Why the smart ones still live at home

Recent American college graduates are each year off to the "real world," as the transition from holding a part-time college job for booze money turns into a full-time job with alcohol-related purchases taking back seat to making money for rent and things like - gasp - groceries. These new (boring?) spending habits are probably a good thing, as besides not being very healthy drinking can also be tough on the wallet. But if Americans could look past the hurry to enter the "real world," and ditch the negative stigma that is sometimes attached to "living at home," parents could gift to their recent college grads an extremely valuable present at almost little cost to themselves: the gift of free rent.

It is no secret that rent is expensive. Judging from cities where this author has friends and depending on the roommate situation, living in Austin, Texas could put you out $400-$900 a month, Boston, Massachusetts could stick you $600-$1400 a month, while San Francisco and New York can ruin you for well over $1500. This author has the honor of forfeiting over $2500 per month for a very small apartment in Hong Kong, eight months out of college. These aren't swanky digs (nor are they dingy); these are the types of places you'd expect for a recent grad with an entry-level position. Doing a little math, an annual figure of between $6,000 and and $30,000 could go purely to rent, with a slightly higher opportunity cost thanks to monthly or up-front payments. That's a lot of money.

For the recent four-year graduate interested in attending graduate school, living at home is a reasonable option to save some serious cash, especially if is entry-level employer is unlikely to pay for future schooling. The same holds true for recent grads eager to get a leg-up on their personal savings. Looking beyond the annoying but inevitable late-night questions from the parents and the potential dulling of one's social life, what is that abhorrent about living at home? Home can't be that bad; who knows, maybe without the tuition payments the parents went wacky and invested in new hot tub or car. Yet even without these (unlikely) incentives, with the extra cash a recent grad may have enough money to put an additional $10,000 towards long-term savings and take that long trip overseas to visit a good friend in, say, Hong Kong.

This article isn't calling for the abandonment of life after college, or the forfeiture of independence so many college grads stumble into (and seem to enjoy) after living on the lam. But the economic benefits just seem so painfully obvious that, if a recent grad is comfortable with the idea of moving home after college (and if the parents and siblings can tolerate it), why the stigma for those who choose to do so? Ironically those recent grads may very well be the smart ones; indeed, the $30,000 annually this author pays for 500 square feet of personal space in Hong Kong doesn't include the luxury of a refrigerator that magically restocks itself every time mom goes to the grocery store.

Home sweet home. . .after the tuition payments?

Regulation of Hedge Funds

Hedge funds are secretive, private pools of money that use either a specific strategy or strategies to make, theoretically, lots of money. Hedge funds are named as such because they hedge against the market, in an attempt to reduce beta (the correlation of a fund's performance in relation to the market). They make money in confusing ways: some hedge funds trade and purchase derivative contracts, others buy stocks long and short-sell as well (making money when stocks go down, not up), other use exotic futures and other mechanisms to make money. But one thing all hedge funds seek to do is obvious: they all seek to make lots of money. They attempt to do that by exploiting a niche in the market that is under-utilized by others, and when they find that inefficiency hedge-funds happily pile in.

This, by nature, makes the market more secure and less risky. The act of locating inefficiencies makes the actor lots of money, but also makes the market more stable by not letting the inefficiency (disparity between value and price) get too large. This is why leaders should hesitate against blindly regulating hedge funds. Currently it's in vogue to criticize the world of hedge funds: jealousy at some hedge funds' ridiculous profits combined with misunderstanding due to hedge funds' secretive nature creates a flow of misinformation about what exactly hedge funds are and, specifically, the good they do for the market and for average, every-day people.

The truth is, most people can't invest in hedge funds. In the US, laws forbid average individuals with a net-worth of less than multiple-millions of dollars to invest, and most hedge funds themselves have minimum investments of anywhere from $500,000 to $5,000,000, making them far too expensive for the average retail investor. But forget the laws: most average people wouldn't even know where to go to get into a hedge fund, even if there was no law. Marketing materials are privately sent to already established individuals and groups. There are no public announcements of results or invitations for capital.

Instead, extremely wealthy individuals, endowments, not-for-profit institutions, capital-pooling companies and some pension funds are the primary investors in the funds. This may raise some eyebrows, especially in the case of endowments, not-for-profit institutions and pensions funds. But the truth behind these organizations is that they invest in hedge funds to diversify and actually reduce risk; they hedge against the market, protecting investors when big standards like the NYSE and S&P 500 go south for a few years. Because they allocate small amounts to these so called "alternative investments," (the broad category in financial-speak where hedge funds fall) should a hedge fund collapse, as Amaranth Advisors did a year ago, it would create but a ripple in the fund and average investors wouldn't notice a change. News readers probably didn't realize that when the stock market tanked between 2001 and 2003 hedge funds were enjoying three years solidly in the black (as was Warren Buffet's Berkshire Hathaway). As middle-class Americans watched their pensions falter and savings decrease, those who owned investments which had diversified parts of their portfolios to hedge funds didn't feel quite the sting.

