If you're not going to do it right, why do it at all?

Many times the intention is right, but the follow through is simply not there.

Let me explain a bit further with two examples.

I live in Manhattan on the lucky side (north of 34th street). We have power. While there have been disruptions, nothing as compared to my southern neighbors. The one disruption I faced was on Tuesday when my local New York Sports Club gym was closed.

Some background. When I first moved to this location, I was trying to decide between two gyms: NYSC ($70/mo) and Equinox ($170/mo). NYSC is like a factory. No frills, just workout and leave. Its competitor, Equinox, sells luxury and customer service. Think Holiday Inn vs. Ritz Carlton. In the membership courting process, I spoke to both gym's sales teams, which both required my contact information to proceed. Long story short, I selected a stay at the no frills Holiday Inn, despite dreaming of the pillows at the Ritz.

After going to the gym on Monday, NYSC notified me that they would be closed on Tuesday due to the storm. Day off from the gym, no big deal. Then, in what was likely in response to the NYSC closure, Equinox pounced. In an email to all of their recent prospects they offered complementary access to the gym on Tuesday. I obviously took them up on the offer.

When I walked into Equinox that next morning, I found an interesting development. Equinox looked great from the posterior.  Until I walked upstairs to the cardiovascular area. The place was packed. I waited in line for 15 minutes for a treadmill to open. While I couldn't complain about a free day, I thought to myself: this was the opportunity to show that a $100/mo premium for Equinox was worth it. They had the right idea to invite prospects, but the follow-through was terrible. Had they really wanted to win business from the local gyms, they would have be far more coordinated, possibly enforcing a 30 minute limit on use or having the staff help people look for open machines. Do it right and people remember.

I got to thinking how often this happens, both in my own endeavors and other as well. How often are things done halfhearted? I can say that I am guilty, but after this experience, I want to change my ways. The select few that do things the right way are winners. What's the saying? If you're not going to do it right, why do it at all?

Another example. Think about the recent sanctions that you must have 3+ passengers to enter Manhattan via a handful of bridges. I understand the theory behind it. Safety of pedestrians first, promote mass transit use second. Also, I think a hidden agenda is also to show a viable plan to limit cars in NYC longer-term, outside of in reaction to this storm.  But just announce the changes and walk away? How about providing the infrastructure for people to collaborate and form the carpools? Why not get ahead of the curve and talk to Robin Chase, founder of Zipcar, on her carpooling venture GoLoco? Do it right the first time and you win over the masses. Do it wrong the first time and everyone remembers the trouble it caused.

I want to start focusing on trying to do things right the first time, and improving from that point. Again, if you're not going to do it right, why do it at all?

France is in trouble

Rumors are swirling that China will be a major part of the Eurozone rescue by buying the debt of many of the troubled countries through the EFSF entity. Below is my understanding of such a move. It is clear the leaders pushing for funding by the BRIC countries are desperate. This leads me to believe that the country most in trouble is actually France with its President, Nicolas Sarkozy the main proponent of such an idea. From what I understand, it is actually France, with its high fiscal deficits and reliance on exports that could be most hurt by securing funding from China.

If the funding does take place not directly into the EFSF, but through an IMF led program, I am not sure how this will affect EU trade balances and capital flows. I hope to dig more into this as the information is released.

Global Warming

I'm sure most of you have heard of global warming, but I propose a new type of warming. This warming takes place in the the ring of currency intervention that has caught fire around the globe. Whether countries are seeking to promote strength or weakness in their local currencies, the ring is heating up. Brazil, Swiss, Japan, and Poland have now all intervened in some way over the last 90 days.

My two questions are who is next and what are the implications as more and currencies go this route. My guess is that all this intervention will not lead to the stability in which officials are hoping...

Where are we?

A book that I recently re-read (The Great Wave: Price Revolutions and the Rhythm of History by David Hackett Fischer). Fischer goes through history to determine commonalities in all price movements. Whether you know it or not, your everyday life is dominated by prices: the price of gas, food, soda, milk, public transport, and stocks.

Yesterday the US Census published its 2010 report. The report showcased something very clear: real wages (those adjusted for inflation) have contracted for 11 years at a total of 7% (SEE BELOW). Oddly enough, a marker of all price revolutions has included negative real wage growth. In addition, food and fuel has led the upward price movement. There are many other indications that confirm where we are in price stages. We have many of the markers of a stage 3 or 4: population growth in the developing world, money supply expansion, class inequality, real wage deflation, and the recognition phase that the price move is secular. At the same time we have some odd differences: social unrest in many parts of the world which would suggest a crisis phase and very low interest rates reminiscent of equilibrium times.

