In Portugal & Spain for Next Month or So…

I will be hiking the Portuguese route of the Camino de Santiago for the next @10 days, then heading to Andalusia until early June.  Life is tough I know.  Although my luggage is currently lost somewhere between London and Porto…

Needless to say, I probably won’t be blogging much while trekking/trudging across rural Portugal.  I will try to avoid dabbling in much travelogue.  But stay tuned for a new, improved product on my return.

More generally, I have been thinking about how to proceed with the blog.  Partly taking into consideration some (deeply appreciated) constructive feedback.  Partly I’ve been doing it long enough to have a better sense of what “it” is.  I continue to enjoy just the exercise of writing.  I will probably be posting with a little less abandon (grin) and hopefully sharpen up the writing a bit more.

Other feedback on what’s worked and what hasn’t would be most welcome – ESPECIALLY the constructive variety.

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White House Net Neutrality Petition

Please consider signing this White House petition concerning Net Neutrality here.  These things do have an impact!

The good news is that the FCC chair’s perfidious proposal has run into a buzz-saw of opposition.  Most notably, and importantly, from the other two Democratic commissioners.  One can even squint and see the possibility that this might be “the” Net Neutrality battle that gets broadband providers re-regulated as common carriers.  I think it will more likely be the “next” flare up of this fight.

Regardless, I remain confident that the re-regulation of the US telecom sector will happen – it is mostly a matter of when and under what conditions.   Broadband is a utility.  And utilities end up regulated.  Often quite profitably for utility company shareholders.  Albeit less so for utility company managements.

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FCC’s Mooted Internet “Fast Lane” An Abomination

New FCC Chairman Wheeler has leaked a proposal to allow ISP’s to charge for higher-speed “fast lane” access to their networks.  This is an abomination.  It is pathetic.  It is a betrayal of the public trust by the Obama administration.  And it is totally unnecessary.  The only thing it does is further the cause of crony capitalism.

What exactly is the problem(s)?  The provider’s obvious incentive is to DEGRADE regular service to force traffic onto their “premium” lanes.  A “fast lane” only makes money if the other lane runs slower.   The slower it is made to run, the more money comes in…. 

Why is this an abomination?

  • It is technically unnecessary – the “slow” lane runs just as fast as the mooted “fast” lane.  A broadband line is NOT a usage sensitive thing like a water line or an electricity line.  It doesn’t “cost” anything more or less to pump more or fewer bits through a system.  Those little router chips don’t wear out any faster running at 1 megabit, 10 megabits, or even 1 gigabit (1,000 megabits).  Total system capacity is limited at some point, but those limits start to happen in the gigabit-per-home range, 1,000x faster than the megabit-per-home range we are in today.  And the system-wide capacity required to keep each end-point connection running “fast” is a trivial investment relative to the profits earned ($millions vs $billions).
  • It is competitively unnecessary.  The ISP’s make good money on Internet service today.  They have made enough money to pay for incremental speed upgrades.  More to the point, they made/make enough money to just as easily pay for truly massive speed upgrades.  Why push a policy that gives them every incentive to stop upgrading?
  • It snatches defeat from the jaws of victory.    There was/is a real risk of competition breaking out again in this market.  Per my (hopeful) post just a few days ago, the telcos are starting to throw in the towel on poky DSL service and at least start marketing the “gigabit” that Google has so deftly set as the new broadband standard.  (Google Gets Us the Gig(abit).  Brilliantly Played.)  In the meantime, more and more municipalities are starting to make serious efforts to secure high-speed Internet as a competitive differentiator.  And the FCC itself is about to consider the Comcast Time Warner merger.  This would have enabled the FCC to make all sorts of enforceable demands that would preserve Net Neutrality and increase broadband speeds.

Even more worrying is the so far deafening silence of the traditional defenders of the Internet.  Where is Google?  Where is Amazon?  Where is Yahoo?  Where is Facebook?  I have a bad feeling they are starting to come around to a “fast lane” as a super-excellent protective barrier for their own businesses.  ”Hmmm, if we create a false impression of scarcity we can jack up the cost of getting decent service and prevent anyone from challenging us.  And it won’t really cost us anything since we can just pass along those costs to the end consumer.  Although I am hoping their PR types realize they have to line up against this.  Or their HR types; the smart developers don’t generally want to work for Darth Vader.

Wheeler’s assurances about the FCC’s aggressive regulation and “commercially reasonable terms” language are transparently horse-pucky. But even if meant honestly, that just puts the FCC in an endless round of refereeing.  More important,  it leaves the door open for a future FCC to give away the store.

Having said all that, this is in some ways not that big a deal in practical terms.

  • I STILL think that the cost and pain of paying for that “special access” will drive the vast majority of Internet services to develop solely for the “slow lane” version.  Especially anyone seeking global reach.  It would be an administrative nightmare to try and negotiate separate “fast lane” agreements with the literally tens of thousands of Internet providers out there.  Which is arguably another great barrier to entry for those who can afford the lawyers (Google, Facebook, Amazon), but still a raving pain for all concerned.  As a metaphor, it’ll be easier to just ride in the regular lane vs juggling literally thousands of different electronic toll tags.
  • The “fast lane access” model would probably mostly end up applying to wide-distribution video streaming (ie. TV and Netflix-esque services). That still sucks, but “the Internet” and “content” is a whole lot more than just video.
  • There will be a huge economic incentive to evade the fast lane – especially if it really starts to make money (becoming a real cost).  There are many creative technical ways to get around this rule.  For example, delivering video from a terabit-sized local hard drive that is recharged overnight versus via direct streaming.   Its worth remembering that Internet video first took off as downloading (remember BitTorrent?).  It can very easily return to its roots.
  • I still think “the Gigabit” cat is out of the bag.  The false impression of bandwidth scarcity has worn too thin.  And too many people understand that more bandwidth does not mean “more expensive” bandwidth – e.g. everyone who bought that gigabit home router at Best Buy for $10 more than the megabit version.  The emperors remain naked.

So I think the Internet will survive.  It is more disturbing as a painfully naked exercise in crony capitalism.  This move has nothing to do with the public good.  It is just a give-away from those in power to those in power.

Obama came in making a lot of promises about preserving the open, innovative Internet.  Six years later, his ex-cable-lobbyist FCC chair serves up this shit sandwich.  It is probably less bad than whatever Romney would have put on our plates.  But that just means less fragrant smeared less thick.*  We deserve better.

* Of course, Obama also made a lot of promises about standing up to Wall Street, reining in surveillance, and blah blah blah so maybe I shouldn’t be so surprised.  And he was probably still probably “better than the alternative.”  But I am getting tired of that rationalization.

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Google Gets Us the Gig(abit). Brilliantly Played.

AT&T’s announcement today that it is “considering”  offering speeds of “up to 1 gigabit” in “up to” 21 cities is not particularly substantial in itself.  But it marks a major turning point.

Google has successfully re-defined “broadband” to mean a gigabit per second.  A gigabit is 1,000 megabits.  That is about 980-994 more megabits than most connections today (in the 6-20 megabit range if everything is running right at 3 AM when no-one else is online).  It is also a lot more than the 20 megabits Randall Stephenson (AT&T CEO) was straight-facedly telling investors was “all people needed” just a few short years ago.   I was in the room when he said that once and the sad thing is most people there just nodded and accepted it.

I wrote a post a few months ago about why/how “gigabit” would become the new access standard (“Why Accept “Meh”-ga When You’ve Can Do GIGA?).   It also explains why AT&T’s next line of defense (“Don’t worry investors!  This will only be in selected, high-value cities”) is just another un-tenable holding position.

The short version is that a two-tier broadband market is politically un-tenable.  It is, in fact, downright laughable.  Broadband is already seen as a “necessary” utility.   It will end up provided to rural and urban, rich and poor alike.  Just like other utilities  - electric power, and – wait for it – telephone service!

The genius of Google was to set the bar at “a Gigabit” via their (small but highly publicized) rollout in Kansas City, Kansas and now Austin Texas (AT&T’s headquarters is in Dallas).  Most importantly, Google showed that you could build and price a Gigabit network for about the same cost as a megabit network.*  This was always obvious, but no-one had made it clear enough that the emperor(s) had no clothes.

That is what is so important about AT&T’s announcement.  It is the corporate equivalent of the legs-crossed-hands-to-the-crotch-and-chest moment when they realize that everyone can see them naked.  The jig is up.  The fat lady has sung.  The tide has gone out and they weren’t weaning shorts.  Its over.  Stick a fork in-em.  Book ‘em Danno.    

