for 95% of mortgages). It was the cost of private origination and securitisation, perhaps more than any other factor, that justified government involvement. Prime, but non-conforming, mortgages (jumbos, insufficient down payments) were being purchased by PIMCO in the hundreds of millions of dollars every week, but at yields of 6, 7, and 8%. If that was the risk/reward tradeoff, compared to FNMA and FHLMC yields at 3.5–4%, how could policymakers pretend that the housing baton could be quickly and cost-effectively passed back to the private market? Few, if any, could afford a new home at those interest rates. If you were a believer in the dominance and superiority of private markets, how could you deny the signal that markets were sending – that the risk was too high given the substantial losses of recent years?... Americans now know that housing prices don’t always go up, and that they can in fact go down by 30–50% in a few short years. Because of this experience, private mortgage lenders will demand extraordinary down payments, impeccable credit histories, and significantly higher yields than what markets grew used to over the past several decades. Could an unbiased observer truly believe that housing starts of two million or even one million per year could be generated under the wing of the private market? In front of Treasury Secretary Geithner and the assembled audience, I said that was impractical. Let me amend that to “ludicrous.”.... Having grown accustomed to a housing market aided and abetted by Uncle Sam, the habit cannot be broken by going cold turkey into the camp of private lending. The cost would be enormous in terms of yields – 300–400 basis points higher than currently offered, crippling any hopes of a housing-led revival to the economy."
I believe the adjustment we just went through is the first phase of what could be another large adjustment if the government decided to get out of mortgages. The adjustment in home prices is a reflection of removing all the loans that should not have existed in the first place: liar loans (no doc), no down payment loans, reverse amortization loans, interest option, among others - these loans were permitting people to buy homes they could not afford and because there was new demand for every particular price point, asset prices went up - we all felt rich, we all spent more, we all got more indebted, ultimately society created this bubble.
The second phase could be equally hurtful or worse - if government stopped guaranteeing mortgages, mortgage rates would go up significantly, and with them, demand for homes at any particular price point would also drop significantly. I don't think government will leave the mortgage market (guarantees, mortgage interest deduction, etc) for this specific reason.... which then leads to another question -> how can we create the right incentives as a society to stop so much investment into dead assets - i.e. homes. Homes don't deliver any economic growth - outside of providing an abode to those that do - at least not in the same fashion as investment in assets that are tied to the production of goods and services. The other negative effect of homeownership - in periods like today - is that it removes flexibility from the labor market. Owning a home does not allow people to move to find work as easily as if they were renting. Obviously owning a home provides many positives for people, famiilies, and society, yet this last argument is purely an economic one.
Going back to the beginning of the article - politics are playing a big part in the public's perception of the economic reality today - are future deficits good or bad? did an increase in government spending do any good for employment and growth? what would tax cuts do relative to spending? etc... and I have seen a lot of people denounce Fannie and Freddie and the government's involvement in the housing industry and a call to allow the private market to run its course... I question if these people are also willing to put the country into another 20-30% adjustment of home prices and the carrying risks to the financial systems that go hand in hand with that.
In the end, at a minimum, we should do everything we can to not allow ourselves to fuel these types of bubbles going forward because as we have seen its almost impossible to get out of them (at least in an optimal fashion).
This is what Bill Gross said after visiting Washington DC last week:
"The private market was nowhere to be found because they charged too much (during the last 12 months, when gov't has been responsible for 95% of mortgages). It was the cost of private origination and securitisation, perhaps more than any other factor, that justified government involvement. Prime, but non-conforming, mortgages (jumbos, insufficient down payments) were being purchased by PIMCO in the hundreds of millions of dollars every week, but at yields of 6, 7, and 8%. If that was the risk/reward tradeoff, compared to FNMA and FHLMC yields at 3.5–4%, how could policymakers pretend that the housing baton could be quickly and cost-effectively passed back to the private market? Few, if any, could afford a new home at those interest rates. If you were a believer in the dominance and superiority of private markets, how could you deny the signal that markets were sending – that the risk was too high given the substantial losses of recent years?... Americans now know that housing prices don’t always go up, and that they can in fact go down by 30–50% in a few short years. Because of this experience, private mortgage lenders will demand extraordinary down payments, impeccable credit histories, and significantly higher yields than what markets grew used to over the past several decades. Could an unbiased observer truly believe that housing starts of two million or even one million per year could be generated under the wing of the private market? In front of Treasury Secretary Geithner and the assembled audience, I said that was impractical. Let me amend that to “ludicrous.”.... Having grown accustomed to a housing market aided and abetted by Uncle Sam, the habit cannot be broken by going cold turkey into the camp of private lending. The cost would be enormous in terms of yields – 300–400 basis points higher than currently offered, crippling any hopes of a housing-led revival to the economy."