Over time price waves have changed in complexity due to technology and other factors, but its seems like one thing is clear, we are in fact in the midst of a price revolution. Daily news flow may suggest otherwise, but that is just noise. Focus on the bigger picture.

Volatility Selling

The Swiss national Bank (SNB) recently announced it will seek defend the 1.20 level in the EURCHF to stem the strength of its currency by buying unlimited quantities. Upon further information, it seems has though they are selling options volatility as a means to defend that significant level. A central bank engaging in option vol selling sounds like a disaster to me. The question I have is what will happen when the plan backfires or they run out of bullets? Seems like to me that a BRIC country running surpluses and room for reserve growth will come to the rescue. The price; high. I bet it will be in the form of the SNB's 1,041 tons of gold as the continued wealth transfer to the eastern economies from the western accelerates.

This is not 2008...

...it's a potential continuation of the events started in 2008 as the system continues to be sick and is seizing up again. Maybe the resolution is closer than we all think. With that said, some questions I am asking myself as we inch closer to fall:

1. Has the U.S entered a new recession?

a. Did oil over $115 or gas over $4.00/gallon get us there?

b. Was it the sovereign crisis in Europe that pushed us over the edge?

2. What effects will the "proposed" austerity in the U.S. have on global growth?

a. After a brief respite, has Washington D.C swung back to the epicenter of the crisis?

3. How much will recessions in the U.S and Eurozone effect demand for Chinese goods and in-turn Chinese accumulation for global assets (namely USD and UST's)?

4. If we have indeed entered a new recession or on the verge of one, can the U.S afford it?

a. Running approximate budget deficits of 8% of GDP (down from 11% in 2008) can the U.S step up and pump fiscal stimulus for the 3rd time in 12-years?

b. What happens if they can't?

I maybe early on this trade, but I think the gold/bond futures is the chart that will give us clues on the level stress in the system:

Cultural Trends

In 2007, Tishman Speyer bought New York City's iconic Stuyvesant town for an ungodly price of $5.4B. Their plan was to take the former MetLife buildings built for returning servicemen from WW2, revamp them, and turn the residences into luxury condos.

Four years and a handful of heavyweight investors (Bill Ackman, etc) later, Stuytown remains the same grounds it has been for years. What these high-powered investors with the deepest pockets did not realize was that they were fighting one of the strongest cultural trends I have ever seen: New York City frugality.

From an investment perspective, fighting cultural trends must be considered. These trends can shift over time, but they are like the titanic heading towards an iceberg, they take time to turn. I don't know how Stuytown plays out, but I can guess 10 years from now, it will look very similar as it does today.

I enjoy thinking about the cultural implications of any situation. Whether it is geographic, demographic, or psychographic they all must be considered, especially when investing in new ideas and trends. I am keeping my eyes open for new cultural trends and will write as I see them.

Picture: Original 1947 Stuyvesant Town

Live Music's Turn

I came across a new live music venue yesterday. It is the size of a living room, has the acoustics of Carnegie Hall, and can be seen by million of viewers (if not more). This location, TRI Studios, has been debuted by Bob Weir from The Greatful Dead. I've been told by a family member that there are more studio's like TRI around and there will be to come, but either way, the model has serious potential.

Traditional live concerts with finite seating capacity and old cost structures rely on cheap energy that allow consumers to travel long distances to see their favorite performer or group. Now, for a fraction of the price, music patrons can watch these live events from the comfort of their own home or office. Home audio and visual technology creates an even better experience. Listening to music on a computer or TV with HDTV or 3-D technology makes the whole live feed concert equation viable.

From an investors point of view, TRI has unlimited operating leverage built into its model. It seems as though the costs involved with putting on the show (booking the talent, operating the location, studio rental, data feed, etc.) will be incurred whether there is one subscriber or ten-million. Those are the kind of business models and numbers we like: each additional dollar in revenue is extremely high margin. Think about it, as the studio operator, how does 5 million $5 tickets sound vs. 20,000 $80 tickets? This setup means money will flow into the sector, most likely from big media starving for growth.