The Austin build was particular genius of Google.  It is a university town, a tech hub, gets excess attention from the chattering classes (SXSW festival if nothing else), and it is right in AT&T’s backyard.  AT&T HAD to respond in Austin.  They would have lost the city (and tremendous face) otherwise.

AT&T’s problem is that all the other kids will start asking for a Gigabit too.  Especially with Google prodding them along.  Remember, Google wins even if AT&T ends up doing the build.

That dynamic is what promoted AT&T’s announcement.  They have given up pretending and starting to chase Google.   In this phase, AT&T can probably get some decent concessions from the local notables to be first in the line.  But every city they add makes it harder to justify NOT adding another city.

I expect the eventual outcome will be a return to some sort of subsidized build-out.  That might smack of “socialism” but its exactly how we built the electricity grid and the original phone grid.

I’d also expect the incumbent telcos will probably try to spin off their local lines (keeping wireless) to escape that regulation.  Like with the original AT&T spin-off of the RBOCs, the smart investor will probably get a better return from the spin-offs.  Boring, predictable cash flows are good.  Especially with a guaranteed (regulated) return.  Even if you do have to do that icky, dull, digging up of the streets.  Besides, betting against telco managements is usually a pretty sure thing…

I’ll finish with a huge round of applause for Google.  They have catalyzed something the country desperately needs (better, universal) broadband.  And they did it brilliantly.  Well done.

*  Cost of Gigabit vs Megabit:  The incumbent telcos have done a great job of masking this clear, indisputable, obvious-when-you-think-about-it fact.  Consider;

  • Today’s corporate LANs run at 1 gigabit.   If we can get a cost-effective gigabit to every desk in a street-block-sized office floor, why can’t you do the same in a street-block-sized (ahem) neighborhood block?
  • Heck, you can buy a Netgear 8 port gigabit Ethernet switch at Best Buy for  $52.99 (on sale now!).  That is $6-7 a port.  A Netgear 8 port 100 Megabit switch (10x slower) is $41.99 ($5-6 a port.  The telco-equivalent gear is different, but not THAT different.  If anything, the mega/giga cost differential is even lower.   And an extra few dollars cost per house is totally meaningless spread out over the 30 year life of the fiber.

The reason the telcos never offered a gigabit is because they would have to have offered it to everyone.  Much better to fabricate the perception of scarcity.

 

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Brownian Motion – A Deeper Problem With High-Frequency Trading, Algortihmic Trading, and Their Ilk.

Micheal Lewis’s new book has done us a favor by finally dragging the high-frequency trading (HFT) phenomenon into the spotlight.  It has always seemed fairly obvious that any trading strategy that depends on being a few milliseconds faster than others is clearly predatory.*

One can argue that ALL trading is inherently predatory, so what’s the problem here?  But that doesn’t sound so good on TV.   So HFT’s defenders fall back on lame arguments about how they provide increased liquidity blah blah blah.  This is total bullshit of course.  That isn’t liquidity. It is “forestalling” – literally to “buy before it gets to the [market] stall.”  Forestalling was banned way back in the middle ages and there’s no reason it should be allowed today.

Old English – foresteall ‘an ambush’ (see fore- and stall). As a verb the earliest sense (Middle English) was ‘intercept and buy up (goods) before they reach the market, so as to raise the price’ (formerly an offense).
 

But I see something more disturbing about HFT and various other computer-driven strategies.  You have more an more market actors who explicitly, consciously, ignore any consideration of “value” – ie. the stream of future earnings that underpin a stock certificate’s actual worth.  

Like most market perversions, this only becomes a problem with scale.  A few robot-actors aren’t a problem.  Nor are particular individual robot-actor strategies.  The problem is when the collective whole starts to crowd out the humans that do (theoretically) consider “value” – if only fleetingly before searching for that next greater fool).

  • Consider the quaint old days when a stock was actually bought or sold on the basis of its dividend.  As in “I am buying shares of Union Pacific because they promise to pay out ten cents a year for every dollar.”  Said while wearing a bowler hat twirling a ferocious mustache.  This goes back to the very idea of “equity” – the profits left over after you have paid off suppliers, workers, and debt interest.
  • Later on, of course, we expanded that conception of “value” to capital gains, retained earnings, and intangibles.  From there, it was a hop, skip and a jump to valuation based on the more modern, scientific “NGF” model (Next Greater Fool).  Basically a stock was worth what someone else was willing to pay you for it.

It is hard to see how a market increasingly dominated by robot-actors doesn’t stray further and further away from the (hypothetical) real value of a stock.  Which is the (perhaps equally quaint) reason for a market’s very existence.  It’s raison d’etre, one might say… (ed: sorry – I couldn’t resist).

Instead, we get a market that is truly a “random walk.”  Driven more by internal correlations and contradictions.  Straying further from the real-world prospects of the companies purportedly represented there.  The system grows increasingly disconnected from the real world and increasingly driven by its own internal Brownian motion (great animation here btw - http://en.wikipedia.org/wiki/Brownian_motion).  And that is not a good thing.

*  The predatory nature of HFT was/is clear to anyone who has watched their own personal “buy” or “sell” order (for a tiny number of shares) make the quoted price skitter away as some HFT shop tries to gouge you for a few pennies.  And then revert right back to what it was quoted at before you actually tried to transact at that price.  I’ve learned to always specify a limit price.  ”At market” orders are just asking to be taken for a ride.

 

 
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Wow. Is Even Thomas Friedman Tiptoeing Away From Israel?

I did something unusual today.  I actually read an entire Thomas Friedman Op-Ed piece.    Even more unusually, he was writing about Israel.  I have pretty much given up on Friedman saying anything substantial in general and about Israel in particular.  But there was a whiff of reality and an undertone of despair to the piece.  (link  http://tinyurl.com/pjyabgg).  Another sign of Israel-fatigue per my recent post on John Kerry’s walk-away here.

The last two paragraphs of Friedman’s piece are, to my eye, “new” news.  There is a new tone of despair/resignation/foreboding.

“The truth is Kerry’s mission is less an act of strategy and more an act of deep friendship. It is America trying to save Israel from trends that will inevitably undermine it as a Jewish and democratic state. But Kerry is the last of an old guard. Those in the Obama administration who think he is on a suicide mission reflect the new U.S. attitude toward the region. And those in Israel who denounce him as a nuisance reflect the new Israel.  Kerry, in my view, is doing the Lord’s work. But the weight of time and all the changes it has wrought on the ground may just be too heavy for such an act of friendship. If he folds his tent, though, Israelis and Palestinians will deeply regret it, and soon.”

Friedman has/had clung to the increasingly threadbare belief in the existence of a realistic sensible-middle-ground outcome in the Israel/Palestinian peace process.  This was predicated on the existence of realistic, sensible, middle-of-the-road actors in positions of actual power.  Which is a little like believing in unicorns.*

The “news” here isn’t that there seems to be not path to a realistic peace (with both  Palestinians and Israelis united in preserving a progressively more toxic status quo).  That has been clear for a while.  The news is that “establishment” Americans are increasingly willing to acknowledge that in public.  We live in interesting times…

*  Another example of Unicorn-spotting is his Times colleague David Brook’s positing the existence of a sensible, middle-of-the-road Republicanism.  I wish there was one, but as the Russian folk-saying goes “If wishes were cucumbers, your mount wouldn’t be a mouth it would be a vegetable garden.”  Or something like that…

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Market/Tech/Beta Meltdown – Some Thoughts. Arguably hopeful.

Stocks have been selling off in general, with tech names selling off in particular.  The concerns aren’t about individual names.  It is just generalized selling of broad sectors and categories ahead of earnings.

I see the underlying problem as such – Everyone like “stocks” as the best-of-bad-choices investment option, but they don’t like specific individual stocks nearly as much.  There is conviction in the asset class, but not the individual assets that actually constitute that class.

  • This helps to explain the recent pattern of group run-ups between quarters, big drops in individual names during earnings, and then another group run-up in the following months (until the next round of earnings).  The problem is that individual names are not delivering the performance or promise hoped for from the asset class as a whole.
  • The market is also getting smart to the pattern above.  That magnifies the swings (especially the downswings) as more people get into the same rhythm.  Run up the “story” stocks when there isn’t any news to contradict ever-rising hopes.  Sell them off when the companies to have the temerity to talk about the actual reality of their businesses (which haven’t matched those hopes and dreams).  Run ‘em up again…
  • It also makes sense after the last few years of huge lurches driven largely by macro events.  People who tried to analyze and buy/hold individual names with any conviction have had suffered bad performance.  They have often lost their jobs, or at least lost assets.  The surviving investors out there have learned to be top-down and “story” driven.  Which makes it harder and harder for individual names to break out or perform (because the people with the money aren’t looking for individual names).