I believe the adjustment we just went through is the first phase of what could be another large adjustment if the government decided to get out of mortgages. The adjustment in home prices is a reflection of removing all the loans that should not have existed in the first place: liar loans (no doc), no down payment loans, reverse amortization loans, interest option, among others - these loans were permitting people to buy homes they could not afford and because there was new demand for every particular price point, asset prices went up - we all felt rich, we all spent more, we all got more indebted, ultimately society created this bubble.
The second phase could be equally hurtful or worse - if government stopped guaranteeing mortgages, mortgage rates would go up significantly, and with them, demand for homes at any particular price point would also drop significantly. I don't think government will leave the mortgage market (guarantees, mortgage interest deduction, etc) for this specific reason.... which then leads to another question -> how can we create the right incentives as a society to stop so much investment into dead assets - i.e. homes. Homes don't deliver any economic growth - outside of providing an abode to those that do - at least not in the same fashion as investment in assets that are tied to the production of goods and services. The other negative effect of homeownership - in periods like today - is that it removes flexibility from the labor market. Owning a home does not allow people to move to find work as easily as if they were renting. Obviously owning a home provides many positives for people, famiilies, and society, yet this last argument is purely an economic one.
Going back to the beginning of the article - politics are playing a big part in the public's perception of the economic reality today - are future deficits good or bad? did an increase in government spending do any good for employment and growth? what would tax cuts do relative to spending? etc... and I have seen a lot of people denounce Fannie and Freddie and the government's involvement in the housing industry and a call to allow the private market to run its course... I question if these people are also willing to put the country into another 20-30% adjustment of home prices and the carrying risks to the financial systems that go hand in hand with that.
In the end, at a minimum, we should do everything we can to not allow ourselves to fuel these types of bubbles going forward because as we have seen its almost impossible to get out of them (at least in an optimal fashion).
Sunday, August 29, 2010
Deflation vs. Inflation Discussion
Lately, arguments on the future prospects of the economy have turned very confusing - so many people worried about the growing deficit and debt, and the potential implications on the currency and high inflation and yet so many other people calling for more deficits and monetary easing due to the fears of deflation. Aren't these two monetary phenomena diametrically opposed? and if they are, how can the market be arguing for the two extremes at the same time?
The answer is yes - they are opposed, and yes, the market has a right to be arguing for both at the same time. At a high level - very significant (fiscal and monetary) measures that could create some serious inflation need to be taken (or better said, need to be expanded) to make sure we don't fall into a deflation trap. Japan has been taking measures for twenty years that would spark fears of hyperinflation and lead to devaluations in most countries, yet, despite those measures, after all these years, its still dealing with falling prices and an appreciating currency.
In simple terms - I've beaten this horse to death - we borrowed significant amounts of money and invested them in non-productive assets. There is no difference between us having invested all the mortgage debt we took out (close to $10Tr to be exact) in homes or in statues (ok, there's a slight difference - we can sleep and eat in our homes, where we wouldn't be able to do it in statues)... yet, while we spent all that money in statues, we still owe the money - but our productive capacity to repay it is less than what its supposed to be... Since we owe so much money with limited productive assets to pay back, our individual decisions point to our savings to pay all that money back - which then puts the economy at risk, which leads companies to invest less, to get leaner, which leads to potential contraction and to potentially lower prices - starting a downward spiral... that also leads to an appreciating currency (because of the falling prices, which makes exports less competitive, despite all the printing of money)... that's the deflation trap we need to do everything to not fall into, its a very bad situation....
So, we will undergo all the practices possible to not fall into it - printing money, providing economic stimulus, etc (if our politics allow it after the elections) - which will ultimately lead to rampant inflation (too much money chasing too few goods) and currency debasing... yet its something we need to do to not fall into the trap above...
that's how we can be talking about inflation and deflation at the same time... we need to take inflationary measures to not fall into a deflation trap. this is all the result of the bubble we all lived through - facilitated by the Fed for so many years, as to how they let it become this way - its a function of another posting...
