About Me 0087: January 2011

Friday, January 28, 2011

Making Money Without

Submitted by Taylor Cottam of Economy Politics

Another Call For The Fed To Raise Rates, So Big Banks Can Start Lending And Hiring Again

As we explained in our previous article Seeking an interest rate solution,
real interest rates are negative and nominal short term interest rates
are near zero. That is not healthy. What is a healthy interest rate? My
view is that short term rates should be above 1% to make them positive
and closer to 2%. It has caused consumer credit to contract.

Of course, banks would argue that a healthy spread is the key to a
healthy banking sector. Raising the rate would likely flatten the yield
curve. What gives?

How banks really make money

Banks are not in the business of making loans per se. They are in the
business of making more off their assets than their liabilities. In
normal times, underwriting consumer and business loans are the best
avenue for them to pursue that goal.

Banks, and many hedge funds, really make money off the yield curve. They
have assets with a higher duration than their liabilities. Although
banks fund their assets with a mix of checking, demand deposits and some
longer dated term deposits (CDs), they have the ability to swap out
longer term deposits (CDs) to make their liabilities duration almost
zero. Their assets, which are typically loans to consumers and
businesses, have a longer duration. Since the yield curve almost always
slopes upward, they make money off the yield curve spread plus the
credit spread.

In 2008, I did some modeling for a large financial institution that had
duration of liabilities of roughly 3.5 years, based upon mostly term
deposits. They were able to bring the duration on their entire
liabilities portfolio down to a duration of less than 0.25 (3 months) by
transacting a simple fixed for floating amortizing swap based upon
their CD maturity schedule. Every quarter, with the 3 month rate sunk
below 25 bps, we would receive a large cash settlement from our
investment bank counterparty. I didn't stick for the full term of the
swap, but on a 1.5 BB principal, our estimate of earnings from the swap
alone stood at $100MM over three years. Based upon where short term
rates have stayed, they could have made 1.5 times that.

With our cost of capital below 25 bps, we did the thing that any
rational person would do. We stopped lending to people and
businesses and lent to the US government instead. We bought Treasuries.
In this case, the 5-year yields were above 2% bringing our expected
risk free spread above 2 points.

In 2008 and 2009, when it became obvious that Bernanke would likely
leave short-term rates low for an extended period of time, yield curve
risk became an afterthought. Those actions have been largely vindicated.
If we held the Treasuries for at least three years, the term of the
swap, we would just sit back and make money off the spread without
having to originate a single loan.

You get to be a bank, without having to do any work to originate loans.
Who needs a large origination group, when you can make a ton of money
and fire half of your employees?

Pushed or Pulled into Treasuries

During the recession there was often talk of a flight to quality.
Investors would flee risky assets and go into something safe. However,
investors are not always being pushed, they are often pulled. During the
recession, we began seeing a very steep yield curve. The spread
investors are as much lured by the allure of easy money with a steep
yield curve as they are by the fear of risky assets.

Whenever you hear a business executive or politician use the term "American competitiveness," watch your wallet. Few terms in public discourse have gone so directly from obscurity to meaninglessness without any intervening period of coherence.

President Obama just appointed Jeffry Immelt, GE's CEO, to head his outside panel of economic advisors, replacing Paul Volcker. According to White House spokesman Robert Gibbs, Immelt has "agreed to work through what makes our country more competitive."

In an opinion piece for the Washington Post announcing his acceptance, Immelt wrote "there is nothing inevitable about America's declining manufacturing competitiveness if we work together to reverse it."

But what's American "competitiveness" and how do you measure it? Here are some different definitions:

It's American exports. Okay, but the easiest way for American companies to increase their exports from the US is for their American-made products to become cheaper internationally. And for them to reduce the price of their American-made stuff they have to cut their costs of production in here. Their biggest cost is their payrolls. So it follows that the simplest way for them to become more "competitive" is to cut their payrolls -- either by substituting software and automated machinery for their US workers, or getting (or forcing) their US workers to accept wage and benefit cuts.

It's net exports. Another way to think about American "competitiveness" is the balance of trade -- how much we import from abroad versus how much they import from us. The easiest and most direct way to improve the trade balance is to coax the value of the dollar down relative to foreign currencies (the Fed's current strategy for flooding the economy with money could have this effect). The result is everything we make becomes cheaper to the rest of the world. But even if other nations were willing to let this happen (doubtful; we'd probably have a currency war instead as they tried to coax down the value of their currencies in response), we'd pay a high price. Everything the rest of the world makes would become more expensive for us.