Of course, the above only suggests that this pattern is about to be broken (with disappointments for the many and high returns for the few).  There are too many wolves hunting too few caribou in the valley of macro/theme/momentum investing.  The few, lean ones left hunting in the adjacent valley of individual company performance are going to feast one day soon.  And so the pendulum starts to swing again.

That swing could start this quarter – particularly with tech stocks.  THis earnings season could mark the beginning of individual company break-outs based on old fashioned stuff like new product cycles, lucky big orders, installed base refreshes, and boring crap like that.  Aided by pent-up long-term demand from years of low investment and short-term demand delayed from the frigid 1st quarter.

  • The economy actually does seems to be picking up.  Particularly capital spending as companies start to see a whiff of higher rates and animal spirits start to revive a bit.
  • It will look even more perky going into the next three quarters because first quarter started out so awful due to weather-related delays/depression.
  • A lot of current investors have probably forgotten about a previously reliable pattern of tech spending/investing seasonality.  1Q always feels grim.  Then things get better.  Expectations follow – building (usually to unsustainably high levels) up to a blowout 4Q.  Managements messaging and tone follows and magnifies this.  The rule was to sell ahead of January earnings reports and buy going into April’s.
  • Right now, you don’t get the feeling many people are actually looking at individual names and forecasting actual likelihood-to-surprise.  Heck, most people out there probably don’t even really know how.  Turnover of people and skillsets is a lot higher in asset management than those 401k ads would lead you to believe…

Unfortunately, I don’t have any great specific ideas for which individual companies will benefit.  That would involve actual hard work and I’ve got a house to paint right now so…  I have a few telecom equipment stocks (INFN, CALX, JNPR) that could do well for various secular reasons.  I also think the broader corporate/enterprise hardware and software makers could do decently (mostly because they have been mostly left for dead).  I expect a lot of other economically sensitive companies that have positioned themselves well during lean times will start to distinguish themselves as things pick up.

What I do see is too many people crowded into an aging investment approach.  Which usually leads to underperformance.  Which eventually leads to money chasing higher performance.  Which crowds the next newly successful investment approach just as it starts to get less and less rewarding.  Which is the underlying human tragedy behind the best title ever of a Wall Street book – “Where Are the Customers’ Yachts: or A Good Hard Look at Wall Street?”  Published in 1940.

Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. He said,
“Look, those are the bankers’ and brokers’ yachts.”
“Where are the customers’ yachts?” asked the naïve visitor.
–Ancient story

Which reminds me I gotta find me a copy and actually read it someday.  But first I gotta paint the damn house.  Ugh.

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A Golf Clap For John Kerry

I had low expectations for John Kerry’s Israeli/Palestinian peace initiative.  I saw it mostly as another sign the Obama administration was giving up on doing much before 2016.  THe recent failure of talks doesn’t change that view, but I do give some grudging respect to Kerry and Obama for how they handled it.  They can now say they gave it an honest try.  And their equally honest admission of failure lays bare both parties disinterest in genuine peace.  More importantly, they edge closer to identifying Israel as the main obstacle.  Read Kerry’s words carefully below, especially the last sentence.

“Both sides, whether advertently or inadvertently, wound up in positions where things happened that were unhelpful,” he said, and went on to explain how the current crisis was created. “Clearly, going to these treaties is not helpful, and we have made that crystal-clear,” he said. “Unfortunately, prisoners were not released on the Saturday they were supposed to be released. And so day went by, day two went by, day three went by. And then in the afternoon, when they were about to maybe get there, 700 settlement units were announced in Jerusalem and, poof, that was sort of the moment. We find ourselves where we are.” 

A lot disappears in that “poof.”  If Kerry follows through (as he should) and diverts his attention elsewhere, this will eventually be seen as a watershed moment.  He is essentially washing his hands of the situation.  Something Obama did for the first 6 years of his presidency.  None of this will halt ritual declarations of support for Israel.  But Kerry’s is not alone in his increasing exasperation.  The next President (and her advisors) will probably do a better job of hiding that, but I’d expect to see less and less genuine effort to save Israel from itself…

I hasten to add that there are huge numbers of smart, thoughtful Israeli’s and people-who-care-about-Israel who aren’t desperately trying to find a peaceful solution.   And the Palestinians are hugely to blame as well.

But the rational arguments for peace seem overpowered by inertia, fear, and the existential need for a defining external conflict – partly to distract from the deep internal existential conflict of secular vs orthodox.  None of this bodes well for the Israel’s future.  But hopefully the US will at least burn fewer cycles trying to pretend that isn’t the most likely path forward.

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Want Faster Traffic Flow? Pass Immigration Reform! Musing on Unintended Consequences

It turns out that SLOW drivers do a lot more to impede smooth traffic flows than speeders.  This is particularly evident here in the otherwise dry and well-paved Bay Area.  You will slowly pick your way through a knot of jammed traffic to find one or two people boobling along at 55-60 with nothing but clear road ahead of them.

While you are stuck behind some such rolling roadblock, you have time to muse on what might be the cause of this odd behavior?

  • Some of it is the curse of the Prius driver trying to get a high score on the ultra-miler on-board video game.  They need to adjust that algorithm to account for the gas wasted by all the people piled up stop-starting behind…
  • Others are the usual suspects – elderly people, elderly cars, tie dye paint jobs, cat-centric bumper stickers, or otherwise obviously impaired.
  • Mellow California-ness?  Possible, but this is the Bay area no Santa Cruz.  And I’ve observed the same elsewhere.

But many of them just seem like ordinary people of ordinary age driving ordinary cars.  And you connect that to recent articles about sky-high deportations after minor brushes with the law.  And you start to wonder if at-the-speed-limit-but slower-than-reasonable driving is an un-intended consequence of the recent immigration crackdown.

This would make at least some sense.  People start to fear (rightly or wrongly doesn’t really matter) that ANY traffic stop will lead to them being put on a plane to a country they often barely remember.  So the obvious answer is to scrupulously obey the traffic laws.  Even if that means doing 55 on a highway where “everyone” does 70.

So we all end up paying an invisible, individually-small-but-collectively-large efficiency tax as a result of over-zealous immigration enforcement.

That or I am just trying to make sense out of the insensible.   Which is more likely the case.  But its a fun idea regardless.

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Dear Google; Next Time You Invade My Home, Could You At Least Knock? (updated)

So I wrote a post back in February musing about the potential security risks posed by Google’s newly acquired NEST Thermostat and PROTECT smoke detectors  (http://strongviewslightlyheld.willowblish.com?p=535).  Its only April and we’ve had our first major home intrusion.  The irony is that the invader was Google itself.

We have 3 of the smoke alarms and one thermostat in our new place.  The key reason we bought the smoke alarm was their “wave to silence” function.  Basically they, they give you a warning in a pleasant recorded voice and a wave of your hands under the device is read as “I know there is smoke I just burned the toast its all good please don’s scream like a banshee and force me to fiddle with tiny, poorly marked buttons before just pulling out the battery because you are just going to go off again.

It turns out the wave to silence function works a little too well.  To quote Nest’s CEO letter.  ”we observed a unique combination of circumstances that caused us to question whether the Nest Wave (a feature that enables you to turn off your alarm with a wave of the hand) could be unintentionally activated. This could delay an alarm going off if there was a real fire.”

All well and good.  They are working on a fix and it should be ready in a few months.  But what  happened next was disquieting, dumb, and downright creepy.  NEST reached into my home via my own Wi-Fi signal and disabled the “wave” feature on all of my smoke detectors.  No notice whatsoever.  We never got an e-mail to our (registered) account.  (I finally found the NEST e-mail in my SPAM folder.  Which is odd given I had signed up and gotten a “welcome” e-mail so the NEST e-mail address should have been on my whitelist.  Splitting hairs here, but that speaks to poor e-mail identity management by NEST.)  We did not get any visual or verbal indications from the devices themselves.  No notice at all.  The first I hear of it was via Google News and a forwarded e-mail from a friend.