The answer is yes - they are opposed, and yes, the market has a right to be arguing for both at the same time. At a high level - very significant (fiscal and monetary) measures that could create some serious inflation need to be taken (or better said, need to be expanded) to make sure we don't fall into a deflation trap. Japan has been taking measures for twenty years that would spark fears of hyperinflation and lead to devaluations in most countries, yet, despite those measures, after all these years, its still dealing with falling prices and an appreciating currency.
In simple terms - I've beaten this horse to death - we borrowed significant amounts of money and invested them in non-productive assets. There is no difference between us having invested all the mortgage debt we took out (close to $10Tr to be exact) in homes or in statues (ok, there's a slight difference - we can sleep and eat in our homes, where we wouldn't be able to do it in statues)... yet, while we spent all that money in statues, we still owe the money - but our productive capacity to repay it is less than what its supposed to be... Since we owe so much money with limited productive assets to pay back, our individual decisions point to our savings to pay all that money back - which then puts the economy at risk, which leads companies to invest less, to get leaner, which leads to potential contraction and to potentially lower prices - starting a downward spiral... that also leads to an appreciating currency (because of the falling prices, which makes exports less competitive, despite all the printing of money)... that's the deflation trap we need to do everything to not fall into, its a very bad situation....
So, we will undergo all the practices possible to not fall into it - printing money, providing economic stimulus, etc (if our politics allow it after the elections) - which will ultimately lead to rampant inflation (too much money chasing too few goods) and currency debasing... yet its something we need to do to not fall into the trap above...
that's how we can be talking about inflation and deflation at the same time... we need to take inflationary measures to not fall into a deflation trap. this is all the result of the bubble we all lived through - facilitated by the Fed for so many years, as to how they let it become this way - its a function of another posting...
Saturday, June 5, 2010
Of Basketball, of John Wooden and of Life
I played basketball when I was young, I played a lot of basketball, at a competitive league, in school - elementary, middle school, JV, varsity; I spent hours on a daily basis on a basketball court. I don't play anymore, in fact I haven't played competitive basketball (other than pick-up games) since I turned 18 years old (I went to a Division I university, one with a pretty good basketball program - not that I would've had a chance in Division III anyway).
I always look back and think about what that time investment gave me... and today I believe it gave me a lot. Beyond the physical exercise and the camaraderie, competitive/organized basketball provides a lot of very good things for later in life. It taught me to be unselfish, to understand how far true teamwork can take you, it gave me enough experiences to understand that sharing success with others is better than sharing success by yourself. It teaches you the meaning of competition - that feeling of having an opponent yet knowing that their excellence is nothing more than a goal/target for yourself to improve; and for when that success is reached it then means so much more. It teaches you that actions have reactions- both in the good sense and the in the bad sense; the unwritten code of behaviour that says that everything we do is not in a vacuum and that it has consequences. Lastly, among so many other things, it teaches you that hard work gets you closer to any goal you may have, there is no such thing as a free lunch, hard work is as necessary in life as it is on a basketball court.
I could write for hours of the many things that basketball gives players or coaches...but, I want to get to John Wooden, the legendary UCLA coach who yesterday died four months before his 100th birthday. While I never met him and never saw him coach (I was born the day before he coached his last game at UCLA - winning the national championship against Kentucky on 3/31/75), I've read about him and followed him for quite some time. I always struck me how a nice and humble person had been so successful, in fact the most successful college basketball coach (arguably on any sport) of all time. Just scratching the surface of his thoughts provides a lot of insight as to how this man was so successful in trade and in life - I would say as successful in LIFE as anyone can be, here are some of his quotes:
I have no doubt John Wooden would have been successful in anything he set out to do - he was successful as a husband, father, grandfather, friend, basketball coach, author, lecturer, among others.... in the same way he would have been successful as a CEO or even as a politician (maybe not, he was too nice , :)).
May he rest in peace and may his teachings and examples which are applicable on the court as off the court (for basketball as in life) serve various generations in the future.
I always look back and think about what that time investment gave me... and today I believe it gave me a lot. Beyond the physical exercise and the camaraderie, competitive/organized basketball provides a lot of very good things for later in life. It taught me to be unselfish, to understand how far true teamwork can take you, it gave me enough experiences to understand that sharing success with others is better than sharing success by yourself. It teaches you the meaning of competition - that feeling of having an opponent yet knowing that their excellence is nothing more than a goal/target for yourself to improve; and for when that success is reached it then means so much more. It teaches you that actions have reactions- both in the good sense and the in the bad sense; the unwritten code of behaviour that says that everything we do is not in a vacuum and that it has consequences. Lastly, among so many other things, it teaches you that hard work gets you closer to any goal you may have, there is no such thing as a free lunch, hard work is as necessary in life as it is on a basketball court.