Everyone I talk to says live concerts will never go away, people want to experience the music and the atmosphere. Those people are probably right. Still, I think these live studio concert feeds have a chance of being a major disruptor. It hits on a few key macro themes: high energy prices, proliferation of high quality (cheap) home entertainment, and the growth of online video consumption. In 5 years will we see some of the worlds biggest acts going this route?

The Individual Producer

Welcome back to Sensical Gibberish. I'm back with more gibberish and hope to post once a month going forward. To follow-up on my last post on the once quaint tradition of doling out gold Rolex's upon retirement, I'd like to develop the thought a little deeper: The Individual Producer.

Advances in technology along with the myriad of issues facing today's labor force are allowing (forcing) individuals to become productive. Quick example -- at one point in time if a journalist wanted to get their voice heard it entailed looking for a job at major newspaper and using that outlet to disseminate their work. Now, that same journalist can start blogging in a matter of minutes, distribute using social mediums, and generate income using advertising and subscriptions.

The theme: forget the days when individuals had to rely on large entities with deep pockets and technological know-how as portals to reach and acquire customers. The return to production is something I have been thinking about for a long time. Today someone passed this article on to me: How E-Books Are Changing the Economics of Writing. It demonstrates how technology is providing individuals amazing tools to harness their abilities.

The article quote from J. A. Konrath caught my attention:

"I have an acquaintance who is a New York Times bestseller," he notes. "She got a great advance. But I'm on track to earn $200,000 this year on e-books alone, and the e-book market is still in its infancy. If she'd kept the rights and self-published her e-book, I bet she would have earned more money in three years on her own than she will with her publisher."

There you have it. Technology is making it attractive for individuals to move away from big firm dependence and give it a shot on their own. As the article points out, there are some hurdles that face all individual producers (in this case self-published e-book authors) such as marketing and distribution to name a couple. Of course, when aren't there problems with a new business model?

I have faith in two things. One, entrepreneurs will continue to come along and enhance the individual producer ecosystem by providing individuals the tools to market, distribute, and solve any other future hurdles (think Etsy.com as a strong ecosystem for small artists and producers). Two, technology will continue to make it easier for individual producers to create and distribute whatever they are good at. I'm talking broad spectrum; from investing advice to farming -- harnessing any act using technology. It can only get more interesting and I'm excited to see whats next.

Gold Rolex?

The monthly US employment report was released yesterday (Friday May 7th) and two internals continue to catch my attention. The first, U-6 measure of unemployment. Some regard U-6 as the true rate of unemployment as it accounts for the unemployed looking for work, those working part-time that would accept at full-time position, and finally those unemployed whom are discouraged and no longer looking for work. This broad unemployment measure is stubbornly high at 17.1%, resisting to come down even though we have now seen four months of positive jobs gains. The second internal, duration of unemployment continues to suggest the long-term unemployed are not finding new jobs. The average duration in weeks rose from 31.2 in March 2010 to 33.0 in April 2010. Seasonally adjusted, those unemployed for 27 weeks or more is 46% of the total 15.3 million jobless Americans.

These two statistics signal that the US unemployment situation is structural by nature. By defining unemployment as a structural issue, this means who lost jobs in the financial, insurance and real estate industries are now without the proper skills or opportunities to find new work. This will keep the unemployment rate stubbornly high.

What I would like to focus on is that new trends will be born out of such a structural problem, not the problem itself. Will work be redefined in such a way that Americans will be forced to occupy multiple jobs? Maybe these jobs will target productivity as opposed to the paper shifting industries which have become so prevalent over the last 30 years. At the same time, inadvertently such a shift would, in my mind, target the psychological multitasking nature of our society.

At one point in America's corporate history, employees with a certain duration of service to one company received a gold Rolex upon retirement, now they may receive a more productive fulfilling lifestyle.

Where does all the dough go?

As the US bond market struggles to find a bid, it's time to ask where does all that money go once it has fled from the risk free asset known as US Treasuries. Conventional thought would say yield chasers find their way into various other bonds (i.e safer sovereign debt or US corporates) and/or dividend yielding equities.

But, what if unconventional is the way to go? What if that income producing capital finds its way into assets that do not produce any income, assets necessary for daily life such as oil and foods? Oh, and lets not forget gold and silver.

TV's and Automobiles

Post World War II a seismic shift within the American economy was taking hold. Two innovations forced this shift from what we knew as the industrial economy to a new vibrant economy based on the consumer. Televisions and automobiles made it possible for consumers (a new term at the time for the American population) to live a life of prosperity coupled with convenience.

