Lună: ianuarie 2015

The Crisis of the Middle Class and American Power

The Expectation of Upward Mobility

I should pause and mention that this was one of the fundamental causes of the 2007-2008 subprime lending crisis. People below the median took out loans with deferred interest with the expectation that their incomes would continue the rise that was traditional since World War II. The caricature of the borrower as irresponsible misses the point. The expectation of rising real incomes was built into the American culture, and many assumed based on that that the rise would resume in five years. When it didn’t they were trapped, but given history, they were not making an irresponsible assumption.

American history was always filled with the assumption that upward mobility was possible. The Midwest and West opened land that could be exploited, and the massive industrialization in the late 19th and early 20th centuries opened opportunities. There was a systemic expectation of upward mobility built into American culture and reality.


Re-engineering the Corporation

But there was, I think, the crisis of the modern corporation. Corporations provided long-term employment to the middle class. It was not unusual to spend your entire life working for one. Working for a corporation, you received yearly pay increases, either as a union or non-union worker. The middle class had both job security and rising income, along with retirement and other benefits. Over the course of time, the culture of the corporation diverged from the realities, as corporate productivity lagged behind costs and the corporations became more and more dysfunctional and ultimately unsupportable. In addition, the corporations ceased focusing on doing one thing well and instead became conglomerates, with a management frequently unable to keep up with the complexity of multiple lines of business.

For these and many other reasons, the corporation became increasingly inefficient, and in the terms of the 1980s, they had to be re-engineered — which meant taken apart, pared down, refined and refocused. And the re-engineering of the corporation, designed to make them agile, meant that there was a permanent revolution in business. Everything was being reinvented. Huge amounts of money, managed by people whose specialty was re-engineering companies, were deployed. The choice was between total failure and radical change. From the point of view of the individual worker, this frequently meant the same thing: unemployment. From the view of the economy, it meant the creation of value whether through breaking up companies, closing some of them or sending jobs overseas. It was designed to increase the total efficiency, and it worked for the most part.

This is where the disjuncture occurred. From the point of view of the investor, they had saved the corporation from total meltdown by redesigning it. From the point of view of the workers, some retained the jobs that they would have lost, while others lost the jobs they would have lost anyway. But the important thing is not the subjective bitterness of those who lost their jobs, but something more complex.

As the permanent corporate jobs declined, more people were starting over. Some of them were starting over every few years as the agile corporation grew more efficient and needed fewer employees. That meant that if they got new jobs it would not be at the munificent corporate pay rate but at near entry-level rates in the small companies that were now the growth engine. As these companies failed, were bought or shifted direction, they would lose their jobs and start over again. Wages didn’t rise for them and for long periods they might be unemployed, never to get a job again in their now obsolete fields, and certainly not working at a company for the next 20 years.


What we are facing now is a structural shift, in which the middle class’ center, not because of laziness or stupidity, is shifting downward in terms of standard of living. It is a structural shift that is rooted in social change (the breakdown of the conventional family) and economic change (the decline of traditional corporations and the creation of corporate agility that places individual workers at a massive disadvantage).

The inherent crisis rests in an increasingly efficient economy and a population that can’t consume what is produced because it can’t afford the products. This has happened numerous times in history, but the United States, excepting the Great Depression, was the counterexample.

Obviously, this is a massive political debate, save that political debates identify problems without clarifying them. In political debates, someone must be blamed. In reality, these processes are beyond even the government’s ability to control. On one hand, the traditional corporation was beneficial to the workers until it collapsed under the burden of its costs. On the other hand, the efficiencies created threaten to undermine consumption by weakening the effective demand among half of society.

The Long-Term Threat

The greatest danger is one that will not be faced for decades but that is lurking out there. The United States was built on the assumption that a rising tide lifts all ships. That has not been the case for the past generation, and there is no indication that this socio-economic reality will change any time soon. That means that a core assumption is at risk. The problem is that social stability has been built around this assumption — not on the assumption that everyone is owed a living, but the assumption that on the whole, all benefit from growing productivity and efficiency.