Because of their secretive nature, there exists much misinformation about hedge funds. But the truth is hedge funds seek to be independent of the market, unlike the major indices and investment houses, making money by using a strategy not overused in the financial sector. This helps hedge funds make profits even when the market is bearish, because generally the strategies are isolated and not entirely correlated to general market performance. An article posted below notes that in the crash of 1988, the biggest buyers in the market were hedge funds (presumably not allowing the market to crash further). And despite the terrible downturn of 2001-2003, the market returned to life in 2004 with hedge funds leading the charge. Huge disparities between price and value like those in 1929 would be difficult to find today, because savvy hedge-fund managers are seeking to make money from incorrect valuations and would undboutedly short-sell overvalued stock, bring the price back down more gradually than a massive decline when retail sellers decide to rush for the exits.

An excellent article on hedge funds was recently printed in the January/February 2007 edition of Foreign Affairs. It's entitled "Hands Off Hedge Funds," and elucidates much more clearly the points I try to make in this article. It can be found here http://www.foreignaffairs.org/20070101faessay86107/sebastian-mallaby/hands-off-hedge-funds.html

The Disaster of Silence

Iran, America and Israel are blundering down a dangerous path towards disaster in the Middle East. Indeed, Iraq is already a disaster. But a nuclear mishap in the region will make Iraq look like a cake-walk.

Iran and America and Iran and Israel desperately need to open diplomatic communication to avert the marginal possibility, albeit an extremely dangerous one, of a quasi-nuclear mistake via an American or Israeli attack on Iran. The obstacles involved in opening telephone line are already obvious. George W. Bush and Dick Cheney are too pigheaded, as is Mahmoud Ahmadinejad. They fail to see open dialogue as potentially beneficial, and instead would rather shoot from the hip and pray that God makes everything okay. Israel and Iran are equally as troubled. Ahmadinejad himself is a Holocaust denier, and hence both his and Israel's desire to open a Cold War-era hot-line seem limited. This is extremely unfortunate.

The stakes are rising, and they rise higher when states can't correctly interpret signals from others. Although Ahmadinejad himself is extremely blighted, Iran's power does not all rest in his hands. His wishes are not necessarily that of Iran, however unfortunately without communication his wishes may become the de facto future course of Iran's international policy.

It is hard enough for great powers locked in silent battle to refrain from war even with communication; The Economist very accurately makes this point in its Leaders article from last week. Even when the Soviet Union and the United States had communication lines open, nuclear war was barely averted during the Cuban Missile Crisis. Without a private channel to convey wills, wishes and intention via diplomatic speak (or blunt assessments), countries with political capital will engage in an escalating public-relations battle that eventually leaves no choice but for conflict. To show the dismal state of America/Israel and Iranian foreign relations, even America and Kim Jong Il's Hermit Kingdom have done far better at communicating with one another.

Through all this, however, Iran appears to be a rational state actor. This is a good start, but a rational actor may believe its acting in a rational way, only to learn that for lack of accurate information about its foe in hindsight such action was truly irrational. Because Israel seems loathe to accept a nuclear armed Iran, Iran's presumed nuclear weapons ambitions may prove to be just that.

One Step Too Far

San Francisco is by any measure one of America's most liberal metropolises. Nearby Berkeley helps round out the eccentricity. Tree-sitting, gay marriage, sex scandals, medical marijuana; it's life in and around the San Francisco Bay Area. It's also a very expensive metropolitan area to live in (trying to get facts was hazy. . . a few websites searched for "most expensive cities" popped up Beijing, China, aka you can live on $0.50 a day if you want, as 14th most expensive, proving that whoever did research for the webpage was either intoxicated, on drugs or robbed of all their cash on the way out of the bank. A city in Cameroon, Africa pops up as 26th most expensive). A search on US ZIP codes has Bay Area-based zip codes taking 12 of the top 30 spots in the country. Whatever the facts, San Francisco is already pretty expensive. San Francisco lawmakers are trying to make it more-so.

San Francisco passed a new law with the high-minded intention of helping underprivileged workers: the law requires one hour sick leave for all employees, full or part-time, for every 30 hours worked. This translates to one day sick for every thirty days worked, assuming an 8-hour day.

This law does four things, one of them good and three of them bad. Positively, it helps out hard-working, underprivileged workers who are taken advantage of by their employers. An employee who is sick should not be at work for productivity and personal health reasons, as well as for others' health; look no farther than those who work with food or have close interaction with others. The number of these employees is probably less than a number to get excited about, but a single story is enough to captivate voters.

Negatively, however
1.) it encourages under-the-table employment. Under-the-table employment isn't necessarily bad, but it's unseen by the government and employees in these professions are ironically more susceptible to employer abuse, not less. This falls particularly hard on illegal immigrants who have no choice but to work illegally. It does not take a leap of the imagination to guess that day-laborers aren't given sick-leave by those who employ them.