The growth of the personal television took strength away from the manufacturers and placed the power in the hands of the Madison Avenue's of the world focusing on advertising and marketing products to consumers.

The implications of the automobile led to shifts in geography as suburbs in new parts the country became widely populated as convenient, cheap, and viable places to live. The quality of life for American's was booming unlike ever before. The television created a desire to buy goods and the automobile led to a means of transportation to buy those goods, thus the rise of malls and shopping centers.

Now it seems like the foundations of these two great innovations have peaked along with the economy they built. Cars are not as cheap as they once were and neither are the products we see on television. What future innovations and themes will spark the next growth phase in the American economy, as cars and TVs once achieved in the post WWII period?

2010 -- The Year of the Tiger

According to the Chinese Zodiac, the Year of 2010 is the Year of the Tiger. I see two things occurring:

1. The correlation of equity markets and the bond market will break. When equities fall, bonds will not be bought as flight to safety trade.

2. Gold stocks will, for the first time in 9 years, trade with the metal on the upside and less so with the overall market.

Call me crazy, but I am not sure we want to see upside economic growth (relative growth vs. expectations on global basis) here in the US. Excess money floating around coupled with real demand overseas will spike the prices of the things we need and rely on (energy, food, and interest rates). Add those to the structurally high unemployment and the deficits we currently face both of which resulting in the goods we own (dollars, houses, and cars) continuing to depreciate. Not something to cheer for.

Goldmember

I try to refrain from using the term "bubble" but since its so widely excepted, I decided to use it just this one time to convey my point.

Gold, contrary to popular opinion, has many uses such as jewelery, medicine, electronics, and as a form of money. Today I would like to focus on the topic of gold in its monetary form. It is hard to ignore the price action of gold over the past 9 years, rising from around $300 to over $1000 an ounce. Although the price appreciation has been steady and consistent, there are constant calls for a gold "top" or identifying it as a "bubble." I am on the other side of the aisle in that gold, in its current state is not a bubble, but in a secular bull market that has a lot of room to run.



Bull markets are very difficult to ride in their entirety because the percentage gain from start to finish is sickening, but the best method is to be part of the bull market and walk away, looking from time to time. By "walk away", I mean to the point you forget you own gold.



I do actually think gold will become a bubble or mania, but again I believe that is far off. I don't have a price in mind, but sentiment will guide me. During the technology mania peak of 1999 and 2000, respectable businesspeople were quitting their jobs to become day traders. They believed this was the future. I believe we will know when gold is in the process of topping when, again these same respectable people will quit their day jobs to be gold dealers or brokers. That will be my sign, but until then the fundamental and technical picture remains in tact. Will you become a Goldmember?

The new financial center v.2

Here is a follow-up to my New York City post a few weeks ago, just focusing on a different city, Boston, MA. These are not my words, they are from a well known site Itulip, which is run by Eric Janszen. Eric begins by discussing the consumer psychology in a depression and continues into some examples that he is seeing.

"What impresses us most is how unimpressed many appear to be about the seriousness of this depression. They ask why many restaurants are still busy and why many malls are still busy, even if apparently the shoppers in them are buying less. Where are soup lines? Where is the high crime rate?

We remind them that we are only one year in to a multi-year process.

The average man or woman does not change his or her behavior until years after an economy has changed around them. No one likes change, even positive change but especially negative change. The tendency is to ignore change as long as possible, and hope it goes away and "normalcy" returns. Meanwhile, change goes on.

This depression is transforming the world around us. If you don't think so, I encourage you to take a closer look. On the surface much appears to be the same as two years ago, but under the surface much has changed and is changing, shifting relationships among friends, families, and colleagues. Changes in circumstances effect the range of choices people can make. They make different decisions than before. Different decisions produce different results. Those results impact someone else's decisions. Collections of decisions combine in unexpected ways. One of the most obvious is that consumers buy less. As they do, after a lag, they will find that they have less to buy.

The Great Depression is taught in American schools as a market crash on a Monday in October 1929 with soup lines forming shortly thereafter. Blurred over are years of failed trial and error policies by politicians who desperately wanted to undo the damage caused by the preceding decade of credit excess. But as time went on, the damage that started off as abstract data on output and debt and incomes began to show up unmistakably in the physiognomy of economic depression. That itself will later to have consequences, feeding back into changes in behavior.

