2nd June 2012: United States Jobs Report of May 2012

May Jobs Report - All Jobs

 

Slate‘s Matthew Yglesias on the United States job report:

 

To understand why persistently high unemployment is avoidable, consider the “breakeven spread” between regular 10-year treasury bonds and inflation-protected treasury bonds. Since these instruments have the same duration and the exact same government backing them, the gap between the interest rates is an indicator of market expectations of inflation over a 10-year horizon. Ever since mid-March they’ve been slumping, probably because of bad news from Europe and the developing world. In particular, the eurozone crisis has increased demand for dollars while signs of a slump in China and India are reducing expectations for commodity prices.

 

Now normally you might think of reduced inflation expectations as a good thing. But one of the signature features of the Great Recession is that throughout the duration stock prices and inflation expectations have been closely correlated.

 

I watched the Twitter feed as the US job report was announced. It was a bearish reaction. A week before I had checked the Dow Jones sectors in Australia and the US on ThomsonReuters Datastream. From mid-March through April there were significant downturns in most Australian sectors although there was off-the-chart growth in defensive sectors like beverages and food.

 

A correlation between stock prices and inflation expectations is not unexpected. Equities investors hope to earn an equity risk premium usually of 5-8% annual returns compared with the risk-free rate of 3-4% in Treasury bonds and fixed income markets (and 8-11% for alternative asset classes like real estate and hedge funds). However, inflation risk can erode the rate of return between the two asset classes. Inflation can also affect the input costs (and hence cost structure and competitiveness) for publicly traded firms. Finally, many equities portfolios are highly exposed to beta market risk and are thus affected by currency and interest rate exposures, unless they are delta neutral hedged. QE3 will not solve these problems.

 

Image: Leader Nancy Pelosi/Flickr.

Mumbai Siege: The Hunt for the Perpetrators

Counterterrorism analysts search for answers as the official death toll from Mumbai’s siege rises to 183 people.  We now enter Susan Moeller‘s second stage of post-terrorist attacks: the hunt for the perpetrators and seeking justice.  See my October 2001 analysis here on the September 11 aftermath and Henry Rollins’ reaction in New York City.

Slate‘s Anne Applebaum observes that we don’t yet know much about the group that carried out the attacks.  Applebaum’s analysis echoes Walter Laqueur‘s ‘new terrorism’ thesis in the mid-to-late 1990s: attempts at mass casualty attacks, tactics from the guerrilla and insurgency playbook, an ideological mix, and groups that either do not claim credit or who are not on the radar of counterterrorism analysts.  Applebaum captures Gregory Treverton‘s distinction between solvable ‘puzzles’ and potentially unsolvable ‘mysteries’ in intelligence analysis.

“The particulars of the attacking group are unknown; the
political-military equation from which the group has almost certainly
arisen is not,” notes The New Yorker‘s Steve Coll.  The most plausible hypotheses for Coll and other counterterrorism experts are: (1) Pakistan’s intelligence services may have funded the group in a clandestine/proxy war with India; or (2) the group emerged as an autonomous cell that was ideologically motivated by the clandestine/proxy war.  Coll explains why at this early stage the Mumbai siege is closer to Treverton’s ‘mysteries’:

If past investigations into such groups prove to be any guide, it may
be difficult to find clear-cut evidence of direct involvement by
Pakistani intelligence or army personnel. This is because Pakistan,
knowing the stakes of getting caught red-handed, has increasingly
pursued its clandestine proxy war against India in Kashmir and on the
Indian mainland through layers and layers of self-managing and
non-state groups. The Pakistani government and its domestic Islamist
proxies, including nominally peaceful charities based in Pakistan but
with operations in Kashmir, almost certainly pass through money and
weapons on a large scale. They do so, however, in such a way that is
very difficult to trace these supplies back to the government.

Applebaum highlights the epistemological challenges that counterterrorism analysts face; Coll offers some guidance on how to conduct an investigation on the basis of ‘contingent’ beliefs and alternative hypotheses.

Pakistan’s government denies any role
in the Mumbai attacks.  Perhaps forensic analysis of crime scene
evidence will provide answers and shift the current speculation from
Treverton’s ‘mystery’ to ‘puzzle’.  Or maybe not.

The next day Coll analyses India’s claim that the group Lashkar-e-Taiba was behind the Mumbai attack.

Duelling Web 2.0 Scenarios: Boom/Bust

Has Tim O’Reilly’s Web 2.0 meme become a high-tech bubble about to burst?

Origins of the Web 2.0 Boom

O’Reilly’s vision of a new Web platform originally fused two developments.

The first development: C, Smalltalk and object oriented programmers devised design patterns in the early 1990s to reuse software code and workaround solutions across projects.  A 1995 catalog catapulted its four authors to software engineering fame.  To capture the rapidly growing number of design patterns programmer Ward Cunningham created the first wiki: the Portland Patterns Repository.