It's the profits of American-based companies. In case you haven't noticed, the profits of American corporations are soaring. That's largely because sales from their foreign-based operations are booming (especially in China, Brazil, and India). It's also because they've cut their costs of production in the US (see the first item above). American-based companies have become global -- making and selling all over the world -- so their profitability has little or nothing to do with the number and quality of jobs here in the US. In fact, it may be inversely related.

It's the number and quality of American jobs. This is my preferred definition, but on this measure we're doing terribly badly. Most Americans are imprisoned in a terrible trade-off -- they can get a job, but only one that pays considerably less than the one they used to have, or they can face unemployment or insecure contract work. The only sure way to improve the quality of jobs over the long term is to build the productivity of American workers and the US overall, which means major investments in education, infrastructure, and basic R&D. But it's far from clear American corporations and their executives will pay the taxes needed to make these investments. And the only sure way to improve the number of jobs is to give the vast middle and working classes of America sufficient purchasing power to get the economy going again. But here again, it's far from clear American corporations and their executives will be willing to push for a more progressive tax code, along with wage subsidies, that would put more money into average workers' pockets.

It's politically important for President Obama, as for any president, to be available to American business, and to avoid the moniker of being "anti-business." But the president must not be seduced into believing -- and must not allow the public to be similarly seduced into thinking -- that the well-being of American business is synonymous with the well-being of Americans.

Robert Reich is the author of Aftershock: The Next Economy and America's Future, now in bookstores. This post originally appeared at RobertReich.org.

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Wednesday, January 26, 2011

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Bludgeoned with delays and rumors of its demise before it even launched, The Daily's set to launch in two weeks according to News Corp's son-of-Rupert, James Murdoch. The app, which Steve Jobs supposedly helped develop, will cost 99c ...

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Bad News for Barry? Posted by Lew Rockwell on January 26, 2011 01:22 PM. The Democratic governor of Hawaii says there is no Obama birth certificate. I have always assumed the prez was a citizen, and if he were pro-freedom, ...

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News Corp's The Daily iPad Newspaper Will Cost $1 a Week

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The cable-news fixture revealed some fierce hip-hop talent at a golf tournament. Is he the Eminem of political reporters?

Bad News for Barry? « LewRockwell.com Blog

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News Corp's The Daily iPad Newspaper Will Cost $1 a Week

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The cable-news fixture revealed some fierce hip-hop talent at a golf tournament. Is he the Eminem of political reporters?

Bad News for Barry? « LewRockwell.com Blog

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News Corp's The Daily iPad Newspaper Will Cost $1 a Week

Fox News' Bret Baier: A rapping delight? - The Week

The cable-news fixture revealed some fierce hip-hop talent at a golf tournament. Is he the Eminem of political reporters?

Bad News for Barry? « LewRockwell.com Blog

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News Corp's The Daily iPad Newspaper Will Cost $1 a Week

Fox News' Bret Baier: A rapping delight? - The Week

The cable-news fixture revealed some fierce hip-hop talent at a golf tournament. Is he the Eminem of political reporters?

Bad News for Barry? « LewRockwell.com Blog

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News Corp's The Daily iPad Newspaper Will Cost $1 a Week

Fox News' Bret Baier: A rapping delight? - The Week

The cable-news fixture revealed some fierce hip-hop talent at a golf tournament. Is he the Eminem of political reporters?

Bad News for Barry? « LewRockwell.com Blog

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News Corp's The Daily iPad Newspaper Will Cost $1 a Week

Fox News' Bret Baier: A rapping delight? - The Week

The cable-news fixture revealed some fierce hip-hop talent at a golf tournament. Is he the Eminem of political reporters?

Bad News for Barry? « LewRockwell.com Blog

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Real Estate News: Home Prices Declined in November - Developments ...

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Read our PlayStation 3 news of Black Ops PS3 patch has Xbox Live error.

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Napping while reliving memories stabilizes people's ability to recall them later.

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Real Estate News: Home Prices Declined in November - Developments ...

Here is a look at real-estate news in today's WSJ:

Black Ops PS3 patch has Xbox Live error PlayStation 3 News - Page ...

Read our PlayStation 3 news of Black Ops PS3 patch has Xbox Live error.

Sleep Makes The Memory - Science News

Napping while reliving memories stabilizes people's ability to recall them later.

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Real Estate News: Home Prices Declined in November - Developments ...

Here is a look at real-estate news in today's WSJ:

Black Ops PS3 patch has Xbox Live error PlayStation 3 News - Page ...

Read our PlayStation 3 news of Black Ops PS3 patch has Xbox Live error.