Practically speaking, this might have been the “right” course of action.  And NEST’s lawyers were probably screaming that NEST would be liable if they had the means to automatically disable that function and didn’t use it.  All well and good BUT…

  • NEST could have at least sent out a notification e-mail THAT DIDN’T END UP CLASSIFIED AS SPAM.  They have our e-mail address and had already been listed as a valid recipient when I got my welcome e-mail.
  • They could have also have sent out a smartphone notification (I HAD to install the NEST app to configure them).
  • They could have at least put the news front and center on their website (It took three clicks and some digging around towards the bottom of the page to find their official communication on the subject).

Most importantly, they should have explained the hows and whys of their decision to come into my house and start messing with the appliances.  With some assurances of what they can or can’t do.  And what they will or won’t do.

As it stands, I have 4 devices in my home with significant sensor capabilities.  They can sense when we are here and when we are not – is that with a motion sensor or a microphone?  What are they recording and to whom is that data going?  It is now painfully clear that I did not actually gain ownership when I “bought” them.  NEST clearly thinks (and acts) like they still “own” them.   They are no more “mine” than a cuckoo’s eggs.  I am just the gullible host for their centrally coordinated flock of autonomous offspring.

None of this is to say that I necessarily object to the practicalities here.  The problem isn’t the outcome, but how NEST/Google went about it.  I am left with a profound mistrust of these devices.  Will I spend the money and time to rip them out?  Probably not.  Might I take them off the grid?  Quite possibly (more on that below).  Will I be recommending them to friends?  Not with a long list of caveats.  Will I be writing negative and fairly annoyed blog posts about it?  Eyup.

*Taking Nest’s off the grid.  My NESTS’s are all connected to our home Wi Fi network.  In fact, they MUST be connected to WiFi to work properly (see below).  Turns out I was wrong on this, as pointed out by Roy RUssel in the comments who is clearly smarter-than-I-am-and-probably-actually-read-all-the-instructions-like-I-keep-planning-to.  His comment “Oh, and the NEST devices communicate with each other via 802.15.4. Probably needed for the battery-powered devices, and it still works without a connection to the Internet via wi-fi. http://support.nest.com/ca/article/How-does-Nest-Protect-connect-wirelessly

So the good news is that I can just change my router password and lobotomize the smoke detectors.  BUt that means changing a lot of other WiFi device passwords.  Or  I just wipe the NESTs and re-install.  The re-install remains a major pain in the ass.

Happily, I have a spare WiFi router lying around.  The obvious solution is to turn that on WITHOUT connecting it to the Internet and then connect all the NESTS to THAT WiFi signal.  That way they can talk to each other, but they can’t get out of the house.  And that keeps NEST/GOOGLE from getting in…  I am likely to do this, but dreading it because the install process is a raving pain in the ass.

**  NEST Install is a Pain In The Ass & Weirdly Dependent on WiFi.  To be up to code, newly installed smoke detectors need to “talk” to each other (so an alarm in one sets off the others).  This is done with a wire for traditional devices.  We have that wiring installed.  The NESTs, however, do not provide a wire to make that connection.  It turns out they use their own proprietary wireless protocol.  Given the NEST team’s origin at Apple, it shouldn’t be a surprise that they have deliberately refused to play well with others.  My bias is to indulge that isolationism by installing any future NESTs as un-connected “islands” and relying on more open protocols for any whole-house systems.

Per the above, this bit is wrong.   NEST’s. however, will ONLY use Wi-Fi for that interconnect – there is no lead for the hard-wired house interconnect wiring.   This is clearly less safe and less reliable.  If I have a power outage, my router goes out and my (otherwise battery backed up) smoke detectors go blind?!?  Lets not even get into the ways that wireless is less reliable than wired.  Or the lack of future proofing in relying on WiFi on smoke detectors that could be installed for @30 years.

Even more annoying (and unsafe) is the surprisingly clunky and annoying set-up.  First of all, it REQUIRES that I install NEST”s app on my smartphone (which presumes you HAVE a smartphone otherwise you are stuck).  But the only way to register the devices is to climb up on a ladder, take the thing off the ceiling, try not to dangle it from its electrical leads, and take a “picture” of the QR code on the back of the device.  Or type in the code printed (in tiny type) on the back.  This all has to be done ON the ladder if your devices are hard-wired as ours are.  Then you go through a weird song and dance of button pressing on the other already-installed NEST’s to create that interconnect.  This went OK for two of our devices.  The third one took multiple tries.

This install is a major pain.  It also creates a long-term safety risk.  I need to repeat this exercise every time I change my router password or upgrade/replace my router.  This is one reason I haven’t taken the things offline yet.  But what happens if I sell or rent the place?  A buyer might go through the effort to re-connect the NEST’s to his/her WiFi.  A renter?  So I guess I can do it (which means the renter would need to give me his/her router password which is weird and creepy).  Or, more likely, that interconnect feature remains but the ability to control the devices is lost over time.

What is most annoying is that our on-line NEST account does not offer the means to save the device ID’s.  I SHOULD be able to change the connectivity settings and router password online, then hit a “commit” button and have the devices re-boot with the new password.  NEST’s recent invasion of my home makes it clear that functionality is available.  But NEST apparently wants to keep that for itself and isn’t willing to share that with me, the ostensible owner of the device.

*** NEST Review:  Like the Smoke Alarms.  Thermostat kind’ve “meh” so far:

We do like the smoke alarms.  Actually the feature we have appreciated most is the “night light” feature that gives off a nice glow when you pass under them in the dark.  We have one in the kitchen, but have had no false alarms or need for the wave-to-silence function so far.  I take the lack of false alarms as a sign they are well tuned.  I am not sure I will put them in the new house given the install and lack of hard-wiring.  I would probably put one in the kitchen as a stand-alone insurance against kitchen fires with wave-to-silence for burned toast.

The thermostat has been meh so far.  The auto-learning function probably works well for people with regular schedules, but it hasn’t coped all that well with us so far.  I haven’t tried to program it manually yet.  The on-device scheduling system is tedious and the on-line scheduling system isn’t much better.  Most glaring is the lack of any easy way to set up a standard program timing that runs all 7 days of the week.  You have to enter times and temperatures for each day individually.  My take is that NEST made it intentionally difficult so you’d just default to the device’s auto-learn function.  Which would be fine it it was auto-learning but…

Also the device looks pretty cool, but it sits on a bigger (and ugly) plastic white mounting plate.  That doesn’t show up in the ads because it CAN be mounted directly to your drywall if your HVAC guy knows to cut a much-smaller-than-standard size hole and electrical box for the wiring.  Ours didn’t so we ended up with the ugly plate.  And no on-line options for less ugly or paint-able plates….  And we didn’t really want to DIY our own drywall repair.  At least not yet.

Conclusion:  Concerned about the smoke detectors as a whole house solution and ambivalent about the thermostat.  But do like the stand-alone smoke detector as a kitchen fire solution….  Elsewhere I figure the alarms aren’t going off unless there really is a problem.

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Girls Soccer and the Perversions of Capitalism…

Lets get this clear at the start – this post is not about any off-kilter sexual issues related to girl’s soccer (although I am sure there is a blog dedicated to that somewhere out there).  It stems from a recent conversation about the increasing cost, complexity, and competitiveness of kid’s sports in general and girl’s club soccer in particular.  The number that stuck in my mind was that the team uniforms alone cost $800 for a full set.  Shorts, shirts, kneepads, socks, and what in the heck else?  That is just insane.  But that’s the ante to stay in the game.

What really fascinates here is how cleanly this illustrates one of capitalism’s persistent perversions.  The free market is working its wonders here.  The results just aren’t that wonderful.   Economically rational decisions of individual, un-coordinated actors combine to create what is basically an extractive, coercive, parasitic “industry.”  AND that process has also sucked much of the joy out of its functional raison d’etre.  Not a bad days work for the invisible hand…

My best guess for how this particular branch of extractive capitalism evolved.