I could write for hours of the many things that basketball gives players or coaches...but, I want to get to John Wooden, the legendary UCLA coach who yesterday died four months before his 100th birthday. While I never met him and never saw him coach (I was born the day before he coached his last game at UCLA - winning the national championship against Kentucky on 3/31/75), I've read about him and followed him for quite some time. I always struck me how a nice and humble person had been so successful, in fact the most successful college basketball coach (arguably on any sport) of all time. Just scratching the surface of his thoughts provides a lot of insight as to how this man was so successful in trade and in life - I would say as successful in LIFE as anyone can be, here are some of his quotes:
- Success is peace of mind which is a direct result of self-satisfaction in knowing you did your best to become the best you are capable of becoming.
- Don't measure yourself by what you have accomplished, but by what you should have accomplished with your ability.
- If you're not making mistakes, then you're not doing anything. I'm positive that a doer makes mistakes.
- It isn't what you do, but how you do it.
- Never mistake activity for achievement.
- Success comes from knowing that you did your best to become the best that you are capable of becoming.
- Failing to prepare is preparing to fail.
- Be more concerned with your character than your reputation, because your character is what you really are, while your reputation is merely what others think you are.
- The main ingredient of stardom is the rest of the team.
- You can't live a perfect day without doing something for someone who will never be able to repay you.
- Consider the rights of others before your own feelings, and the feelings of others before your own rights.
- Be true to yourself.
- Make each day your masterpiece.
- Help others.
- Drink deeply from good books, especially the Bible.
- Make friendship a fine art.
- Build a shelter against a rainy day.
- Pray for guidance and give thanks for your blessings every day.
I have no doubt John Wooden would have been successful in anything he set out to do - he was successful as a husband, father, grandfather, friend, basketball coach, author, lecturer, among others.... in the same way he would have been successful as a CEO or even as a politician (maybe not, he was too nice , :)).
May he rest in peace and may his teachings and examples which are applicable on the court as off the court (for basketball as in life) serve various generations in the future.
Tuesday, May 11, 2010
The Euro - the clock is ticking.
As I established a year ago - its a matter of time for the less competitive countries in Europe (Spain in my example) to run into trouble within a common monetary system with more competitive countries. The inflow of money that comes with the anchoring of the monetary unit combined with the missallocation of credit (to non-productive uses) or simply the expenditure of that money ultimately leads to a situation where the country becomes uncompetitive, and will ultimately lose its ability to grow out of a recession.
Spain, Italy, Greece and Portugal (and Ireland) are in that predicament and no matter how much the ECB and its sister countries "throw" at the problem (i.e. to cover debt maturities in each one of these countries), its a problem that has no easy solution. The only way to solve the lack of competitiveness for these countries is to coordinate salary deflation across its public and private sector to regain the competitiveness it needs. Since we know from history and reason that is not possible, there is only one ending to this story: devaluation (and in most situations) default.
Let's take the two extremes: Greece - has an uncompetitive private sector and a bloated public sector + unsustainable debt levels - it will simply default, leave the euro, and devalue. For Spain the story is a little different - it has an uncompetitive (less in relative terms than the Greeks) private sector + a bloated public sector (less than Greece) + a sustainable debt level (At this pt). So, for Spain, while its still liquid, the engine that generates profits in that country is dead (within the Euro) - its like a company with little debt, yet, it can't make money for the foreseeable future, so its wholly dependent on creditors (who are happy to lend the hot potato at above market levels, knowing that there are certainly places where they can unload the debt at a partiucular pt in time). So, if Spain gets out of the Euro now, devalues, it might not have to default...however, reason and politics tell us that it will obviously stick it out and then devalue.
The lack of central taxing authority (to take care of most needs of the population) + the lack of mobility for people is what puts all the countries (who are not equally competitive) in this bind. A solution for the lack of competitiveness in these countries would have been: (1) to have a central authority take care of basic people needs (i.e. so there is no country-specific political turmoil - think a US state), or (2) for unemployment to have a high bar as people can easily move to other places with more work (Again, think the US under a common language - or taken to the extreme - think Puerto Rico, whihc has about 4MM Puertorricans in the US).
The better question is what then remains of the Euro if these four countries leave?