To get a street level view of this process, I brought my camera with me on my latest bike ride into Boston from the western suburbs where I live. On the usually pristine Minuteman Bike Trail that I ride on as far as Arlington, not seen on previous trips over the past ten years are now graffiti, piles of burned trash, groups of teenagers hanging out, and police cars parked on the side of the trail. Nothing says “things are not going well at home with Mom and Dad” like graffiti on the side of a boutique grocery store.

Riding down Newbury Street, Boston’s posh shopping district, I took 15 pictures of retailers that had gone out of business, eight of them side by side. So desirable is the location that even during the 1980s recessions a single vacant Newbury Street shop was a rare sight."

I will again come back to the idea that the U.S cities that decided to base their underlying economic strength on financial and retail sectors will have a hard time regaining their dominance. Again I ask, what will be the next great financial center of the United States?

Nice problem to have, but still a good read

Good article in Newsweek

Cuff Em

Friday’s slight improvement in the jobs number has found a way to quickly make a mockery of US monetary policy. The less bad headline number of -345,000 jobs lost in the month of May 2009 has prompted the expectations of the Federal Funds rate, set by the Federal Reserve Committee, to sky rocket. With short terms rates at 0% and talk of it staying that way for a long time to come from Chairman Bernanke, the FED now faces an interesting quandary. Expectations on what the FED will do during the upcoming meetings based on FED Funds Futures are as follows: 33% possibility of a 50-basis-point interest rate hike by September, a 40%-plus chance of a Sept hike and a 100% possibility by December. This after a report of a contraction of over 300k jobs!

If we think back to a similar situation where the FED was faced with this predicament, it can be last seen in the 1931-1934 period during The Great Depression. The FED saw the economic data improving and decided to raise rates prematurely. This backfired and sent the economy back into a downturn. As we all know, Ben Bernanke has dedicated his life to studying the Depression, so in my estimation, this policy action will be avoided (Fed Fund Futures are wrong in my opinion).

Leaving the question of whether we should currently be at 0% in the first place aside, this is where the FED has to make some decisions. Do they want to disappoint the American people and send us back into a depression they worked so hard to avoid, or will they continue to inflate the economy through low interest rates and liquidity programs? Inflation vs. Deflation, we have seen that the FED has chosen inflation, why will it change?

Now, the interesting part. The elephant in the room is foreign ownership of US Treasuries and T-Bills. Because the FED policy thus far has been one of ZIRP (Zero Interest Rate Policy) everyone and their mother has shortened duration in the treasuries they hold. For example, if I owned 10-year treasuries, I have decided to swap those in for 2–years as we know they are “safe” and tied to short term rates by the FED, who has told us time and time again they are on hold for “an extended period of time.”

So, two roads. Fed Funds Futures market is correct, and the FED decides to raise rates by the September 2009 meeting. OR, they stay on hold as implied by the last eight months of statements. Some believe the FED does not control the short end, the market does, which is quite possibility true. Either way, raising rates will cause a catastrophe in the short end of the curve due to enormous over crowding and will send us back on depression watch. Due to FED policy, banks have had the opportunity to make obscene profits from the record steep yield curve; this will go away. If they stay on hold, long-term rates will continue to climb, but this time at faster speeds thus squashing any housing recovery due to exploding mortgage rates. In addition, by upsetting what the market wants will create a dollar debacle, something our creditors have been staunch opponents of as they hold immense dollar assets.

Either way, their hands are tied.

The new financial center?

In the 1700's New York City gained prominence as THE financial center of America. It established itself as a major trading port due to the Hudson River availability and for a brief time was the capitol of the US. As time went on, it grew in importance as a financial, cultural, fashion and entertainment mecca. In the financial realm, it is best known for Wall Street. Wall Street has been a key driver for the local economy in Manhattan fueling real estate, retail, fine dining, and nightlife. I believe this is changing. Manhattan will always be a cultural and entertainment hotbed, but the demise of finance will bear great strains on the city. You can see it walking around the streets. New Yorkers don't march up and down 5th Ave. shopping, it's foreign buyers here on vacation. Much of the real estate boom in New York was driven by lofty bonuses and a foreign buyer. What happens to a city that is reliant on one industry, a city that is not self sustaining?

The real question is what will be the next great financial center of the United States?