IT - Really?

This blog is supposed to be about information technology and capital. More specifically, it's supposed to be about the use (and abuse) of capital and information technology. For the last couple of years, I've been exclusively posting about capital markets and finance. I'm going to try to return to information technology when I can and this post is as good a place as any to start.

Clay Shirky (at http://www.shirky.com/weblog/2013/11/healthcare-gov-and-the-gulf-between-planning-and-reality/) has an excellent post about the testing failures of the recently rolled-out Healthcare.gov. My purpose in linking this is not to wax philosophic about Obamacare but to use it as an illustration of a management problem I've seen for all of my 30-plus years in IT.

Clay makes some excellent points about non-IT management's willful blindness to requirments, testing, and adaptation. Here's my favorite.

Failure is always an option. Engineers work as hard as they do because they understand the risk of failure. And for anything it might have meant in its screenplay version, here that sentiment means the opposite; the unnamed executives were saying “Addressing the possibility of failure is not an option.

What is Clay getting at here? Let's pause for a moment and think about one of my favorite analogies for a go-live for a large system, the Valley of Despair. I have a chart graphic somewhere, but not at my fingertips, that shows the productivity losses at the cutover to a new system and the long, usually gradual, climb back to productivity and eventually to improved productivity. This slide into chaos is the Valley of Despair. (If you've been part of a large project, you know of which I speak.)

My own personal favorite was a company president's response when we were discussing the impending go-live of an enterprise system. I described to him the challenges his people would be facing and the struggles they'd have in getting productivity back to normal. Then I used the term Valley of Despair. His response was, "We're not going to have one of those ... are we". It wasn't a question.

It was also a blindingly obvious example of executive management refusal to deal with truth.

Clay's web post has some excellent observations on this management behavior. Don't think about his post as a critique of Obamacare but rather think of it as a warning on management and management's view of information technology. Read the whole thing.

What's Going on in China?

Walter Kurtz at Pragmatic Capital has been watching short-term interest rates in China and is sounding the alarm.

This graphic is the equivalent of the US Federal Funds rate (or the overnight rate banks charge each other). One of the classic signs of an impending recession is when short-term interest rates are higher than long-term rates. It's a sign a central bank is stiffening; although in this case it may be that their central bank is simply looking the other way. 

You do hear stories of empty cities built with cheap money and that Chinese authorities want to curtail this speculative activity. This is one way to do it.

Now, can they do it without triggering a recession. This bears watching.

How Much Do They Know? Really ...

Apparently not much.

I've never studied economic projections but like I suspect most people do, I have a healthy suspicion of them. One of my favorite expressions is, "You can lay all the economists in the world end-to-end and never reach a conclusion."

Here's an example.

 It's the projection of American unemployment (from the Council on Foreign Relations?) from November 2012 through April 2013. Now, it's been a long while since I studied statistics but I think I can safely conclude that they don't have any more of an idea than you or I.

Tell you what; I'll take a while stab at it like they're doing and I'll charge half as much. Deal?

You Say You Want a Revolution!

I've posited earlier on what oil development in North America and the fracking technology will do to the world. Now the world is noticing! This article in Investors Business Daily goes into detail on how the growth of North American oil is starting to rend OPEC apart.

At Friday's Organization of Petroleum Exporting Countries meeting in Vienna, the mask of non-chalance about America's new fracking energy boom came off.

As I've said before, if you want to stop wars for oil and (long-term) Islamic terrorism, this is how you do it.

Capitalism Baby!

The Beginning of the End - Or the End of the Beginning

Sorry to steal from the mighty Winston C. but some facts are coming together that tell me that we are at the end of the beginning of a true recovery.

First, federal tax revenues are up (thank you tepid recovery) and federal spending is down, at least slightly (thank you Sequester!). This reduces what in the old days we called "Crowding Out" which I discussed here and here some time ago.

Second, bank loans to small businesses are up which I discussed here. (The Federal Reserve does not "print" money. It creates banking reserves and the banks then create money by making loans. Cullen Roche had a great comment on this when said that the government has privatized the creation of money.) This is a very powerful stimulant to the money supply in the real world, not in Federal Reserve Land.