  • Ambitious, dual-income, uber-educated upper middle class families with tight schedules found it harder and harder to find volunteer coaches.
  • At the same time, ambitious, dual-income, uber-educated upper middle class families wanted to make sure their kids got “the best” so why not hire a professional?
  • So everyone agrees to club dues sufficient to hire some recent graduate with good soccer skills.  Costs go up, but the team starts to win a lot more games.  Other clubs see the impact and respond.  Pretty soon all coaches are pros.
  • The problem, of course, is that those coaches fail to remain recent graduates.  Their needs and expectations increase with age.  The short term-impact is a round of competitive hiring.  But the more entrepreneurial among them realize that the bigger and better money is made in expanding their new-born “industry.”
  • New entrepreneurial niches are exploited.  Specialist training workshops (big $$ taken from the most ambitious).    Specialist gear (like $800 uniforms).  Ever-expanding tournament and travel schedules (with someone taking a cut of fees to organize).  Underlying this all is, must, be paybacks flowing back to those front-line coaches.  I’d guess $100 of that $800 uniform is finding its way back into the coaches pocket in some way or another.
  • Of course, none of those niches prosper unless you can whip the consuming classes into a frenzy of keeping-up-with-the-Jonesing.  Of course, the target market for girl’s club soccer – high SAT upper middle class ambitious status conscious good schools maybe-a-scholarship? – is perfect for this sort of rat race.  Each season you turn the screw a few more times and the wood squeaks but it just holds tighter.
  • The key to all this, of course, is that the parents are the real consumers.  If you put 20-30 pre-teen girls in shorts on a field with a soccer ball, they’d find a way to have fun.  A few would probably have the natural desire to really work hard enough to try and get really good.  Even fewer would actually get good.  A (small) fractional number would get a college scholarship. The rest of them are doing the sports equivalent of sawing away until they can get old enough to age out of the goddam viola lessons.

All this money produces very little joy.  A fractional few lottery winners get a scholarship.  A few parents get happy uber-atheletes.  Others get unhappy or injured ones.  Most parents get shades of “meh” from their over-scheduled, stressed, helicoptered offspring.  And a few cope with the dark stuff that hyper competitive pre-teens can wreak upon their peers (or themselves) when given the chance.  Not a whole lot of happiness out of the whole thing.

The end result is an “industry” that is largely extractive.  The parents pay out huge sums.  A few kids get rewarded but the majority aren’t seeing much real return on that “investment.”  And the whole thing keeps spinning farther and farther away from the ostensible purpose to get some exercise, learn team skills, and have a little fun.  With each orbit, the dollars go up and the joy drains away.   The only winner is the house.

The key term in all this is the ante – “a forced bet in the game of poker.”  So many markets are defined by this sort of “forced bet.”  The really juicy markets are ones where the house can claim most or all of that forced bet instead of paying it out to the winner.

The perversion of this is that the game rigs itself.  There is no controlling mastermind.  Just people trying to get ahead.  A group of actors who guileless self-interest is to rig the game to extract as much as possible from those playing it.   But the end result is arguably tighter and more efficiently extractive for it – the free market is incredibly efficient in that regard.  But its outcomes aren’t always benign.

To my mind, this is a perversion of capitalism.  Society is NOT net better off from the workings of the market.  A few winners take all and a lot of people make (still small) livings off an inherently extractive industry.  But the working mechanism of that industry pretty clearly reduces the positive benefits of team sports for most of the girls (and parents) involved.  The net return in social capital is negative.

**A fun, related example.  Sometime in the last few years, New York State’s Little League mandated that at least ONE practice be a simple pick-up game.  The kids were supposed to just choose up teams and play a full game.  The key rule was that no adults could be involved (except as umpires I guess).  The kids handled it fine and generally loved it.  The parents and coaches had huge trouble.  A huge wave of questions and clarifications flooded the League in advance.  On the day, parents and coaches struggled to stay away (or even off the field).  I don’t know if they repeated the experiment, but it clearly was seen as just that.

***My other fun fact is that kid’s playing on organized teams don’t even get much exercise.  They spend a lot of time doing low-effort drills or just sitting watching others.  They’d be much better off just running around playing (badly, but energetically).  Baseball is particularly bad, but most organized sports appear have the same negative effect.

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Monetary Velocity (and Thus Animal Spirits) Still Sucking WInd

Halfway through my first cup of coffee, the thought “I wonder what’s happened with Monetary Velocity?” flitted by.  So I went and looked it up.  Because that’s just how I roll.  Besides, it was better than confronting the unpacking jobs that lies abundantly/expectantly/endlessly at my feet.

Monetary Velocity is one of those incredibly useful intellectual tools as long as you don’t try to get too precise or math-y with it.  Roughly speaking it is how fast money moves through the economy.  If you tracked a single dollar bill, how many times did it change hands?  Another good short definition from Investopedia. ”The rate at which money is exchanged from one transaction to another, and how much a unit of currency is used in a given period of time. Velocity of money is usually measured as a ratio of GNP to a country’s total supply of money.  (http://tinyurl.com/kwkroyw and Wikipedia entry http://en.wikipedia.org/wiki/Velocity_of_money).”

Currently, velocity (still) sucks.  And the economy will probably suck until we find a way to get it back up again.  See chart below.  There are a few (complementary) drivers to higher velocity.

  • Inflation:  If money is going to be worth less in the future, people tend to spend it faster now.
  • Income Redistribution:  If you give a dollar to an unemployed person, they are going to spend it fast on food-shelter-fun.  If you give that same dollar to a plutocrat, they are going to park it for a while and then “invest” it.  With low interest rates and even lower animal spirits, those invested dollars are moving kind of sluggish these days.  And whole lot of it is basically parked.
  • Those darn Animal Spirits again:  If people feel good, they spend more freely.  Which makes other people feel good.  Which makes them spend more freely.  Which gets things moving again.  Which we desperately need.

Velocity has actually been losing, umm, velocity, since the 2000′s.  You could argue this was due to lower inflation expectations (which sounds nice and serious and non-partisan).  But inflation was “tamed” in the 80′s and 90′s.  The main trend of the 2000′s was rising income inequality.  More dollars “parked” in various places by the Mitt Romney’s of the world and fewer dollars re-circulated by the Walter Mitty’s.  Of course we had some manic phases in there (Animal Spirits tends to trump all and what else would you call the mortgage/housing/lending boom and the Dot Com era?).  But the chart also shows energy leaking out of the “real” economy’s market halls, workshops, and taverns as it is carted up the hill to gild the glorious-but-sterile halls of the plutocrat’s palaces.  Trapped wealth is sluggish money.  And we could a use a little more velocity these days.

MZM Monetary Velocity

The good news is that Animal Spirits are perking up again.  I expect higher inflation as a necessary evil.  So does the Federal Reserve although they won’t come out and say it (they should).  But a lot more needs to be done on the inequality side.  My personal benchmark is when a person can work a single job at Wal Mart without having to draw food stamps.

  • This bothers me as a taxpayer (I end up subsidizing Wal Mart’s wage bill).
  • It bothers me as a citizen (people on government aid don’t make for a healthy community).
  • It REALLY bothers me as an economist (poor people spend money faster and we NEED money to move around more).

I think inflation and wage rebalancing are coming over the next decade.  Not as fast as some think, but more likely than many would like/hope to believe.  From an investing perspective, remember that hope is not a strategy.

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Spared the Maddening Madnesses of March Madness

It is just possible that I have finally escaped March Madness.  Just some short musing here without much real point.  Mostly just taking a break from un-packing.

Every year, I would grin and nod along while my fellow co-workers and peers nattered along about whether Syracuse had a shot if West Virginia beat Kentucky now that Kansas had upset Lousiville (uh huh…).  Although only if Tennessee could get past South Dakota which you gotta admit’s been an incredible run (oooh!  yeah!).  And don’t forget San Diego State…  (mmm.  yeah).  Nod nod nod ummmm…

Unless you kept up your own mental “bracket” to provide context, it would (and did) sound like some sort of weird 7th grade Geography quiz gone very wrong.

Or the “manly” conversation opener (usually delivered by an institutional salesman a good 6 inches taller than me and infinitely more athletic) – “Wow!  Wasn’t that a great game last night?”  To which I was expected to have some sort of secret code reply affirming my own manliness.  Never really felt like I got that whole interchange down over the years.

Except for a short stretch in 8th grade, I have just never gotten anything out of basketball.  I understand there is a tremendous sport in there for some people.  But it just looks like a lot of tall guys running back and forth.  And back and forth and so on – ad infinitum ad nauseum and somehow ad hoc.

I actually had a lot of company in the Wall Street “grit your teeth and get through March it will soon be over” club.  Most of the women I worked with never cared much.  And a lot of the guys were too busy working and worrying about other things to really pay that much attention.  You also got a sense that a lot of the (mostly) guys rolling the banter along weren’t really that engaged either – especially as they got older.