Sleep Makes The Memory - Science News

Napping while reliving memories stabilizes people's ability to recall them later.

eric seiger

Real Estate News: Home Prices Declined in November - Developments ...

Here is a look at real-estate news in today's WSJ:

Black Ops PS3 patch has Xbox Live error PlayStation 3 News - Page ...

Read our PlayStation 3 news of Black Ops PS3 patch has Xbox Live error.

Sleep Makes The Memory - Science News

Napping while reliving memories stabilizes people's ability to recall them later.

eric seiger

Real Estate News: Home Prices Declined in November - Developments ...

Here is a look at real-estate news in today's WSJ:

Black Ops PS3 patch has Xbox Live error PlayStation 3 News - Page ...

Read our PlayStation 3 news of Black Ops PS3 patch has Xbox Live error.

Sleep Makes The Memory - Science News

Napping while reliving memories stabilizes people's ability to recall them later.

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Real Estate News: Home Prices Declined in November - Developments ...

Here is a look at real-estate news in today's WSJ:

Black Ops PS3 patch has Xbox Live error PlayStation 3 News - Page ...

Read our PlayStation 3 news of Black Ops PS3 patch has Xbox Live error.

Sleep Makes The Memory - Science News

Napping while reliving memories stabilizes people's ability to recall them later.

Monday, January 24, 2011

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I'm not doing cartwheels over the new HTML5 logo, which reminds me of a superhero badge. It's bold, masculine and sort of orange, which will appeal how to the majority of web users? But the logo is a great idea, and it's big splash promotion -- some of that from Microsoft -- is exactly what the standard-in-progress needs right now.

Today in a blog post, Jean Paoli, Microsoft's general manager of interoperability, writes: "The logo links back to W3C, the place for authoritative information on HTML5, including specs and test cases. It's time to tell the world that HTML5 is ready to be adopted."

There's a strange appropriateness to Microsoft promoting the logo's use. It's what the company did in the late 1990s to promote Internet Explorer. During the so-called browser wars between Microsoft and Netscape, each side adopted proprietary tags not necessarily supported in the other's browser. Microsoft encouraged websites supporting Internet Explorer to put up an IE logo/badge -- to be proud, to proclaim their support. As a marketing mechanism, the logo branding was brilliant and quite uncommon.

I remember interviewing Sun cofounder and then chief executive Scott McNealy in his office about Java; some time in 1997. McNealy, an avid amateur hockey player, limped from an injury on the ice from the night before. I scolded McNealy, calling him a boy who cried wolf, for making promise after promise after promise about Java -- like powering light switches -- that never came to be. He didn't get upset at that but my accusations about Java branding. I observed that Internet Explorer logos were on tens of thousands of websites, while Java was seemingly nowhere. If developers are using Java, why are they keeping a secret, I accused. McNealy responded by pointing across the room at his Java terminal and the tiny logo on the side. He blamed his marketers for not listening.

Someone listened, or observed -- that is Microsoft's browser, and the logo program was one reason. The US Justice Department painted a black-and-white case about Microsoft triumphing over Netscape during the browser wars. Simply stated: Microsoft abused its monopoly position in desktop operating systems to gain dominance in the adjacent browser market. I don't agree with that simplistic portrayal. Microsoft's success was about more than integrating the browser into the operating system. Microsoft also made huge investments in developer programs and branding and marketing efforts. The logo program was among them.

I'm not asserting that developers and downloaders adopted IE over Netscape simply because of a logo program. That said, no one should misunderstand the influence a well-placed logo can have. Take for example TV networks, which not long after the browser wars, started putting their logos in the lower right-hand side of the screen. It's about brand recognition and in some ways territory marking -- the network asserting: "This is my content."

On the web, the logo means something more. If the popular sites support Internet Explorer there must be a reason for that. People take social cues from one another all the time, about the clothes other people where, the cars they drive, the jewelry they wear and in the 2010s which smartphones they carry (and what apps are on them). In the late 1990s, pervasive IE logos indicated that Internet Explorer was the happening browser -- to developers and web surfers.

The HTML5 logo is even more significant, and its usage communicates that the standard is ready enough to adopt. More web developers will support HTML5 as they see others doing so. Microsoft's support communicates something, too. Right now, IE has a reputation for being a non-standards browser, mainly because of persistent IE6 usage and the still-supported ActiveX plug-in architecture. Large businesses are among the biggest consumers of ActiveX, which holds back the browser's future development (backwards compatibility is a Microsoft customer priority). Microsoft's loud support for HTML5 and now its logo communicates to legacy customers and developers that the future is something else. It's one thing for Google to call for HTML5 support, and something all together different for Microsoft -- the company with the perpetual Internet Explorer standards non-compliance black eye -- to do so.

