SalesQualia is my new home

You probably found this blog because your search "Scott Sambucci" on Google. Cool. I don't blog here anymore. Instead, check out:

www.salesqualia.com

Catch me there. Looking forward to your visit soon.

Bye Bye Blospot... On to a New Location

If you're one of the two people that stumbles across my blog this week, please note that I'm now hosting and writing at a new location:

www.freemarketvoice.org

It's a WordPress-based blog now - a little more functionality and better authoring tools. Sometimes change for the sake of change is a good thing. See you over at the new blog site...

Monkeys & the Housing Bubble

Good news - monkeys would have taken option ARM and pay-as-you go mortgages too:

For more about Human Irrationality, check out Dan Ariely's blog and his book - Predictably Irrational.

Equilibrium Economics & DSGE

Many thanks to Greg Mankiw for posting the link on his blog to Robert Solow's prepared statement to the House Committee on Science and Technology Subcommittee on Investigations and Oversight - “Building a Science of Economics for the Real World."

I didn't realize it at the time, but I was introduced to the field of DSGE (Dynamic stochastic general equilibrium modeling) economics in part last year at the "Stimulus SmackDown: Can Deficit Spending Save the Economy?" hosted at the University of California - Davis where Michele Boldrin expressed his view from the vantage point of equilibrium economics, of which DSGE is a branch.

Why is does this matter?

Along with other explicit reasons to mistrust DSGE as a viable economic theory, Solow explains:

The only way that DSGE and related models can cope with unemployment is to make it somehow voluntary, a choice of current leisure or a desire to retain some kind of flexibility for the future or something like that. But this is exactly the sort of explanation that does not pass the smell test.

Much of today's political approach to economic cures focuses on reviving the Keynesian/government intervention approach. Robert Solow developed the Solow Eocnomic Growth Model (yes, that Solow...) and his economic standpoint falls on the opposite end of spectrum from Keynesians and New Keynesians.

It's reasonable to generalize about economic conditions and accept that there will be gaps and holes in describing how economic events and policies affect each individual participant. There's certainly no accounting for taste (as microeconomists often state) and how participants respond or are affected by each new macroeconomic condition may in fact change each time because of amultitude conscious and sub-conscious factors weighing decisions. While noble, the notion that modeling macroeconomic activity as a construct of measured individual decisions emits a certain arrogance that individual human behavior can be predicted and subsequently controlled through economic policy.

Solow, Friedman and scores of other free market economists have long shown the positive effects of less government intervention and empowering individuals to make their own economic decisions. While some will choose poorly and even irrationally, the aggregate optimizes their situation with any set of given constraints. Most importantly, I simply want the liberty to make such decisions. It's just not possible to predict how the individual, on an individual basis, will respond to conditions at any one point in time.

The complexities of individual choice border on infinite and have long been articulated. Nobel prize winner Hebert Simon published his paper "A Behavioral Model of Rational Choice" back in 1955 (and even used the housing market to illustrate his point...).

I'm not suggesting that DSGE economists are seeking to control behavior, but a general Keynesian approach that includes modeling nearly infinite variations for individual players just doesn't seem right.

The Social Media Monopoly

Interesting article on Wired today - 5 Thinks That Could Topple Facebook's Empire. It's fun and easy to create this lists - 5 things that..., 10 things that... - but thought-provoking nonetheless.

Terms on a patent are 20 years, but businesses of the Facebook sort are difficult to make patentable, let alone enforce any legal restrictions on design or usability. (Ask Apple how that went with Microsoft a few years back.)

This effect shrinks the window of opportunity for a company like Facebook to capitalize on their monopoly and create an infallible social network medium. But, infallibility is more of a quixotic notion that one borne in reality. Technology companies with enormous market and mind share are constantly getting nipped in the heels by direct competitors or emerging niche players in the very same industries that the Facebook-like companies helped to create - Skype with other VoIP providers or eBay with UBid, ePier, atOncer... Heck, even Facebook took over the social media space created by previous players like MySpace (remember them?).