2.) it makes work slightly more expensive for businesses which hurts workers, and increasing expense is an upward trend in San Francisco. In 2003 San Francisco passed a minimum wage of $8.50. A wage floor is a foundation for working-class Americans, but an $8.50 wage floor is a tad over the top. Further, San Francisco sales tax is higher than anywhere else in the Bay Area, which may explain why more shoppers head to the East Bay and Palo Alto areas to take care of their shopping. Businesses, loathed by green activists, are the same entities who give life to employees. It is true that many business, unchecked, will likely exploit workers. But this attitude has driven activists to play the zero-sum game of hurting businesses to the point where businesses hurt workers, and these activists forget how far regulation and conditions have improved.

3.) San Francisco is simply passing the buck. This is the most unfortunate trend in San Francisco's misguided economic policies. Business go elsewhere, poorer residents are the biggest losers, and San Francisco's disparity problems, housing problems, and social problems get siphoned off to the suburbs, some in developments which core Bay Area locals also look down upon as the greed of corporate America. While this author has a strong distaste for unplanned urban development, city planners in big cities ignore ignore the fact that it's their own ill-sighted economic policies that are causing social, economic and environmental problems everywhere else. The Bay Area is fortunate because it is beautiful, the weather is nearly perfect and an unlimited number of activities and venues are all within easy reach. It can choose, so to speak, who lives there thanks to the extraordinary cost-of-living. But San Franciscans should not pat themselves on the back if San Francisco ever basks in the utopian sunlight it desires. It should look farther east to the suburbs of Sacramento, and south-east to Stockton, to see what it really has accomplished. Chances are it has simply tossed its problems into someone else's basket.

It is unclear if devout litmus-test liberals are so because they truly care about helping the less unfortunate, or because their parents gave them too much free time and free money as children. It's nearly as contradictory as the vegetarian who knows eating meat isn't entirely healthy, and explains this and the problems with corporate America while smoking a Camel. This is for certain: San Francisco will probably be a nice place to live for a long time. It's unclear whether or not it will be a great place to work.


This article is based on this article, and this article, both in the San Francisco Chronicle.

The Great Hype of China

It takes less than 2 minutes to cross the Lo Wu bridge, an enclosed concrete arc over no-mans land that spans a narrow greenish/brown river held back by straight cement walls, with dark coils of thick circular barbed wire flowing atop them. To the back are the customs booths of Hong Kong; 100 meters to the front lies those of the surging, rising, popular China.

Thousands of shoppers pass through the customs gates at Lo Wu on the Hong Kong/China border headed from Hong Kong to the markets of Shenzhen, an enormous city situated on China's southernmost border just 100 meters past the Lo Wu gates. Shoppers come with enormous bags folded over arms and suitcases rattling in tow; many walk briskly across the country-less bridge, eager to pass Chinese customs towards the self-emblazoned "Shopping City" situated on the Shenzhen side, an enormous reflective-glass edifice home to millions of cheap goods. In the evening the ritual is conducted in the other direction, bustling shoppers surging through Chinese customs, across the bridge, high above the barbed wire and through Hong Kong customs towards home.

This surging flow of people towards Shenzhen looks like a symbolic reenactment of the China effect on the world. Indeed, via a more complicated distribution method, millions of western shoppers every day head through Chinese customs, plucking up cheap Chinese goods as they finish online Christmas shopping or buy the perfect birthday present at the mall. Maybe because of this, Americans have caught the China bug: some point to China's rise as a model for strong government, others point to China as a rising threat; everyone has an opinion. But one agreed-upon theme stands out: China is rising.

Many think they alone happened upon this China epiphany. This article poses a question: Instead of throwing arms up in praise of China's rise, shouldn't the response be a more blunted "duh"? With the unlimited potential of 1.3+ billion people, abundant natural resources, an enormous coastline, a hard-working and intelligent society, it certainly is convenient when disastrous political ideas like Mao's "Great Leap Forward" and the Cultural Revolution disappear from view for over 30 years. Even events like Tian'anmen Square are dwarfed domestically by the tragedies unleashed during Mao's tenuous 25+ years at the helm. In turn, the government has done much good in the past 30 years which allows great economic effects to be felt.

Although the CCP maintains a monopoly on power, this much is true; basic education is relatively widespread, running water flows more places now and famines are unheard of. Basic life is simply much better for Chinese citizens. Even controversial projects mean (relatively) well: a massive dam over an active fault-line isn't the world's smartest idea, but brownie points for facing the future energy needs for an enormous region. The world's highest railway, connecting Tibet to the rest of China, doesn't win-over fans of Tibetan culture, but it will bring more wealth to one of the poorest regions of China. Yet despite these relatively good intentions, a monopoly on power is dangerous and deceptive. China is being held back by its current government, not helped.

It seems likely that China has all the pieces of a puzzle that needed to be fit together. And the puzzle is being put together, sort of. Roughly 10% GDP growth per year is incredible, while the positive changes in Chinese citizens' lives in 30 years is staggering. Yet the redundant, obviously negative facts about China raise legitimate questions about whether China's "rise" is as spectacular as some claim, and begs to ask if China is still sacrificing due to a backwards government that fails to understand that economic freedom is not compatible with authoritarianism.