But a super-engaged minority was always able to drive the water cooler chat into tedious banter around various state, city, and college names.  One could say the same thing about a whole lot of conversational fodder.  The Oscars.  The Olympics.  Election campaigns.  But somehow March Madness always stood out for me as a particularly prolonged and pointless waste of time and brain cycles.

It is a tremendous relief to have trekked far enough away to hear nothing more than the occasional murmur;  If Utah can beat Carolina then Duke will definitely win over NC State which clears the way for GW to get into the final four unless they get upset by FLorida which won’t happen because they will never get past Vanderbilt.  Unless Michigan can upset Ohio in which case you really have to look at Washington or Wisconsin.  But of course Notre Dame could be a problem for St Johns especially with Oklahoma out.  And…    (fade to black) 

 

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Economy – Think Those Animal Spirits Have a “Great” Summer Ahead

Keynes’ term “Animal Spirits” is one of those key economic concepts that many economists seem desperate to deny, avoid, or leave up in the attic like a crazy aunt.

“Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”

It’s the human element; a core emotionalism that makes some people uncomfortable.  The sort of person who aspires to become economists (or to Wall Street) are often the types who try hardest to deny/avoid/control our own humanness.

Because so many people refuse to go there, the whole “Animal Spirits” area a great place to look for unforseen turning points and big surprises.  Besides, it doesn’t require heavy data analysis or that math stuff, so I am particularly attracted to it.

All a long preface to the conclusion that we are probably set up for a “great” summer in terms of animal spirits.  After 6-7 long, miserable years of grinding out of the Great Recession, I think we will see optimism breaking out all over the place.  That starts in motion a great cycle of self-reinforcing economic activity driven by nothing more than people felling “better.”  That marks the end of the analytical section of this piece.  You can see why I like tilling this particular field…

Why do I see this?  Its about 1/4 in the statistics, 1/2 in the weather, and 1/4 in my gut (which has coffee in it but no breakfast yet so this could be a little disjointed).

  • Statistics:  The job numbers are getting better.  Meaningfully so.  Retail sales are decent.  Corporate cash piles are huge.  The stock market is up and resilient vs shocks.  All that shows a lot of dry tinder looking for a spark of optimism to ignite it.
  • Weather.  It is going to get better.  It has to.  It’s been awful recently.  Spring will come and “everyone” is going to feel AWESOME because the change is going to be huge.  I am not kidding here.  That same schlep sludging through slush today is going to walk to work in a few months and notice a breath of spring, feel the sun on their (slightly exposed) skin, and see the most amazing seasonal event in New York City.  GIRLS IN SKIRTS!  You think I am kidding.  But there is always that one day where it seems like women’s legs reappear all at once via some magic sartorial bush telegraph.   And the sap rises (for all parties involved) for all the deep, primal possibilities that bare legs suggest.  That animal surge will feel particularly powerful because the weather in the most of the country (OK, I’ve been wearing shorts recently) has been abysmal.  In particular, it has been awful in areas where large numbers of decision and opinion makers are centered – the Northeast Acela Corridor in general and New York in particular.  One thing you appreciate more when you leave New York – the emotional “weather” in New York has a huge impact on the nation’s outlook overall.  And New Yorkers are tired, cold, miserable, grumpy, and wading through slush.*  Animal Spirits do not thrive in slush.
  • Gut:  It feels like people are sick and tired of being sick and tired.  Politically, even the Republican’s seem to have lost their taste for mayhem.  We haven’t had a catastrophically stupid, self-inflicted, politically driven economic shock from them all year long.  Heck, the debt ceiling passed with barely a peep.  Some of that is upcoming elections, but I think it also just reflects exhaustion.  You can only stay angry and outraged for so long.  The same goes on the Democratic side, where enthusiasm for Obama is ebbing more out of exhaustion than anything else.  In the corporate world, companies are tired of belt tightening.  Executives are tired of working hard(er).  They want to hire minions to do the actual work and go back to playing corporate politics full-time again.  CEO’s want to deals (which are fun) vs cut heads (which isn’t).  And ordinary citizens are just tired of preparing for the worst (which has often come) and looking to splurge a little bit.

Put all that together and Spring/Summer 2014 could prove to be the catalytic moment where Animal Spirits start to drive things forward – not hold them back.  I am NOT sure if that drives the stock market much higher in 2014.  It “should.”   But stocks tend to reflect the next 6 months earlier than we think, so that rise might have already happened.  But it WILL drive the real economy higher, faster, stronger.  And that should eventually set us up for a really nice run in the markets over the next few years.  Unless we go to war in Russia, another hurricane hits the Northeast, or the Republicans revert to prior obstreperous form.

Anyway – on to breakfast and a final day of touch-up painting.  Plus some amateur plumbing work (be very afraid).  Move-in is tomorrow.

* Slush:  It is said the Eskimos have 10-15 different words for “snow.”  I have always thought that New Yorkers needed at least about 5-10 different words for “slush.”  Snow is actually pretty uniform within a limited range of types.  Slush expresses itself in a much wider, occasionally astonishing variety of ways…

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Facts? We Don’t Need No Stinkin Facts! Why “Chatter” Wins Over Substance in the Markets.

A good friend sent around a piece clearly refuting some current rumor/chatter tempest-in-a-teapot that is gyrating semiconductor stocks (Intel, TSMC, etc…)   It is clear that the facts are totally in opposition to the “chatter.”  And the writers evident frustration makes it clear that the chatter is winning – facts be damned.

Brought back the memories.   Those pesky fact thingies.  Inconveniently in opposition to what “everyone is talking about.”  One of my greatest frustrations as an analyst.

  • Something like this would brew up (driven and fed by the 90% of “analysts” who really just repeat and generate chatter).
  • So you, the dutiful “real analyst”, go assemble some basic, easily available facts that clearly refute the ever-mounting echo-wave of chatter.
  • You present these facts to your peers and PM’s.
  • The response is either a shrug or a smirk with the comment (and implied criticism) “Well, that’s what’s driving the stock.”

After a while, you begin to figure out that the real game is to get in early on the chatter, not the facts. 

Makes sense when you work out the cost-benefit for the professional investing class.

  • Facts are a bit like fossils.   Hard to come by, harder to interpret, and rarely fitting together cleanly.
  • “Chatter” can be generated with nothing more than a fervid imagination and a cooperative chat-room crew.
  • Even better, chatter can give you a one-way bet.  As long as you are confident that you are early in the chatter-production-chain.  You are transformed from a gossip into the “smart money.”
  • This is really what gives the “established” hedge fund community its edge.  It is sort’ve like high school where the popular crowd could set the trend by an effort of sheer will and self-reinforcing behaviors.  If the cool kids are doing it, it must be cool.  In a recursive loop spooling endlessly away from the late-adopter uncool-kids.
  • Those popular guys and girls all grow up to get jobs – some of them at hedge funds. And they realize that generating the same recursive pattern gives them visibility on the direction of a stock.  And that gives you a trading edge.  So you pump up the chatter machine loud enough to overwhelm those pesky facts.  Confident that your fellow chatterers aren’t interested in facts anyway.
  • Even better, this is easy work.  Its what you did naturally in high school.  Bluster and loud assertion are already the go-to skills in the toolkit.  Much easier than doing any of that icky, fact-based “research” like the nerdy kids…  Much safer than trying to get an actual edge on facts.  Blech.  Too much work.  Too much risk.  You just have to keep trading fast enough so that the facts don’t catch up with you.

Sigh.  I found this frustrating mostly because I have never been good at “chatter.”  Its a skill you either pick up in high school or you don’t.  I was/am good with piecing together a factual fossil puzzle.  It never looked very pretty or tidy (unlike “chatter” which bends to account for everything).  But it usually worked out to be a decent approximation of the truth.  And the truth DOES matter in the long run.  Although the “runs” seemed to just get shorter and shorter over the years.

Anyway.  One more week until we (hopefully) get phase 1 of the house construction finished and we can move in.  Of course last night found me up until 2 AM painting baseboards when I wasn’t hugging a washer dryer that was trying to walk its way across the kitchen on its spin cycle.  Just ordered parts to bolt it to the floor.  Sigh.

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Target Was Burgled Through the HVAC System? So Many Ways to Read This

Has it really been ten+ days since I last posted?  Ugh.  We are in the final few weeks of house-renovation with a target move-in date of “before March 15 or we’re homeless.”  Just haven’t been  able to summon the focus to write something well, so haven’t been writing at all.  The house itself is coming along well – just exhausted from trying to corral all the contingencies in my usual overly-exhaustive fashion.