Facebook has been around a while and still emits a feeling that it's still in start-up stage. Monopoly power is a good thing - that's what drives entrepreneurs to create new products and services because of the clear profit motive. Would be a shame if they missed their profit opportunity but waiting too long to capitalize.

Rational Optimism - Matt Ridley on TED.com

How humans' ability to conceptualize and capitalize on gains from trade leads to economic and societal progress:

http://www.ted.com/talks/lang/eng/matt_ridley_when_ideas_have_sex.html

Ridley references one of my favorite economics lessons from Uncle Milty - The Story of the Pencil - though he fails to cite Milton Friedman on the idea... Found that rather disappointing.

(Thanks to Paul Kedrosky's blog post for pointing out this video presentation.)

Recent Housing Bubble reads

Just finished reading "The Big Short" by Michael Lewis - a nice explanation of CDOs and their contribution to the housing bubble. Lewis takes a head-shaking-you-won't-believe-this-happened viewpoint than Gregory Zuckerman's "The Greatest Trade Ever." (Zuckerman takes more of the holy-crap-you-won't-believe-that-this-Paulson-guy-figured-out-the-trade! approach.) Lewis only mentions John Paulson and his hedge fund once in the entire book that I can recall.

Both are worth the time. Makes me want to draw up an org chart of the key players just to see the direct and dotted lines to the whole thing.

Mad Props to Southwest Airlines

This showed up in my inbox this afternoon.

Greetings from Southwest Airlines:

I’m sorry that we were unable to get you to the terminal promptly and off the airplane quicker after your flight arrived at Denver on April 11. Unfortunately, your gate was occupied by another LUV jet that evening that was taking a little longer than we expected—we appreciate your patience during this situation. Naturally, we’d like to provide you with better travel experiences; therefore, I am sending you a LUV Voucher that can be applied toward a future Southwest reservation. You can be sure that we are looking forward to welcoming you back again real soon.

That. Is. Awesome.

Howard Dean, Fiscal Conservative?

I was fortunate enough to attend the ASF 2010 Working Lunch, pretty good rubber chicken with a side of CNBC's Larry Kudlow moderating between Howard Dean and Newt Gingrich. Much to my surprise, Howard Dean appeared to show signs of fiscal conservatism and the willingness to speak with candor and criticisum about the Obama administration.

Couple of memorable points (paraphrased):

• "You can't have capitalism on the way up and socialism on the way down." - Newt Gingrich when about about US government invention into the financial markets.
• "I'll let Newt save his modesty - he's running." - Howard Dean answering for Gingrich when Gingrich was asked if he was gearing up for a 2012 Presidential run.
• "No way." - Howard Dean when asked by Kudlow if Hillary Clinton was preparing to oppose Obama in the 2012 Democratic primaries.
• "There's a 50/50 chance that the Republicans will pick up a majority in both the House and the Senate in the 2010 mid-term elections." - Newt Gingrich
• "About 45 Senate seats and 30-40 House seats." - Howard Dean's perspective.
• Dean & Kudlow agreed that they would not have re-appointed Ben Bernanke to the Federal Reserve. Gingrich said he would have.

Much to my own surprise, and maybe more to my initial disappointment, I found Dean to be lucid, intelligent, and seemingly likable. Gingrich has a knack for explaining complex issues with ease.

There was lots more said between the two throughout the 1:30 discussion, but the rest focused on the economy, unemployment, and health case. Nothing earth-shattering that you wouldn't expect to hear from either side.

I have a hunch that these two like and respect each other in real life. TV interviews and media outlets typically showcase the animosity between any two individuals of the two parties, but it seems that these two could sit down over a bottle of scotch for a complex, civilized, philosophical conversation about the ways to approach societal, government, and economic challenges. They don't hate each other - just mostly disagree on the basic way to approach issues. Maybe that is what I learned the most.