Third, the market is noticing. This morning uber-investor David Tepper, being interviewed on CNBC noticed the falling rate of growth of the government's need for money while at the same time the Fed is still creating excess reserves (through QE) and the infamous money multiplier may be kicking in. In paraphrase I lifted from Seeking Alpha he said, 

The U.S. budget deficit over the next 6 months will only be $100B, while the Fed is scheduled to buy about $500B. That's $400B coming out of the bond market and going to investors who can buy more fixed-income, more real estate, more stocks.

 What does that mean? Less money in the hands of inefficient governments and more money in the hands of efficient businesses. What does that mean? Good old-fashioned growth.

Fourth, Obama is now embroiled in scandals. I'm not here to comment on the scandals or Obama. He is, though, seen as aggressively hostile to free markets and any political damage to him will be taken by market makers as a positive sign for markets.

I'm cautiously optimistic that this is the end of the beginning.

Is This the Beginning?

A problem with the Federal Reserve's policies of the last few years has been the lack of a multiplier effect of the easy money (aka Quantitative Easing). The Fed works with the monetary base and the rate at which banks load money in the base creates what's called the velocity of money. This velocity for a long time.

Money goes into the economy when banks in the Federal Reserve system lend against their reserves that make up the monetary base. The monetary velocity has been falling for years and is a key marker of why the Fed has been pushing ropes with quantitative easing.

So, is this changing now? Cullen Roche of Pragmatic Capitalism reports that loans have been growing recently.  If so, this means the money supply gas pedal may finally be pressed down. The recent swing in the financial markets from defensive to cyclical stocks is another confirming indicator.

On balance, this is very good news. Now let's watch for the first tickling signs of our old friend, inflation.

Because Tom Said So - Jefferson on Public Debt

I've posted this before but it bears repeating. Here's our third president on the topic of public debt. From this point on, his words speak for themselves.

“To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our selection between economy and liberty or profusion and servitude.

If we run into such debts as that, we must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our callings and our creeds, as the people of England are.

Our people, like them, must come to labor sixteen hours in the twenty-four, give the earnings of fifteen of these to the government for their debts and daily expenses; and the sixteenth being insufficient to afford us bread, we must live, as they now do, on oatmeal and potatoes, have no time to think, no means of calling the mismanagers to account; but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers.

Our land-holders, too, like theirs, retaining, indeed, the title and stewardship of estates called theirs, but held really in trust for the treasury, must wander, like theirs, in foreign countries, and be contented with penury, obscurity, exile, and the glory of the nation.

This example reads to us the salutary lesson that private fortunes are destroyed by public, as well as by private extravagance. And this is the tendency of all human governments.

A departure from principle in one instance, becomes a precedent for a second, that second for a third, and so on, till the bulk of society is reduced to be mere automatons of misery, to have no sensibilities left but for sinning and suffering.

Then begins, indeed, the bellum omnium in omnia, which some philosophers, observing to be so general in the world, have mistaken it for the natural, instead of the abusive state of man.

And the forehorse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression.”

– Thomas Jefferson 

Where Do They Find the Time?

Omnipresent economics gadfly James Pethokoukis of the American Enterprise Institute has an interesting post on economic growth in the US versus other areas over a veerrryy long time. 

It's pretty cool that our poor, downtrodden US of A outperforms the rest of the world without even breaking a sweat. Only Europe comes close and it isn't really that close.

My other observation is that I wonder how guys and gals like Pethokoukis find the time in their day to appear as talking heads on television, write copious amounts of research and observation, and still stop at the 7-Eleven on the way home for milk? There are dozens of folks out there like that and I'll bet you can name some too. My jealous hat is off to them for their raw productivity.

We're Not Number One!

Here's a nice little tidbit about the ratio of household debt to income in some of the developed countries. Apparently, Americans are not the most irresponsible, profligate tribe on the planet. (The downward trend, by the way, is the deleveraging that continues from the Great Recession.)

  
This chart from The Economic Analyst blog shows that our seemingly frugal neighbors to the north carry more debt per household than do we spendthrift Yanks. Who knew?

Brevity is the Soul of Wit

Well, that's what they say ...

A blogger I haven't read until today named Paul (never trust anyone with two first names) Nathan has a very concise summary of the panic of 2008 at this link. It's a good read if you're confused by all the storm and fury you hear in the mainstream press on the topic.

Before 2008 I never thought I'd live through something like it. I thought our financial betters had learned their lessons from the Great Depression. I wish.

In some respects, I still doubt that they have ... but don't we all?