Let's see where this story takes us, as its not easy to exit these monetary unions.
Spain, Italy, Greece and Portugal (and Ireland) are in that predicament and no matter how much the ECB and its sister countries "throw" at the problem (i.e. to cover debt maturities in each one of these countries), its a problem that has no easy solution. The only way to solve the lack of competitiveness for these countries is to coordinate salary deflation across its public and private sector to regain the competitiveness it needs. Since we know from history and reason that is not possible, there is only one ending to this story: devaluation (and in most situations) default.
Let's take the two extremes: Greece - has an uncompetitive private sector and a bloated public sector + unsustainable debt levels - it will simply default, leave the euro, and devalue. For Spain the story is a little different - it has an uncompetitive (less in relative terms than the Greeks) private sector + a bloated public sector (less than Greece) + a sustainable debt level (At this pt). So, for Spain, while its still liquid, the engine that generates profits in that country is dead (within the Euro) - its like a company with little debt, yet, it can't make money for the foreseeable future, so its wholly dependent on creditors (who are happy to lend the hot potato at above market levels, knowing that there are certainly places where they can unload the debt at a partiucular pt in time). So, if Spain gets out of the Euro now, devalues, it might not have to default...however, reason and politics tell us that it will obviously stick it out and then devalue.
The lack of central taxing authority (to take care of most needs of the population) + the lack of mobility for people is what puts all the countries (who are not equally competitive) in this bind. A solution for the lack of competitiveness in these countries would have been: (1) to have a central authority take care of basic people needs (i.e. so there is no country-specific political turmoil - think a US state), or (2) for unemployment to have a high bar as people can easily move to other places with more work (Again, think the US under a common language - or taken to the extreme - think Puerto Rico, whihc has about 4MM Puertorricans in the US).
The better question is what then remains of the Euro if these four countries leave?
Let's see where this story takes us, as its not easy to exit these monetary unions.
Monday, April 19, 2010
The trading / buyer beware culture that doesnt add anything to society
The unfolding events for Goldman Sachs exemplifies the grotesque trading culture that has invaded our banking system. Its probably better suited to generalize the behavior by calling the responsibles traders as opposed to bankers.
You see, the banking function is supposed to allocate capital from savers to investors (look for best uses). In doing that, it performs a key function in society and in the economy - providing the funds that ultimately fuel our economic growth. That function if combined by agents who are aligned with their shareholders (i.e. management who is aligned with its shareholders), can never be speculative in itself, because the future of the firm depends on its investment decisions. Clients become sacred, and the reputation of the firm is its most important asset to maintain its going concern value.
In the trading culture that has invaded Wall Street through periods of excess, the agent as a trustee of its shareholders has broken down, and thus the clients also lose value. Its a fee-based culture, buyer beware culture that would lend itself to excesses, bubbles and busts.
When "traders" are motivated by the turnover of transactions (because that's what generates fees) as opposed to their end result, and when the short-term gains are greater than the lost trust from their clients down the road, human greed will lead to situations in which there are a few fee-based unscrupulous winners, and a lot of losers (usually society as a whole, as an example - the current housing bubble).
Furthermore, this behavior doesn't add any value to society. The synthetic securities that were created didn't add anything to society - they didn't provide any funding to new industries or companies - they simply were financial creations that allow a double-sided bet. The bad part is that in these creations there is usually one side that has full information, whereas the other side is "searched for" in any corner around the world (even if they are accredited investors). These securities didn't really have a reason to exist other than making some fully informed parties very rich, and providing very good returns for their fee-based bankers in the middle. That industry grew to a size it should have never grown.
Another example of the fee-based, buyer beware culture that permeates every bubble (with a lot of fee-based middle men in the middle), we can also simplify the housing bubble. The allocation of capital to buy homes went from a simple party to party transaction (bank to borrower) to one in which there could be up to X layers in between the actual lender and a borrower (the transaction was essentially created by the middlemen, otherwise it would not have happened). Lets assume a future borrower was looking for a home and is enticed into buying a bigger home (with a bad loan) by a mortage broker (middlemen #1 - who collect a fee if a loan is made), who then connects that borrower to a bank (mmen#2 - who collects a fee for selling that loan to a Wall Street bank, only way they make the loan), who then sells the loan to Wall Street (mmen #3 - who collects a fee for packaging a lot of these loans), who then sells the loan to the end investor (in some cases, who never had full information about how loan was made). There could be examples of other transactions with even more middlemen (conduits that take loans from smaller banks to wall street, etc). We could keep on writing - like writing about the ratings agencies and how they were paid by wall street, providing clear conflicts of interest in their ratings.