The logo is important, as is Microsoft's promoting it. Paoli and I agree. He writes: "As developer and site owners see this logo across the web, we hope it will signal that while there is still a lot of work to do until all the HTML5 technologies are ready, real sites are starting to take advantage of them today."

There remains one question. What's your reaction to the HTML5 logo? OK another: Will you mark you territory with the HTML5 logo? Please answer in comments.

In the world of entrepreneurship one of the most important forms of currency is information. If you aren’t on Quora, you probably don’t have that currency.

Listening To Customers

One of the hottest topics in Silicon Valley nowadays is the “Lean Startup Model”, a model in which quick iterations are superior to theoretically long, drawn out releases which have a significant potential of failure. The position of Lean Startup Model evangelists is a legitimate one: if you don’t listen to your customers then you are pretty much destined to fail because customers tell you what they want. To many of those individuals I would suggest that their single landing page site which is used to test an idea is often times completely misleading. One case and point comes from a story told on Quora by Michael Flaxman in response to the question “What is the best way to test an internet startup idea?”:

Unfortunately, the most reliable way to find out is to build the minimum viable product and see how people respond to it.

The idea that you can scientifically determine whether or not a startup will work is a nice thought, but I think it’s unrealistic. If there were reliable tests you could take before launching a startup, wouldn’t startups fail at an exceptionally low rate?

I have a developer friend who wanted to build a cheaper email marketing software, but he didn’t want to make the investment in building a product only to find that it couldn’t make money. So, he found some of his competitors’ clients and asked them if they’d switch. When that seemed promising he setup a landing page that looked like it was for real email marketing software, only the software wasn’t yet built. He then bought traffic and carefully measured how expensive it was to get a “signup” on his landing page. Looking good so far. 6 months of building a clone product and he was ready to get it to some of those trial users.

Unfortunately, his users had lots of reasons why they now wouldn’t actually leave their current SaaS product and switch to his cheaper one. 6 more months of fixing bugs and adding features — including one that let you 1-click copy your account from one of his major competitors into his software — and the project had flopped. It turns out getting people to say yes to “are you interested in a better/cheaper product?” is much easier than getting them to actually make the change (and pay money for it).

Ouch! Take that lean startup people! Listening to the customer is definitely important to some extent, however I would suggest that customers don’t know what they want. That doesn’t mean that all hope should be lost though. That’s because there’s a much better indicator of what to build: the market.

Listening To The Market

While the customer doesn’t necessarily know what they want, the market is a very effective gauge of it. Successful companies are those who build products that resonate with their customers. Those customers in turn tell others about the product and eventually the product reaches a significant number of customers. So how on earth do you monitor the market? Read the news, extensively research the market, and most importantly (if you are in the Internet industry): read Quora! I have a quick story to illustrate the point of this.

I have an entrepreneur friend who is constantly asking me for advice and asking for help on raising funding. My single greatest complaint isn’t about his business (e.g. that it’s a bad idea … which it isn’t), but instead that he has no idea who the other players are in the market. How can you truly become a seriously player in a market that you are completely oblivious to? The answer: you can’t. There are tons of companies who are out there doing the research for you to find out what the market wants.

Unless you are a first mover, which is most often not the case, there is no excuse for not knowing who’s in your market, what they’re doing, and what works for them and what isn’t working. The bottom line: if entrepreneurship were a chess game, no chess player makes their moves without taking into consideration the other player’s moves. So pay attention to the market!

Quora As A Place To Gain Insight

While Quora is by no means the beat of the marketplace, there is plenty of insight to be gleaned from people who post on the site. There are great responses posted about many of the toughest challenges facing entrepreneurs. Clearly, if you spend too much time on the site you are doing yourself a disservice. Additionally, not all players in the marketplace are exactly transparent about their intentions, so the deepest insight comes from those who are sharing the moves they made weeks, months, or most often, years ago.

These anecdotes can prove to be extremely valuable. Business anecdotes are one of the reasons that incubators like YCombinator have become so successful. Aside from providing money, they provide unfiltered insight from business leaders in the community. While much of the information on Quora is clearly filtered (often times so much that it’s clear the person responding has intentionally left out chunks of a story), there are plenty of great insights to be gleaned from reading the site. Do you agree that Quora has become a critical resource for any serious internet entrepreneur? Do you use the site regularly?

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On Sunday's "Reliable Sources," former MSNBC host David Shuster fervently defended Keith Olbermann and criticized Fox News while clashing with a fellow guest who compared Olbermann to Joe McCarthy. Shuster--who frequently filled in for ...