In a nutshell, the CCP restricts the free flow of information in China by censoring media outlets and skewing educational standards. The CCP argues under a thin guise that such policy is for stability and the economy, and quietly points to China's economic miracle as justification. An economy can be mobilized without freedom. But an economy will not become the "next United States" unless it allows its citizens creative freedom to pursue a free market in all realms, even if it means infringing on the CCP's monopoly on power. The common rebuke is that China is, and will, gradually change its attitude towards freedom, and eventually all Chinese will enjoy rights similar to those of Japanese, Europeans or Americans. Everyone should sincerely hope this is the case. But the CCP is stubborn, and devout China watchers over the past few years have grown wary that regarding the free flow of information, the country is closing up, not opening.

Chinese Premier Hu Jintao recently has vowed to "purify" the internet, quoting an article in the South China Morning Post originally run by Reuters (found here). This isn't surprising, but it is troubling. An estimated up to 30,000 CCP officials' sole job is to police the internet. Surfing the internet in mainland China, if you haven't had the opportunity, is a remarkably antagonizing experience (numerous websites like BBC and Wikipedia in English are simply blocked, internet surfing takes painfully long at seemingly random times, and searches for things like "Tian'anmen Square" and "Falun Gong" turn up empty). Possibly a cause for its own censorship, Wikipedia has a great article on the matter.

There are other troubling signs as well, as well as some misunderstood positive ones. A Beijing court recently upheld a petty verdict against a New York Times employee (Zhao Yan), Shandong police beat up a blind rights lawyer for exposing corrupt officials, a second rights lawyer in the province was sentenced to jail for a similar offense, and a Hong Kong reporter was given a jail sentence for allegedly spying for Taiwan. The CCP still hasn't resolved the tragedy of Dongzhou in 2005, when between 3 and 40 villagers were shot by police while protesting in the largest known atrocity since Tian'anmen Square. And even as pundits praise China's recent crackdown on corrupt Shanghai party bosses, many fail to realize that crackdowns are common in the year leading up to the Communist Party Congress (held this year), as the premier uses "corruption" charges as a convenient way to complete a more sordid task: consolidating his own power within the party (the New York Times ran a few commendable pieces on the phenomenon).

The power to think creatively and compete in the name of efficiency, growth and more fulfilling human life will not happen unless people have enough freedom to challenge the status quo. Life without freedom is sterile, one-sided, and unknowingly blinded to the potential and rewards offered by competition and the free flow of ideas. China has yet to learn this lesson, probably a result of its recent economic success. Yet China doesn't need to look far to see the choices made by people who are given one between two systems, between freedom and not. China simply needs to focus its gaze south to Shenzhen, on the border of Hong Kong and watch as, at five o'clock sharp, thousands of shoppers repeat their morning ritual in reverse, streaming out of the Shopping City, lining up at the customs gates, passing over the Lo Wu bridge, and back into Hong Kong territory and freedom. Because the freedom to shop isn't real freedom. The freedom to think is.

iPhone looks cool, but you may not want to buy. . .

. . .stock in Apple. Right now there are millions of articles about the iPhone. But a few of those articles have odd pieces of advice, chummy rumblings like "you better buy Apple stock." One young respondent in an informal San Francisco Chronicle survey half-jokingly wondered if he should open an online stock account just to buy Apple.

Benjamin Graham, the founder of value-based investments, would grimace. He differentiates investment - buying shares in a financially-sound company whose market value is discounted from the fair value, giving the high probability of long-run positive return - and speculation, or buying shares in a company for any other reason. Investors make money in the long run. Speculators can make wild returns, but they can also make wildly bad bets leading to very poor financial results.

A little about AAPL, the four letters that are Apple's ticker symbol. AAPL is trading at a Price/Earnings ratio of around 41.5, well ahead of Microsoft's 26 (Google is roaring along with a P/E ratio of 68, Research in Motion is 62.53). What does this mean? The P/E is stock price, now between $94 and $95 per share, divided by Apple's earnings per share, a very respectable $2.27 in October 2006. EPS is calculated by dividing Apple's net income ($1.99 billion for Oct05-Oct06) by the total shares outstanding (877 million). The P/E can be seen as the market's view of a company's future growth - a company with no growth should trade at its net book value, aka the value of assets (including cash) minus liabilities (like debt and depreciation), + the value of its annual profits, ideally paid in dividends. Valuations above a company's book value (virtually all stocks on the market) are thought to be incorporating future returns. With Apple's P/E of 41, it will take Apple 7.5 years to reach the future level where investors value (or rather, anticipate) Apple to be, if Apple's annual growth retains an average of 50% over the next 7.5 years*. If Apple maintains "modest" annual growth of 25% (an enormous task of any company), it will take Apple 15 years to reach that valuation.The P/E ratio is also a good comparative ratio, allowing the market's perception of Apple's future to be juxtaposed with competition.