The second development: a re-evaluation of dotcom era business models to encompass new technologies that enhanced the end-user experience including the site interface and information architecture.  Industry buzz around News Corporation’s acquisition of MySpace (18th July 2005), Yahoo!’s purchase of Flickr (21st March 2005) and del.ico.us (9th December 2005), and Google’s stock-for-stock deal for YouTube (9th October 2006) made O’Reilly’s vision the ‘default’ vision for Web pundits and investors.

The media’s buzz cycle soon went into warp speed as Facebook frenzy replaced MySpace mania.  In a move that exemplified the pivotal role of complementors O’Reilly & Associates morphed into the juggernaut O’Reilly Media.  Ajax and Ruby Rails soon replaced Java and C# as the languages for new programmers to learn.  For activists in community-based media, angel investors investing in scalable programming prototypes and international conglomerates seeking to control their industry white-spaces Web 2.0 provided an all-encompassing answer to venture capitalists on how they would change the world.

Two Scenarios: Web 2.0 Boom & Bust

For industry pundits Google’s decision in October 2008 not to acquire Digg may signal the Web 2.0 boom has become a bubble.  If true Google’s decision could be the mirror of News Corporation and Yahoo!’s acquisitions in 2005.  Slate‘s Chris Anderson points to several factors: no tech IPOs in the second quarter of 2008, the cyclical nature of the digital consumer market, the exit of Yahoo! as a potential buyer due to internal problems, market noise due to low barriers of entry for startups, and a smaller “window of opportunity in which startups can think of a new neat trick, generate buzz, and cash out.”  YouTube’s co-founder Jawed Karim adamently believes that Silicon Valley is in a bubble.

Twitter is the latest startup in the duelling scenarios of Web 2.0 boom versus bust. New York Times journalist Adam Lashinsky experiences a similar euphoria to Facebook and YouTube when he visits Twitter’s co-founder Jack Dorsey.  Sceptics counter that Facebook and YouTube have not ‘monetised’ their business models into profitable revenues.  Portfolio‘s Sam Gustin raises the ‘monetisation’ problem with Twitter co-founder Biz Stone who believes that service reliability is a priority over the “distraction” of revenue pressures.  In support of Stone’s position Anderson observes that cloud computing and open source software are lowering the operational costs and slowing the burn rates of startups.

Yet monetisation remains a primary concern for Sand Hill Road entrepreneurs and other venture capitalists.  They differ in their decision-making criteria to Web 2.0 pundits and high-tech futurists: for angel investors and first round VC funding the entrepreneurs will demand a solid management team, the execution ability to control an industry whitespace, and viable sources of future revenue growth.  This is the realm of financial ratios and mark-to-market valuation rather than normative beliefs and ideals which probably influenced the acquiring firm’s decisions and valuation models in 2005-06.

Furthermore, if a Web 2.0 bust scenario is in play, the ‘contrarian’ sceptics will look to Charles Mackay, Charles P. Kindleberger, Joseph Stiglitz and other chroniclers of past bubbles, contagion and manias for guidance.  With different frames and time horizons the Web 2.0 pundits, high-tech futurists and venture capitalists will continue to talk past each other, creating still more Twitter microblogging, blog posts and media coverage.

Several preliminary conclusions can be drawn from the Web 2.0 boom/bust debate.  In a powerful case of futures thinking O’Reilly’s original Web 2.0 definition envisioned the conceptual frontier which enabled the social network or user-generated site of your choice to come into being.  The successful Web 2.0 startups in Silicon Valley have a distinctive strategy comparable to their dotcom era counterparts in Los Angeles and New York’s Silicon Alley.  Web 2.0 advocates who justify their stance with MySpace, YouTube and del.icio.us are still vulnerable to hindsight and survivorship biases. There’s a middle ground here to integrate the deep conceptual insights
of high-tech futurists with the quantitative precision of valuation
models.

It’s possible that the high-visibility Web 2.0 acquisitions in 2005-06 were due to a consolidation wave and strategic moves/counter-moves by their acquirers in a larger competitive game.  There are two precedents for this view.  Industry deregulation sparked a mergers and acquisitions boom in Europe’s telecommunications sector in the late 1990s comparable to the mid-1980s leveraged buyout wave in the United States.  Several factors including pension fund managers, day trading culture and the 1999 repeal of the US Glass-Steagall Act combined to accelerate the 1995-2000 dotcom bubble.  Thus, analysts who want to understand the boom/bust dynamics need to combine elements and factors from Web 2.0 pundits, high tech futurists and venture capitalists.

If the Web 2.0 boom has become a bubble then all is not lost.  Future entrepreneurs can take their cue from Newsweek journalist Daniel Gross and his book Pop! Why Bubbles Are Great for the Economy (Collins, New York, 2007): the wreckage from near-future busts may become the foundation of future bubbles.  Web 3.0 debates are already in play and will soon be eclipsed by Ray Kurzweil‘s Transhumanist agenda for Web 23.0.