The point is that whenever there are a lot of middlemen in the financial industry and its combined with perverse (and large) fee-based incentives, thats trouble brewing for the economy and society. In the housing industry, in the stock market, in the bond market, in the sovereign market you name it.
A lot of the profits that have been made by the financial industry in the past decade are not tied to real economic growth, but, rather to the bad intermediation that usually resembled gambling.
Its time we focus on those elements of the financial industry that help fuel real and sustainable economic growth in society. The % of profits that the financial industry takes should hold relevance to the economic output of that country. Whenever it gets out of whack, its probably that some danger is brewing - they are getting their profits from promoting gambling behavior outside of their basic function of channeling funds from savers to investors.
You see, the banking function is supposed to allocate capital from savers to investors (look for best uses). In doing that, it performs a key function in society and in the economy - providing the funds that ultimately fuel our economic growth. That function if combined by agents who are aligned with their shareholders (i.e. management who is aligned with its shareholders), can never be speculative in itself, because the future of the firm depends on its investment decisions. Clients become sacred, and the reputation of the firm is its most important asset to maintain its going concern value.
In the trading culture that has invaded Wall Street through periods of excess, the agent as a trustee of its shareholders has broken down, and thus the clients also lose value. Its a fee-based culture, buyer beware culture that would lend itself to excesses, bubbles and busts.
When "traders" are motivated by the turnover of transactions (because that's what generates fees) as opposed to their end result, and when the short-term gains are greater than the lost trust from their clients down the road, human greed will lead to situations in which there are a few fee-based unscrupulous winners, and a lot of losers (usually society as a whole, as an example - the current housing bubble).
Furthermore, this behavior doesn't add any value to society. The synthetic securities that were created didn't add anything to society - they didn't provide any funding to new industries or companies - they simply were financial creations that allow a double-sided bet. The bad part is that in these creations there is usually one side that has full information, whereas the other side is "searched for" in any corner around the world (even if they are accredited investors). These securities didn't really have a reason to exist other than making some fully informed parties very rich, and providing very good returns for their fee-based bankers in the middle. That industry grew to a size it should have never grown.
Another example of the fee-based, buyer beware culture that permeates every bubble (with a lot of fee-based middle men in the middle), we can also simplify the housing bubble. The allocation of capital to buy homes went from a simple party to party transaction (bank to borrower) to one in which there could be up to X layers in between the actual lender and a borrower (the transaction was essentially created by the middlemen, otherwise it would not have happened). Lets assume a future borrower was looking for a home and is enticed into buying a bigger home (with a bad loan) by a mortage broker (middlemen #1 - who collect a fee if a loan is made), who then connects that borrower to a bank (mmen#2 - who collects a fee for selling that loan to a Wall Street bank, only way they make the loan), who then sells the loan to Wall Street (mmen #3 - who collects a fee for packaging a lot of these loans), who then sells the loan to the end investor (in some cases, who never had full information about how loan was made). There could be examples of other transactions with even more middlemen (conduits that take loans from smaller banks to wall street, etc). We could keep on writing - like writing about the ratings agencies and how they were paid by wall street, providing clear conflicts of interest in their ratings.
The point is that whenever there are a lot of middlemen in the financial industry and its combined with perverse (and large) fee-based incentives, thats trouble brewing for the economy and society. In the housing industry, in the stock market, in the bond market, in the sovereign market you name it.
A lot of the profits that have been made by the financial industry in the past decade are not tied to real economic growth, but, rather to the bad intermediation that usually resembled gambling.
Its time we focus on those elements of the financial industry that help fuel real and sustainable economic growth in society. The % of profits that the financial industry takes should hold relevance to the economic output of that country. Whenever it gets out of whack, its probably that some danger is brewing - they are getting their profits from promoting gambling behavior outside of their basic function of channeling funds from savers to investors.
Sunday, June 28, 2009
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.
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.
Wednesday, May 6, 2009
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.
“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.
Thursday, April 30, 2009
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.
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).
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).
Tuesday, April 21, 2009
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).
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).
Friday, April 10, 2009
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...
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...
Sunday, April 5, 2009
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.
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.
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.
Sunday, March 15, 2009
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 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.
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.
Friday, March 13, 2009
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.
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.
Saturday, February 28, 2009
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.
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.
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