Nathan raises the point of two great blunders made by the Securities and Exchange Commission (SEC) that didn't cause but did exacerbate the plunge, mark-to-market accounting and the uptick rule.

Adding injury to insult, at the very time the stock market entered a bear market the government made two disastrous moves. First, it imposed the mark to market rule. ...

Further, the government allowed the uptick rule to expire for the first time since the Great Depression. The uptick rule discouraged massive short selling. By removing it as a governor on short-selling it encouraged shorting just as the market began to dive. Not only were these questionable moves, they couldn’t have come at a worse time, reducing liquidity just when increased liquidity was critical.

It's the uptick rule that still puzzles me. Why did the SEC suspend it? It's a very simple rule that has a powerful effect on preventing bear raids on stocks. Since 2008, the SEC has suspended mark-to-market but has still not re-instated the uptick rule.

So, here's a challenge for the financial press. Let's start dismembering the crash of 2008. Next time you have Chris Cox (SEC) or Ben Bernancke in the box, ask them about the questions Nathan raises. I'd love to hear the answers.

If you want to see who is going to guarantee your funds, look in the nearest mirror.

I've seen two posts today that put paid to the notion that Cyprus can't happen here. In fact it is possible (if not probable) that it will happen again somewhere in Euro-World.

Now just for the record, I am not a fan of hyperventilating shock scenarios and predictions of disaster. I am perpetually amused at the commercials for gold sellers that flood the radio waves when I'm out running errands at lunch time. Well, I'm not one of them. Each blip in the economy is not the end.

But this post in ETF Daily News and this one at Seeking Alpha give very detailed and technical explanations of how, in fact, in can happen here.

Again, I want to say that I do not believe this will happen just that it can happen within the legal framework that sits atop our financial system. My money is still in the bank and my retirement account is still at eTrade.

Still, as the ETF Daily News author says, "If you want to see who is going to guarantee your funds, look in the nearest mirror." This will win the award as my favorite quote of the week.

With Friends Like These ...

With friends like these, who needs enemies? This picture (from Pragmatic Capital) compares industrial production in the Eurozone over the last several years.

Everything seems to go swimmingly for the Euros until 2011. Here's the bonus question; what financial event began in late 2010 and continues to this day? (No cheating!)  Okay, it's the European union and the Euro currency struggles.

Oh, and Pragmatic Capital has some other interesting tidbits I'd like to share.

• Spain's stock market is worth 50 percent less than in 2007 and hasn't moved since joining the Euro.
• Italy's market is down 60 percent and is lower than when it joined the Euro.
• Portugal's market is over 60 percent lower and hasn't moved since joining the Euro.
• Greece's market (the most popular example) is down 80 percent.
• Cyprus' market is down 98 percent from its 2007 high. Yes, that's right, 98 percent!

As the title says, with friends like northern Europe, the Mediterranean countries hardly need enemies.

Bail-Outs, Bail-Ins, and Old Fashioned Failures

The recent drama in the Eurozone and, specifically, Cyprus is worth the commentary of people a lot more skilled in financial analysis than I. Future careers at organizations like the International Monetary Fund will be made by young people just now writing their doctoral these on bank failures.

Because an old-fashioned bank failure is what we're seeing happen to bankers, the investors, and the depositors. It's the fate of the depositors that is grabbing the most attention because plain-old middle class folk are being stuck with the bill. How would you enjoy losing 10 percent of your life savings?

The most important turn in this story is the seizure of deposits; what some have dubbed a "bail-in" instead of a bail-out.

So I invite you, dear reader (and bless you, whoever you are), to take a moment to ponder what happened to bank depositors before the Great Depression. In those hoary old days maybe your bank had private deposit insurance and maybe it didn't. If the bank went under you could very well lose your deposits - maybe your life savings.

Which is why the pictures of long lines of people rushing to take their money out of failing banks in the Depression are so famous. Government deposit insurance came out of that as a comfort check for people to keep their money in the banks instead of precipitating a run on a bank and only making a potential failure into a real failure.

Well, that's what's happening today. Europe has now set the precedent that your deposited money greater than 100,000 Euros is now at risk. You had better understand that risk and the solvency of your bank. Depositor beware.

Ta-Da! Give them a Nobel Prize

As I pointed out here and here, North America is now an oil and gas producing powerhouse and it will only grow over time.

What more proof? Check out the graphic and the article here at Pragmatic Capitalism.