One thing that has me mulling over the wisdom of installing a NEST thermostat (recently acquired by Google) and 4 of their smoke detectors is the recent Target Credit Card data breach affecting 1/3 (or was it 2/3?) of Americans.  What’s the connection?  The thieves got in through the HVAC system.

It seems that Target used a contractor to run/monitor their HVAC systems.  That contractor was pretty lax about security – apparently using the same password for multiple clients.  After all, its just the heating and cooling right?  Not like you have to be super paranoid?

Except that the access to the HVAC systems allowed access to Target’s broader corporate network.   This is the digital equivalent of forgetting to seal off the vent ducts into your otherwise secure vault.  Except you don’t get any fun “Mission Impossible” visuals of Tom Cruise wriggling around criss-crossing laser alarm beams.  Just a whole lot of pain and cost visited on the American people (and Target).

There are so many ways to read this.  I couldn’t decide on just one narrative path, so I am going to run a short ways down a few different of the various vectors.

  • Security is almost always a human problem. not a technology problem.  The security “industry” is always trying to sell you a new box that will solve all your problems.  The reality is that the security gaps are almost always the wet squishy human things in the equation.  Pace Edward Snowden at the NSA, Target, etc. etc.  The economic problem is that there is no money in solving human problems.  It is tedious, unrewarding, and prone to failure (with subsequent blame).  More profoundly, individual humans don’t like to confront just how fallible humanity is.  That would force us to admit our own weaknesses.  Far better to keep designing systems that accept the delusion of human competence than to accept that we are incredibly prone to errors, omissions, and mis-judgement.
  • Outsourcing’s false economies.  I am sure Target has a VP somewhere who got a very nice bonus for proposing the outsourcing of HVAC system management.  I am also sure that no-one at an executive level really thought about the possible security implications.  I am EXTREMELY sure that anyone who did either didn’t mention it in a meeting, had his/her concerns promptly dismissed. or was simply laughed out of the room.  When faced with a tangible near-term benefit and a long term uncertain risk we humans reliably go for the cookie.
  • Should I disable my NEST’s?  Watch for the same thing to happen on a small scale in “smart homes” starting to spring up among the smart set.  I will confess that I haven’t yet read the manual for my brand new flock of Wi-Fi enabled  NEST thermostat/smoke detectors thingies (They talk.  In a very pleasant tone of voice.  Its a bit eerie).  I am certain that on page 4 or 5 will be instructions on how to change the default password.  I am equally certain that a lot of NEST buyers will fail to actually change the password.  Or will change it to something really easy to crack.  Of course, those same people also usually fail to change their WiFi passwords so arguably their network was insecure in the first place.  But…
  • The power of inertia to sustain clearly behaviors – see “chip and PIN” credit cards:  The whole Target breach wouldn’t have happened if the US had “Chip and PIN” credit cards (which have a smartcard and reader that requires a PIN code to authorize a transaction).  The rest of the world already has chip and PIN.  After being unable to buy gas at the pump in Iceland, I finally searched out and asked for a Chip and PIN card for travel myself.  But I had to ask for it.
  • The idiocy of the extreme “free marketeer’s” dogma.  This is a textbook case of negative externalities and deadweight loss – collective losses caused by lack of individual incentive to act. There is no “free market” mechanism that would prevent things like the Target breach.  You could make Target liable for the loss, but that would be “onerous government regulation” with the practical impact of preventing any merchant from accepting credit cards without a blood sample.  You could make consumers liable for the losses.  That would take us back to carrying stacks of cash and writing checks – a huge efficiency loss for the economy.  If you accept that electronic payments are a good thing (gold-bugs may leave the room now), then you need some sort of coherent regulatory system to nudge everyone along toward a more functional, efficient system.  The problem is that I just used the now-politically-loaded-nanny-state-word “nudge” so that is probably the end of any productive discussion on this subject.

Anyway.  It has been great to get the fingers flying across the keyboard again.  Now off for a 2 day oddessy of applying the second coat of interior paint before the stainless steel commercial-kitchen countertop & sink arrive on Friday.  Pressure washer arrives next week and I confront the task of painting the house exterior.  I’ll post some pictures as things start to gel.

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Google Glass is the New Segway – NYPD Test Another Nail in the Coffin.

Remember all the hype over the Segway?  It was going to revolutionize transportation and generally change the world.  Decades later, use is confined largely to tourist tours, mall security, and cops.

The NYPD’s announcement they are testing Google Glass seems like another small step into a similar slide into irrelevance.  Ending with a few use cases that only reinforce its deeply un-cool status in the broader human ecosystem.  The things are just geeky-looking.  Not to mention just how hopelessly awkward someone wearing them is going to be in person (fact:  people are proven to be awful at multi-tasking, but they think they are great at it).   Even worse, the initial use cases (beyond a few uber geeks)?

  • Cops – Glass would actually be a good way to record incidents and look up records.
  • Tourists – watch for Google Glass enabled “self tour” groups bumbling around a metropolis near you (and looking up, around, or anywhere else besides where they are going).
  • Mall Security, teachers, dog-catchers, and other “nuisance” quasi-authority figures:  They’ll mostly buy it to feel cool – because the cops will have them.  But they will come up with some sort of justification over time.

So there you have it.  The Segway trinity re-created.  And another perfectly good product (with useful potential) is irredeemably condemned to the ghetto of geekiness.

Real geek;  Not that cute, semi-distracted mad scientist-y guy.  Not the no-makeup-but-cute-with-her-hair-down girl with the slightly-too-thick-black-eyeglass-frames.  Real geek.  The kind that even other geeks won’t date…

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AT&T’s European Wireless M&A Hopes. Crushed Under a Boulder Named “Snowden?”

AT&T just formally stated it would not bid for the UK’s Vodafone for the next 6 months.  This was forced by the UK takeover commission, which has an (admirable) put up or shut up rule.  However, the side commentary remains that AT&T will be looking to buy into Europe.  I think they are wandering into the path of a boulder named “angry Europeans retaliate for NSA spying.”  See illustrative picture below (Somewhere recently in Italy – Source:  AP Markus Hell).

It is a very short path from “AT&T worked with NSA” to “AT&T is the NSA.”  The involvement was too close.  And pretty darn enthusiastic on AT&T’s part (vs Google, Facebook, etc…).  We only need one clever European to come up with a slogan and start to shout it.  The question is;  “are there enough angry Europeans to take up the chant?”

Plenty of Europeans are plenty angry.  The NSA spying “feels” more hurtful in their context (all harm, no benefit).  More importantly, they feel helpless to stop it or retaliate.  Even worse (for AT&T) – this sentiment increases as you move up the social power structure.  Probably the most pissed off European right now is Germany’s Angela Merkel.  This is personal.  The US tapped her personal phone calls.  Angela the human being (assuming such a thing exists) is NOT happy about that.    Angela the German Chancellor is in a position to do something about it.

So when AT&T blunders in (Texas twangs and all) they are going to present a huge target labeled “Aiming point for out all your frustrations on the US Techno-Military-Industrial complex, government surveillance, Yankee arrogance, the modern world in general, and your own feelings of tiny-sclerotic-nation-state inadequacy.”  Expect a tremendous, almost joyful blast of anger in response.  Expect the powers that be (ie. Ms. Merkel) to take delight in standing behind their people in righteous anger (with a big dish or payback on the side).  Even less angry politicians will likely join in if only to be on the right side of popular sentiment for once.

Can AT&T get a deal done under those circumstances?  Perhaps they can if the target is UK-based Vodafone.  After all, the UK’s intelligence services are dug about as deep in the Snowden revelations as the NSA.  If AT&T tries to shop somewhere on the continent, I’d expect to see a lot of creative roadblocks.  Either way, the ensuing protest will permanently damage the brand and thus the business (whatever branding they use).

** Another measure of European anger.  A big chunk of the Danish cabinet resigned yesterday to protest the sale of a 18% minority stake in the power company to a Goldman Sachs investment vehicle.  Their apparent objection was simply to Goldman.  Not necessarily the sale.  Just the “vampire squid” as buyer.  This does not bode well for other US brand-name acquirers.  It also suggests that Goldman’s branding problem may be more long-term than they’d like to admit.

** We can also see the impact of the Snowden leaks in the emerging market results of companies like IBM, Cisco, etc…  A whole lot of non-US business got re-thought as the extent and depth of NSA surveillance effort became clear.