An important man


Comparing Apple and Microsoft is not a perfect comparison, but it seems an oddity that the market is more bullish about Apple than Microsoft. To explain this author's view why buying AAPL is more speculation than investment, here are 10 reasons:

1. Apple is not Benjamin Graham's definition of a financially-sound company, because Apple has experienced wild fluctuations in profits and revenue. iPod is the latest revenue fad, which gave Apple in the year ending Oct2004 a 287% increase in net income, 500% in 2005 and 50% in 2006 (25% would be considered very commendable). Yet many consumers have already forgotten that in 2003 Apple only increased net income by 4.6% over 2002 (in 2003 actually lost operating revenue, and only made money on interest off its float), and in 2001 Apple actually lost money. This probably points to the high degree of Apple's linkage to consumer sales, which are exacerbated by market conditions (2001-2002 were trying times for many companies). Further, Apple's recent drop in growth rate (to 50% from 500%) is part due to saturation of iPods in the market, part slowing consumer sales overall, and part the law of large numbers. Microsoft was not hurt like Apple during the 2001-2002 downturn (see below).
   
2. Microsoft has not lost money in any of the last 13 years researched for this article (since 1994). In fact, Microsoft increased net income every year except 2002, when it's $5.36 billion net income was below the $7.35 billion net income in 2001. Apple, in turn, has lost money in three years since 1996: in 1996 Apple lost $816 million, in 1997 Apple lost $1.1 billion, and in 2001 Apple lost $25 million. These are not positive signs for sustainable long-term uninterrupted growth.
   
3. Steve Jobs has a very small, but real, chance of being removed as CEO due to a backdating scandal. He also may have a recurrence of cancer or be incapacitated in a way unforeseen by investors. Steve Jobs seems more vital to the future of Apple than other executives are to the future of their companies.
4. Apple's current business model is the "wow" model. A beautiful product wows consumers, who buy (including Wall Street). This is a dangerous precedent: it's hard to keep impressing consumers (and Wall Street), over and over and and over again. The computer business and iTunes store are nice supplementary ways around this model and Apple should be commended for these, but they do not make up a large enough part of Apple's revenue stream.
   
5. The iPhone, if successful, may compete with the iPod (an Apple cash-cow) for sales.
6. More on the iPhone. The market is betting that the iPhone is a hit like the iPod. This may be true. However, iPod practically created the market for MP3 players and slowly morphed (and improved drastically) from cult hit to must-have accessory. The iPhone doesn't have this opportunity; expectations are already sky-high. Apple has to hit a home-run on the first try.
   
7. Apple makes excellent products, but those products still exist in a fiercely competitive field littered with manufacturers who, although it doesn't seem likely now, could produce a "hit" product which could slice Apple's market share from their valuable iPods. Consumer electronic buyers are notoriously fickle and cold-blooded.
8. Microsoft, not nearly as hip as Apple (see clunky picture), has a near-monopoly on PC operating systems and oogles of software. Monopolies stink for consumers, but make investors lots of money. PC computers come loaded with Windows (Vista will have problems, but people will buy it anyway, for lack of choice). People use MS Office. And as Apple tries to take tiny chunks away from Microsoft's monopoly by selling Apple computers, Microsoft is also working against Apple, creating the not-so-popular Zune and Zune music marketplace, and the Xbox, which may compete with Apple more than the consumer thinks. The Xbox360, and a possible second-generation Xbox360, will attempt to thwart Apple's eventual push to the living room.
9. Microsoft doesn't have to do the work Apple does, and makes lots more money because of it. This means Microsoft can try ventures and cheerily fail at them; Apple isn't quite so lucky. Apple's cost of revenue as a percent of gross income is 71%. Microsoft's ratio is an almost-comical 16% (indeed, Apple's revenue is almost $20 billion, almost double what Microsoft takes in. However, after cost of income, research and marketing, Microsoft is left with with nearly 9x the net income).
   
10. Microsoft pays a regular dividend, and has so since 2002. Apple's last dividend payment was in 1995.
    

No cost of revenue, eh?


This doesn't mean Apple stock won't shoot up tomorrow. Steve Jobs may introduce the iRobot, iMassageTherapist and iToilet, and speculators may continue to boost Apple's share price with their fingers crossed that the iPhone will be the next cash cow. It very well may be, because Apple has done so in the past. It's just not as certain as its stock price may suggest.

This also doesn't necessarily mean Microsoft is a great value, it just seems a better one that Apple. The AAPL story doesn't seem to make sense for value-seeking, long-term investor. It's not that there's something wrong with Apple, Inc. - it's that there's something wrong with the way the market values it.



*To calculate, take the natural log of 41, and divide by % expected earnings.

The future of the past

A new face on an old idea.


This car represents the face of the American car industry's future. Both Ford and Chevy, the latter a flagship brand of GM, are looking back to the good ole' days of American muscle, when gas prices were irrelevant (probably because they weren't $3 a gallon) and when the only "trans" in the news was the legendary TransAm sports car. The makers recently at the Detroit auto show released prototypes of cars to hit the market beginning in 2008-2009, and it seems that when all else fails, as it has, the companies are hoping the glorious past can revive the bottom line.