If we move to a system where half of the country is either stagnant or losing ground while the other half is surging, the social fabric of the United States is at risk, and with it the massive global power the United States has accumulated. Other superpowers such as Britain or Rome did not have the idea of a perpetually improving condition of the middle class as a core value. The United States does. If it loses that, it loses one of the pillars of its geopolitical power.

All great empires eventually decline. Will this be the root cause of the decline of USA?

Apple’s Earnings Call notes

Apple – Apple Financial Results – Q1 2015.

My notes:

74M iPhones +46%, 687$ avg, >$50B sales

Tim Cook sees long runway for iPhone 6 because:

-small fraction of installed base upgraded (most to come)
-tons of android switchers
-new users

5.5M macs +14% $6.9B sales
21.5M iPads. No changes – still bullish over the long arc of time, but nothing special coming, apart from IBM partnership for enterprise verticals

App store +41%
iOS developers earned $25B in total
>1 bn iOS devices sold in total
75B revenue in quarter
18B earnings
EPS +48% 3.06$
33.6B cash from operations
Apple Pay: 2/3 of all contactless payments in US
Apple Watch shipping in April
China +70% sales, double iPhone sales
Margin 39.9%
178B in cash
8B returned to shareholders – in total 103B, of which 57B just in the last year
In April will update return program
Guidance 52-54B
Margin 38.5-39.5
Divident for quarter 0.47$ for shareholders of Feb 9
Sales -4% because of US$ appreciation, mitigated somewhat by hedging
Next Q even stronger currency headwinds – about 5%
Gross market % impacted by about 1% – but already included in guidance

Here’s where the pros see opportunity – in Germany

Here’s where the pros see opportunity.

With the Euro at 1.12 providing significant stimulus to German exporters (especially big caps) and the massive QE providing even more upside, I say buy and hold the DAX (currently at 10500), it will be 12000 before QE is done.

A future on the DAX gives much better leverage – but you can lose everything pretty quickly. Same with options.

Anyway, I think this QE thing that was so much opposed by Germany will turn out to be the best thing that ever happened to them.

European Central Bank announces €60bn a month of quantitative easing

After months – no years – of waiting, Mario Draghi finally announced the European Central Bank is pushing the button on quantitative easing.

It comes roughly six years after the US and the UK embarked on their own versions of QE, and more than two-and-a-half years after Draghi vowed to do “whatever it takes” to save the euro.

Here is a quick summary of what we learned:

  • The programme will involve purchases of €60bn a month, split between private and public sector assets
  • Purchases will run from March to the end of September 2016, totalling €1.1tn
  • There is however some ambiguity on the timing of the end of the scheme, given Draghi also said purchases would be “conducted until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term”
  • The governing council’s decision to start QE now was not unanimous
  • The ECB won’t buy more than 25% of each issue of government debt, and not more than 33% of each issuers debt
  • In a concession to Germany (long opponents of eurozone QE), Draghi promised that national central banks would bear most of the risk of their governments defaulting, with just 20% of the new bond-purchases subject to “risk-sharing”.
  • The ECB has not ruled out buying Greek bonds, but said certain (unspecified) criteria would have to be met
  • Draghi said QE would not be enough in itself to revive the eurozone economy – structural reforms at country level are also essential
  • Markets have broadly welcomed the announcement

via European Central Bank announces €60bn a month of quantitative easing – live | Business | The Guardian.

First reactions: 1 EUR=1.14 USD, German 2-year notes have a negative (-0.18%) yield, markets up reasonably, volatility spiked, gold up over $1300.

Methinks it’s a good thing for Europe, albeit way too late. But this is the right path (apart from the radical solution of abandoning the euro). Coupled with growth policies at the European and national level (such as more infrastructure spending in Germany, more structural reforms in places like France and Italy and Cyprus) and less austerity it may even have a chance to keep the Euro alive and kicking into the next decade. However I wouldn’t bet on it. So go USD!

Microsoft announces Windows Holographic with HoloLens headset

Microsoft announces Windows Holographic with HoloLens headset | The Verge.

This „crazy banana pants” stuff is really interesting, because it is so different from the now-dead (ahem, „graduated„) Google Glass – made to be worn only in private, at work or at home, not everywhere.

And Windows 10 will be a free upgrade for the first year. Haha… it took them a while to start their photocopiers. But it really is a new Microsoft. Go, Satya!