The United States has surpassed Saudi Arabia in oil production (at least in November of 2012). Ta-da! (That's the sound a magician makes when he pulls the rabbit out of the hat.) Why, it seems like just four short years ago when America was on an inevitable road to energy decline with no road to redemption. Don't you just love irony?

Now, the fortuitous side effect is what again? Oh, yes, less war over oil. Add to this a seven million barrels a day unmet capacity in Venezuela - just recently removed from the yoke of Hugo (por que no te callas!) Chavez - and suddenly it's not looking like being an oil sheikh is such a hot gig.

The people that developed the fracking technology should get a Nobel Peace Prize.

Suddenly, I Like Him

This is an unusual and off-topic post for this blog but I just have to congratulate Andrew Mason (now the former CEO of Groupon) for his resignation letter, which you can read in full here.

I've never been a fan of Groupon or their business model but this is the most refreshing letter to employees I've ever read and here's a nice snippet.

"After four and a half intense and wonderful years as CEO of Groupon, I've decided that I'd like to spend more time with my family. Just kidding – I was fired today."

In a world where such events are wrapped in more and more twisted euphemisms and management teams move heaven and earth to say anything but the truth, I find this just wonderful. There are  many more gems in his note and I particularly like the comment about finding a good fat camp. Check it out.

Did John Maynard Keynes Understand Money?

This provocative questions come via Pragmatic Capitalism is an excellent and short post wherein the author discovers that Keynes may well have not understood monetary supply.

In my student days, I was versed in the ways of Milton Friedman - the original monetarist. A couple of his books still sit gathering dust on my bookshelf. One of the things I learned was that the government creates money through the banks.

As Cullen Roach at pragcap.com likes to describe it, the government has privatized the creation of money through the banking system. In economics terms this is often called the money multiplier, which, by the way, has been less than one for a long, long time. That is, for every dollar the government prints, less than one dollar is making its way into the economy.

 

(Click on the graphic to enlarge)

The picture is the money velocity within the monetary system of the United States. The top (red) line shows that for every dollar the Fed prints, less than one dollar is making it into the economy. There are a lot of reasons for this (mostly related to the still hampered condition of the banks) but that waaaayyy beyond the scope of this post.

I find Keynesian economics sound but its application in the real world is frightfully bad and it is nothing but a temptation to the weaker instincts of politicians. Now, having said that, did Keynes really understand the mechanics of the creation of money? And, if not, is that failing still having an impact today in our Federal Reserve's actions? Things that make you go hmmm ...

Why Does No One Believe Me?

The United States will soon be a net exporter of oil; if by soon you mean five years or so. Yet when you read the press, it seems that this is a surprise. Check out this link at CNBC.

Our huge growth in oil production should have been obvious to anyone paying even the slightest attention.  

Oh, and as long as I'm snarking ... Do you want world peace? Get the US away from middle eastern oil and it will happen all by itself. 

Capitalism is just simply amazing.

Drill Baby, Drill!

Australia is the next great oil producer? Follow this link to find out why.

Whither Steve Jobs?

Steve Jobs passed away in October of 2011 and it now appears that Apple-The-Magnificent  passed with him.

Apple's stock has been in decline for several weeks as it ran into two immutable facts. The first is the law of large numbers. That is, the larger the company, the more difficult it is to grow. The second is that Tim Cook is not Steve Jobs.

And, in case you don't watch the financial news, Apple stock is getting absolutely hammered today. I personally own some and I had to sell about half my holdings to avoid the bloodbath.

I'm working my way (slowly) through Steve Jobs biography. The book is not as easy a read as I expected because the author spends a lot of time in the minutiae of Apple's internecine spats over product design, office layout, dress codes - you name it.

What I'm learning about Jobs, though, is that he was a truly extraordinary businessman. Henry Ford changed American life with the Model T and mass production. Steve Jobs is the Henry Ford of our time and he changed the way we live our lives in ways that we don't yet appreciate.

But Steve Jobs is gone and Apple has run into the law of large numbers. Tim Cook is not Steve Jobs and Apple is now just another big company. It's a pity.

US Housing Prices Over Recent Time

Huh? No clever title to grab your attention and pull you in? Well, maybe next time.

Here's an interesting graph covering US housing prices since 1975. For those too young to remember, that gray vertical bar around 1990 is what we called the Savings and Loan Crisis. This was the little brother of our more recent sub-prime fiasco and the 2008 crash.