For American companies, the recent Detroit Auto Show has given Detroit a chance to show their future wares, but has also forced American car makers' plights under the magnifying glass, and it's not necessarily an enviable plight. The companies (GM and Ford) are losing billions of dollars each year (Ford lost a cool $2.4 billion alone in 3Q 2005, GM lost a measly $800m), Toyota just passed Chrysler and is poised to slip past Ford into position as the #2 U.S. seller, and while the U.S. companies are struggling with layoffs and cost-cutting their Japanese rivals are building more plants in the US. GM recently complained in this article that Toyota now has more lobbying clout with congress.

Forget the financials, and try to remember how these companies generate revenue: they sell cars. Unfortunately the American companies haven't been able to do that very well recently. Why is that? Well, have you asked yourself recently if you really want to by a Ford or GM? With zillions of SUV and pickup truck options, and bland-looking efficient models (this author wonders if it is strategy to make gas-efficient-models physically unattractive), the onus, of course, will be on you to answer that question as a consumer in the coming decade. I certainly cannot make predictions.

It does, however seem a bit disappointing that "concept" cars of the future are really old designs dug out of the glory days. Will the new TransAm, the redone Camero (in a picture at the top) and Ford's promise to produce a new Mustang each year as it did in the 90s really resonate with today's buyers? Are muscle and extra cup holders more important than gas-mileage, utility and luxury? Cadillac (a GM brand), in an ad campaign over the holiday season, hyped free navigation systems, as if to broadcast to the consumer that satellite navigation was finally available in their cars (and possibly admit that it's more convenient to use an onboard system instead of call someone via the *On-Star system. Who wants to have to call a real person when a cool computer can show you a map, anyway?). I still remember in the mid-1990s when I first saw a Lexus equipped with satellite navigation, over five years before any Cadillac model could say the same. Further, Ford and GM's newest cars do not offer the plethora of less gasoline-hungry models that expected, although it seems that at least in the short-term Detroit gambled correctly that oil prises would continue their free-fall, now nearly $50 a barrel, down from being regularly over $60 in the past year and reaching $70 at one point.

This could be short-sighted, especially in regards to oil consumption. First, for better or worse, oil will continue to be a political lynch-pin and a reasonable argument stands that an addiction to oil isn't necessarily great for American national security interests. Second, global warming is still warming. As the crisis becomes more serious, more and more states will place further restrictions on auto emissions and oil consumption. Third, gas prices could rise again in the future. Their low price now is no guarantee that they will stay here for good.

Recently on a family vacation, a rental car salesman offered my parents a large Chevy SUV instead of the mid-size car they had ordered. When they turned him down, he offered to let them pay for the compact-size car and still take the SUV. Strangely, the GM and Ford concept cars of tomorrow have gas mileage only slightly better than their SUV lines. That same salesman is probably grimacing.

A must-read article

If there is any article anyone interested in international affairs should read, it was recently written by The Economist magazine in their annual "The World" edition ("The World in 2007," identifiable by the giant picture of a pointing George Bush on the cover). The article is about what it perceives as the declining role of the nation-state in world affairs. See "The Authority Deficit," in the "Leaders" section, by The Economist foreign editor Peter David.

The article points out that many states have less authority over their citizens than before. This makes sense, because it seems likely that tools like the internet and a truly global economy takes some of the umph - that is, a monopoly on information - out of many governments and gives that power to the individual. Governments, many of which naturally gravitate towards power-consolidation, are simply losing the battle to dictate the direction and orientation of its citizens.

What fills this this void? The article insinuates that NGOs, the UN and Islam. Islam, the article discusses, fills this void by allowing for a truly individual religion that gives Muslims and would-be Muslims the ability to read and interpret the Koran as they see fit, "Commendably democratic - and dangerous," the author comments. The author sums it up like this: "[This system] lives every Tom, Dick and Osama with access to the web and a Koran free to interpret the truth path as he pleases." Like in Iraq, a powerful, if not brutal, government can discourage this mobbish form of democracy (which, mind you, could take place anywhere and with any idea, Islam just happens to be the fad); once the dictator falls however, the winds of chaos may take over. I certainly agree.

The author does not recommend giving the state more power, because it will hurt the free movement of "ideas, capital and labour." True, indeed. However, as a recommendation the author settles on strengthening international institutions. The author may be right, there is always that possibility and the idea and motions of the UN is certainly a good one. But when is the UN actually able to act on critical issues of the times? By the author's admission, the UN has ordered Iran to stop enriching uranium (it hasn't), North Korea to give up its nuclear bomb (nope), the Sudanese government to stop killing its own civilians in Darfur (no), and Hizbullah to disband (hasn't happened yet. . .). The author has some interesting and thoughtful points - how relevant can the UN be when Russia, a has-been third-world country with a backwards economy, has a veto power but Brazil and India don't? Yet will the edition of these countries and more money, i.e. the "strengthening" of the UN, actually make it stronger? Until states regularly send massive amounts of troops to enforce resolutions, dreamers can keep dreaming of a reality about as plausible of winning the Mega Millions lottery seven times in a row. Unfortunately for humanity, states don't have much of an incentive to spend their soldiers to the middle of Africa.

