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.
Tuesday, May 11, 2010
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...
Subscribe to:
Posts (Atom)