You see, you young whipper-snapper, there used to be a type of bank called a Savings and Loan (S&L). These were local banks chartered by the government to serve mostly local business and the housing markets. George Bailey in "It's a Wonderful Life" ran a Savings and Loan bank.

Well, in the late 1980s the US Congress had the bright idea of arbitrarily increasing the deposit guarantees. If my memory serves (without Googling it) the amount went from $30,000 per account to $100,000 for no particular reason other than an influential congressman's pressure.

Once that happened, money flooded into the Savings and Loans around the country as what we call the risk-free money pool increased dramatically. This created a housing bubble which burst in the late 1980s-to-early 1990s and took down a good number of Savings and Loan banks with it.

The government saved the day (after creating the mess) by creating an agency that bought bad loans from the S&Ls and then sold them into the mortgage market as a discount. The price for this was the shutter the S&Ls involved and allow them to re-open as traditional banks, if they could qualify.

Thus ended the S&L version of a bank.

Honestly, I thought when our current problem started in 2006-2007, that the government would do something similar because it actually worked very well. In fact, the original TARP program was just that but it morphed very quickly into the bank bailouts which are now all so familiar.

So, whither Fannie and Freddie which played a similar role as the deposit guarantee did in the S&L fiasco? Why do they still exist?

Up Up and Away?

Home prices are rising too fast. At least that's what CNBC says in this web article. Although I hardly consider CNBC to be an authority on this topic, it is an interesting take on the now firm rebound in real estate.

The other day I was perusing Zillow.com and Trulia.com for the local real estate market and came across a few listings where the asking price had been raised (that's right, raised!) in the last bit of time. Of course, CNBC is all over this with worry. Oh, well.

As soon as I find something authoritative and graphical, I'll make another post. I suspect this is mostly the famous old "reversion to the mean" in practice.

You Say You Want a Revolution?

There aren't any pretty graphs with this one but here's a link to an article on US domestic oil production and consumption at The American Interest. Our 2012 imports of oil are the lowest in 25 years.

If you're inclined to think that our struggles with the Middle East in recent history have been wars for oil (which they have, but that's a different topic) then here's how to end those wars. Drill baby drill!

In separate new articles, I've seen that at the current rates of production increase, the US will be a net exporter of oil by 2020. Here's hoping.

Can The U.S. Go Bankrupt?

Okay, there will be no suspense on this one. The answer is no.

Why? Because the U.S. (like Japan, Mexico, Canada, etc.) is a currency issuer. That is, if I'm a currency issuer and I have bills to pay then all I need to do is make more currency. The noise in the United States about defaults is caused by the debt ceiling mechanism inside the U.S. law.

Now, one of my favorite bloggers is Cullen Roche at Pragmatic Capitalism and he's a proponent of Modern Realism (MR) which I have not studied formally. (I have formally studied Milton Friedman's monetarism theories, by the way.)

This won't be a sexy as most of my scintillating entries but Cullen has a very interesting short take on the "can we go broke" question that I'll cut and paste here.

"It’s important to understand what govt spending is in the first place.  Most people don’t get this right.  When the govt taxes it takes from Peter to pay Paul.  When the govt spends in excessive of tax receipts it must sell bonds to finance the spending.  So, they sell a bond to Peter to pay Paul AND issue Paul a bond.  So, the deficit spending results in a redistribution of existing money AND the issuance of a net financial asset (the bond).  So, govt spending is really just a perpetual redistribution mechanism.  It’s not really money printing as most people call it (unless you want to call bonds money which is not correct).  The govt sells the bonds basically by bribing the banks to be their dealers.  So the govt doesn’t “run out of” buyers.  Auctions are literally designed not to fail.  But all this spending can cause inflation.  And the issuance of net financial assets can cause healthier private balance sheets to leverage up by borrowing from banks (who are the real money printers).  This whole process can cause inflation which is the real constraint.  Spending in excess of productive capacity could cause the economy to overheat and could cause any number of problems from asset bubbles to real declines in living standards.  So always remember that high inflation is the constraint."

So, there you have it. The real risk in the Federal Reserves perpetual QE is inflation. If you're a seasoned observer as I am then you'll remember the high inflation 1970s. When will QE lead to inflation, if it ever does? Tune in next time.