Yet maybe the author is concerned about the wrong things. I'm inclined to say the author is (very intellectually) engaging in the pessimism of the times, worried about terror and the glorification of Islamic terrorism (or, as the thoughtful Fox News Channel calls it, "Islamofacisism"), and concerned about a too-powerful America that may possibly start a decline. Yes, states are losing power in the sense of control over their citizens via information. But their citizens are also growing wiser and more savvy with this information, making them better-equip to solve tomorrow's problems and governments will adapt, accordingly. It is, remember, those same citizens who eventually will be part of the government. So maybe we don't have to worry about the "decline" of the power of the government, but maybe we should talk about how the government needs to evolve to better suit today's needs. It's my own prediction that the United States probably isn't going anywhere any time soon, Osama will be a fad, and that in 15 years something new will be news that journalists will struggle to understand.

It seems that the images of AK-47 wielding terrorists in Iraq have gotten the better hand of many people, including some of the smart authors at The Economist. Is the power of the state really waning? Maybe, but I doubt it. The state has remained a powerful tool entity since its creation, and I doubt the internet and RPGs are going to destroy it. Instead, they will simply make it evolve.

Netflix v Blockbuster

Blockbuster has stepped up its attack on rival Netflix, pushing its online subscribers past the 2m mark (Netflix still has a comfortable lead with nearly 6m subscribers). Who will prevail, can they coexist, or are they both doomed in the long-run? I read their advertisements, surfed their internet sites, signed up for the free trial from both Blockbuster and Netflix, and still couldn't come to a conclusion.

Blockbuster or Netflix?
As advertised:
Netflix has more: Titles, 70,000, compared to Blockbuster's 65,000. Rental plans, 6 compared to Blockbuster's 3. In addition, Netflix has a 4-at-a-time plan, while Blockbuster's largest plan is a 3-at-a-time plan. Free trial time, Netflix gives you a month, Blockbuster gives you two weeks.
They both are the same on: Price, and with both you are charged rental tax, usually the same as sales tax, in almost every state.
Blockbuster has an advantage in: Having lots of stores, because you can return either Blockbuster OR Netflix movie titles to many Blockbuster stores, to get a free in-store movie rental. The Blockbuster store returns the movie for you, and the next movie in your queue is sent.

As surfed:
Both of them are rather similar and use a queue to line up movies you want in the future. It is slightly more difficult to find out about Blockbuster's two cheaper plans, probably because they want you to sign up for their 3-at-a-time plan.

As tried:
*Netflix movies routinely came a day faster than the Blockbuster ones. Netflix movies sent out on a Monday were received by Netflix on Tuesday (confirmation sent via email) and a new movie was received on Wednesday. With Blockbuster, I received the new movie on Thursday.
*Blockbuster lacked a few obscure (Chinese) titles I was looking for, which Netflix happily coughed up with one click of the "search" button.
*I forgot about the in-store feature that Blockbuster offers
*Both Netflix and Blockbuster carry Playboy movies.

The Blockbuster deal does sound appetizing considering the in-store option. However, how often would people actually use that plan? A local video-store owner, who I had a chat with as I rented movies with the intention of ripping them to my iPod, told me he actually thought the Blockbuster strategy was a good one. He said many of his customers who use Netflix still come in on the whim to get a movie for something spontaneous. He reckoned that in the long-run and considering Blockbuster's sheer number of stores, the Blockbuster plan may be appetizing for those types of people (This is obviously assuming that eventually, Blockbuster will stop accepting Netflix rentals for free in-store Blockbuster rentals).

Maybe the video-store owner isn't right, though. Our generation demands quick service, and who wants to drive to the video store, anyway? That requires remembering to put the DVD in the car, driving, parking, walking into a store, browsing, waiting in line and driving some more. Indeed it's a nice option, but will people actually use it? Is Blockbuster's store option worth the extra day wait for the movie? And why doesn't Blockbuster have as many titles as Netflix? Haven't they been in the business longer? If Blockbuster can add distribution centers to cut down on delivery time, and if they can expand their selection, Netflix may need to reconsider. But Blockbuster isn't there yet, and who knows. . .maybe Blockbuster will consolidate with Netflix (a move that inevitably will pain us consumers, woe the lack of competition).

But the real question remains. What about people like me who rip DVDs to their iPod? More specifically, what about downloads and pay-per-view? A friend who's a financial analyst covering Netflix doesn't see this happening any time soon. He points out that DVDs, around for over a decade, are just now achieving full penetration in the market (suggesting that technology still takes a while to reach the full consumer audience). Plus, digital-rights-management technology is cumbersome, with companies like Apple and Sony subscribing to different standards which makes it confusing and annoying as a consumer. Further, broadband will increase in speed, but when and by how much? To download movies that are 7-10 gigabytes, you'll need some serious speed if you want to download a 2 hour movie faster than driving down to the video store and driving back.

Who knows? Let's wait and see.

War on the Cheap

War is brutal, unforgiving and recurring. No Americans except for the 3,000 dead soldiers have seen the end of today’s Iraq war. Yet even though war occurs with (disturbing) frequency, leaders still fail to grasp two hard truths: 1.) more troops win more wars, and 2.) more technology will augment troops, not replace them.