**Why is AT&T so dead set on a deal in the first place?

  • A recent conversation with a (smarter and much more thoughtful) friend of mine makes it clear AT&T is as desperate for cash flows and (especially) tax losses.  Otherwise, AT&T would have to (horrors) pay the full US tax rate in actual cash.  AND it would get pretty tough to sustain the current juicy dividend.  AT&T is paying out a 5.5% dividend yield.  That is one percentage point above (much healthier) peer Verizon.  In absolute terms it is also a big flashing warning sign in its own right given where rates are and the like.  It is clear the stock is where it is ONLY because of the dividend.  The high yield is also suggesting the market knows that dividend is at risk.
  • I still also see a longer-term plan by management to get away from the wheezing residential landline business.  They have under-invested landline into a ditch.  If they can build a big enough wireless platform, senior management and their favored minions can just un-hitch it, jump in and drive themselves away from the wreck they’ve made (leaving behind an unfair share of the debt, a huge catch-up investment program, and the losers in the corporate political warfare).
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The Scourge of Capitalism Infects US Wireless? Charlie Ergen’s DISH In The Catbird Seat.

You have to laugh at T-Mobile’s brilliant, cheeky full-page NYT ad today (image below).    This comes on the heels of a suspiciously well-sourced WSJ report making it clear the US DoJ and FCC have no enthusiasm for a merger between Sprint and T-Mobile.

T-Mobile’s recent success and hard-hitting ads have validated the regulator’s decision to block AT&T’s purchase of T-Mo.  However, T-Mobile does need more, nationally broad spectrum to mount a more sustained competitive challenge.  Sprint has been gamely making the case that a combination of Sprint’s huge spectrum holdings and T-Mobile non-incompetent marketers would create a stronger competitor.  The argument has some merits, but it falters on two key points.

  • The evident enthusiasm for a deal from Wall Street and the companies involved.  Investors and business managers like comfortable, high profit, oligopolistic markets.  Higher profits and lower competition are much easier and less risky for everyone involved.  The overly enthusiastic cheerleading for consolidation has helped make the case against allowing it.
  • The huge, un-used spectrum holdings of Charlie Ergen’s DISH (plus the spectrum held by Faclone’s LightSquared).

If T-Mobile gets more spectrum, it can comfortably compete at national scale.  That slides the US wireless market all the way down the slippery slope to – horrors! - a full-fledged competitive market.  Capitalism red in tooth and claw!  A free market!  Eeeeek!

Watching this game play out over 2014-2015 is going to be fascinating.  The pivotal role played by the mercurial Charlie Ergen’s DISH is also likely to make it pretty darn wacky.  It will be interesting to see which of Charlie’s warring impulses win out.  

  • He loves to play the maverick spoiler.  DISH has always been a scrappy company – the T-Mobile of the pay TV industry if you will.  Before that, Ergen was a leader in the C-band home satellite dish movement that challenged the cozy cable/broadcast business (those huge 10-12 foot dishes people would buy to pull down un-encrypted HBO and the like).  Ergen has to relish the opportunity to stick it in the eye of the establishment one more time.
  • He is a hyper controlling, unpredictable game-player who seems to love the art of the deal more than the outcome.  Ergen’s past is littered with almost-deals that grew increasingly byzantine in what almost seems to be a form of entertainment for him.  He either tries to be too cute and the whole thing collapses.  Or he sells out everyone with a last-minute plot twist.

Ergen has already been pretty clearly chatting with Sprint about a deal (with or without T-Mobile).  I’d expect him to get more publicly involved with T-Mobile over the course of 2014.  The unknown is who will he betray?  His counterparts at Sprint?  Or his enablers at the Doj/FCC?  I really have no idea.  I have a funny feeling Ergen doesn’t know his end game yet either.  But my best guess is that he ends up with T-Mobile with Sprint left sobbing at the altar.

What seems more certain is that AT&T and Verizon lose no matter how this game plays out.  US wireless costs are high and coverage is weak because it is a cozy duopoly.  We will see lower prices and broader build-outs over the next 5 years.  That cursed capitalism at work.  Good for consumers.  Good for the economy.    Bad for plutocratic profit margins.  It will be fun to watch.

On a personal note – this week’s learning is that you really cannot spend too much time on surface prep before you paint a house interior.  I wish I’d figured that out before we put on the first coat of finish paint, but at least we’ve got a second coat to cover up the remedial work.  :-)

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Obama’s Sinking “Economy” Approval – Republicans Should Be Worried Not Gloating

Obama’s declining approval rating is generating the usual “horse race” stories reading Obama’s loss as a gain for the Republicans.  Bloomberg News quote below.  I suggest a more plausible, profound, and persistent perspective (what I’ll do for the sake of alliteration).  The next time, disaffected voters are going to shift more left.   The 20-30 year leftward swing of the political pendulum is gathering momentum.

“Just as the world’s largest economy is finally getting better, the public’s opinion of President Barack Obama’s handling of it is getting worse…. Yet Obama will carry into next week’s State of the Union address weakening approval ratings on the economy. What’s happening, Republicans and some Democrats say, is that voters left behind in the recovery now blame him and not his predecessor, George W. Bush, and could punish Obama’s fellow Democrats in this year’s congressional elections.  In a Bloomberg National Poll last month, 58 percent of Americans disapproved of Obama’s economic stewardship, his worst showing since September 2011. Surveys by the Wall Street Journal/NBC News and Quinnipiac University show similar results.”  http://tinyurl.com/pymr37n

The coverage assumes that the “negative” respondents all disapprove for the same reason.  This flies in the face of reason.  We need to divide that “disapprove” group into two very  different segments.

  • Republicans (no change):  Probably 40 points worth of the “disapprove” group and consistent over time.  No change here.  No news here.
  • Disaffected Democrats and Independents (the source of the increase):  The 10-20 point swing in the approval numbers has to come almost entirely from this group.

Growing frustration with Obama reflects growing frustration with the (plutocratic) status quo.  Voters don’t want the status quo.  They want the “change” they voted for in 2008 and 2012.  Change Obama hasn’t (really) delivered.  Underlying that is a growing resentment that “the recovery” has helped the 1% and bypassed the 99%.

Their frustration is that Obama hasn’t been MORE progressive and MORE “liberal.”  Obama’s inherently centrist instincts (and continued hobnobbing with the likes of Larry Summers) fuel a rising sense that 2008′s “hope and change” was no more than “Meet the new boss.  Same as the old boss.”   As much as Obama gets demonized as a Socialist, he really hasn’t (and didn’t) try to shake up the existing power structure.  The 99%, feeling increasingly left behind, are walking away.     

The short-term question is, “What are those disaffected voters likely to do when it comes to election time?”  There are two likely answers and one highly un-likely one.

  1. Stay home:  This is a reasonable forecast for 2014.  Disappointed voters will declare a “pox on both your houses” and vote by non-participation.  This would be a positive for Republicans in the 2014 elections.
  2. Show up in droves:  This is also a less-likely-but-still-reasonable forecast for 2014.  In 2014, things like minimum wage and marijuana ballot initiatives will give individual state liberals a reason to show up and to send a message.  Immigration reform could also help (I think the Republicans will end up wounding themselves here in 2014).  It is also the LIKELY forecast for the 2016 presidential election cycle.  Democratic turnout is usually strong and the Republican primary will probably have reminded them what they are voting “against.”
  3. Vote Republican(?!?!).  Not!  That is the one thing these disaffected voters will not do.  Obama may be a disappointment, but these disaffected voters are the LEAST likely to vote Republican.  ”The 47%” aren’t going to shift to the party of “the 1%.”

You can see other signs of this liberal/progressive trend in things like the New York City mayoral election, drug legalization, and the surprising emergence of the minimum wage as a real issue.  Those trends will gather strength and will, by 2016, probably have out-run the Democratic party’s (currently centrist-to-center-right) establishment.  Look for the entertaining prospect of Hillary trying to show she is actually as “liberal” as her detractor’s make her out to be.  More importantly, look for a major “wave” election with the sort of ideological tinge we typically associate with the Republican party.

None of the above will turn us into a socialist nation.  I think it will actually be healthy for a long time to come.  But whether it is healthy or not, it is likely.  If you think otherwise – take a minute to watch the videos coming out of Ukraine and Thailand this week.  We are in the midst of a global, deep, tidal-force movement of middle-lower-class push-back against the current power elite.  Change will happen.  Far better to effect that change that in the ballot box than in the streets.

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