1.) More troops, not less

People have a hard time understanding large numbers. In Vietnam, Defense Secretary McNamara was famous for wanting body counts, ostensibly in the name of attrition against North Vietnamese forces to the point where they could no longer fight. Today, news reports from Iraq and Afghanistan eagerly report numbers of insurgents killed, as if some tangible aggregate number of enemy was being reduced with each felled terrorist. This is problematic.

It is virtually impossible to kill the enemy fast enough for complete attrition. In Iraq alone, approximately 385,000 males will turn the age of 18 this year (a similar number will turn 17 and 16 respectively). Approximately 256,000 Syrian males will have their 18^th birthdays this year, as will 660,000 Iranian males, and some 38,000 Palestinian males (see the CIA Factbook and "Palestinian People" on Wikipedia for age demographics). Were America to go to war with Iran, looking simply at attrition rates America would have to kill 660,000 Iranian soldiers in one year just to keep the number of fighting-age Iranians from growing. That is nearly 2,000 combat kills per day.

Clearly the above is a simplification. Yet the point should be clear that counting kills is a fanciful game of misdirection. Unfortunately, America’s move towards a smaller, more mobile army subtly pays heed to this philosophy of enemy kills rather than enemy coercion. The small army hopes that by mere attrition of enemy forces the enemy will capitulate. But the smaller army is solely reactionary, and cannot hope to raise the costs of resistance to terrorist forces. “Small and mobile” overlooks the hard costs that the enemy is willing to sustain to reach his goals (autonomy, religious rule, new territory, etc.). Currently, to envision America’s forces in Iraq, imagine a small brigade of well-equip firefighters, racing around a vast wilderness trying to fight a thousand different brushfires at once.

More troops per square mile, even if the troops are less mobile, can raise the immediate cost of resistance to terrorist forces in a specific area (by making their goals too costly). The cost of resistance must be raised to exceed the enemy’s value of obtaining his goals. Without proper ground-force size, enemy forces can identify locales where troop-strength is weak and can concentrate their activity in these regions, less likely to be disrupted. There must be overwhelming friendly troop concentration in the area of attention; splotch and blotter strategies are short-sighted and flawed.

Obviously, these lessons are now painfully apparent to the American military planners regarding Iraq. But these lessons often must be relearned, and that is costly.

2.) Technology the (un)replacement

It seems appetizing, due to a public distaste for war, to reduce the size of infantry forces. Leaders need to resist this pressure, because humans are better at identifying enemy forces (especially guerilla ones) than machines due to a superior adaptability and sensory platform. Bombs, once a cutting-edge technology, destroy more things than they need to. Cruise-missiles, a newer advancement, are still fired from distant platforms and insurgent targets are often gone before the missile arrives at its destination. Enemy forces learn to conceal their weapons and fighting positions, strategies in Iraq that render bombs and missiles less effective because of fear of collateral damage, incorrect target-identification and the time-lag between target identification and target destruction.

It seems difficult for leaders to learn the value of a large ground-force element. Israel this summer embarrassingly attempted to cripple Hezbollah via air power, a strategy doomed to failure due to the time-lag element of air weapons-platforms, the difficulty with target-identification, the risk of collateral damage and the guerrilla-like strategies employed by Hezbollah (blending with and living on the local population, and primarily using rudimentary weapons).

The airplane is an interesting analogy when discussing the substitution of technology for infantry. The aircraft was introduced as a cutting-edge fighting vehicle in World War I, hailed as humane replacement for the bloody trenches that marred the western front. Battles would be fought and won in air; armies would be superfluous. In 1939, after Hitler invaded Western Europe, western tacticians concluded that a strategic bombing campaign would coerce Germany to surrender. This didn't work; although 300,000 German civilians were killed and over 1 million rendered homeless, and despite attacks on factories, rail yards and oil fields, the German war economy actually peaked between the end of 1944 and 1945 and the German morale did not “break.” Instead, industrial production was spread out, substitute products were found for "necessities" (German engineers nearly eliminated ball bearings from plane designs), and Hitler's oil supplies were only eliminated after ground forces captured the Romanian oil fields, despite numerous bombing attempts to put them out of action. Successful bombing operations only occurred mainly in conjunction with friendly ground forces, like strafing enemy troops, bombing rear-area supply networks, and destroying front-line communications and transportation hubs to impair enemy troop movement.




The Serbian engagement of 1999 is another interesting example. It took the United States, along with its NATO allies 78 days to force a very limited conditional agreement on a small, third-world country (Yugoslavia). Over 1,000 F-16s, F-18s, F117 stealth fighters and B2 stealth bombers didn't have the overpowering effect despite just a couple B2 bombers having a net worth of more than Yugoslavia's GDP. These expensive platforms are often described as making “war on the cheap,” in reference to the value saved in human lives. The lack of proper conflict resolution, leading to future conflict, is always overlooked in these calculations. Unfortunately, it seems unlikely that the reality of war’s expense will ever be learned soon, despite America’s failures in Iraq.