An Appreciation of Milton Friedman

I got into a Facebook conversation yesterday about capitalism and greed, and immediately thought about this excerpt of the Phil Donahue show, interviewing Milton Friedman back in the 1970s:

http://www.youtube.com/watch?v=RWsx1X8PV_A

And as is the beauty of YouTube, I also found this episode of the Charlie Rose show, taped just a day after Milton Friedman passed away a couple years ago. Great stuff:

http://www.youtube.com/watch?v=-pbHo_fQCFg&feature=fvw

"Inflation is a monetary phenomenon..."

The Venture Capital Market

There's a wonderful blog conversation ongoing between Paul Kedrosky and Fred Wilson on the optimal number of venture capital firms. To summarize, both advocate for a reduction in amount of capital and number of VC firms participating in the market.

Check out Kedrosky's post from this week - Fred Wilson and the Venture Capital (Non-)Cartel and Wilson's - The Venture Diet is Working.

I look at it from a market standpoint, driven by supply and demand. But like a good economic analyst, I've got more than two hands...

1. Good firms will survive and poor ones will exit. The challenge though is the slow speed of entry and exit in the VC market. Firms can take years to raise capital from investors, then need time to evaluate eventual investments, then ride them through to exit. Unsuccessful firms that enter the market take years to display their incompetence, so the market is stuck in the intermediate term with an over supply of VC firms and capital. Overall, you'd think that's a good thing for entrepreneurs - more investment money chasing fewer projects. But, VCs are not a commodity product - each have their advantages and strengths that abet entrepreneurs in their drive to successful exit. This means that entrepreneurs need to examine their options more closely - more money and more favorable terms doesn't always mean the best deal.

2. Maybe the challenge is not an over-supply of VC firms, but a dearth of investment targets. Are we out of good ideas? I'd say no way this is the case. There are always plenty of good ideas in today's global marketplace, with that number rising exponentially as countries like India and China gain increased access to technology and build a economic infrastructure that supports the development of new technologies to replace the old.

3. Market inefficiency could be an explanation - there isn't enough communication between aspiring entrepreneurs and VCs. I don't think this is the case either - VCs get hundreds of business plans submitted every week and "investable"start-ups only going to develop in markets with access to communication nodes and infrastructure that provides clear awareness and access to the existing VC firms.

4. Or maybe it's that the venture capital model is no longer relevant for a majority of emerging companies. Back in December 2008, I wrote that venture capital is moving "up the ladder." As deal size requirements get bigger and bigger, that means that the exit opportunities must be bigger and bigger. There's limited room for the mega-exits, so that means that more and more start-ups are seeking smaller investment amounts funded by angel investors, leaving the formal venture capital firms with fewer investment opportunities. Bigger exit requirements also mean smaller rewards for company founders and early-stage team members that accept venture capital. That makes the whole idea of funding with VC less attractive. Altos Research is bootstrapped, profitable, and quickly growing (gasp!). Our company founders never wanted to use VC as a vehicle for precisely this reason (and others...).

Profile of Angel Investors

Received an emailed list of the :most cited articles from Institutional Investor Journals. One of them caught my eye - "A Profile of Angel Investors" - published in the Journal of Private Equity. Haven't downloaded or read the article yet, but passing along in case you should care to...

Technology & Start-ups in the Sacramento Valley

I've been spending some time of late researching some of the organizations focused on technology and start-ups in the Sacramento Valley of late. Couple of interesting items to share:

UC-Davis Center for Entrepreneurship - Based at the University of California, Davis in a brand new facility, this center focuses on Green Technology and Food & Health (but technology stuff too!). I've chatted with a couple of people over here - very engaging and committed from what I can see - looking forward to getting involved with them in 2010.

The Sacramento Area Regional Technology Alliance (SARTA) is a tech-focused corporation that supports entrepreneurial programs, companies and technology investment throughout Butte, El Dorado, Nevada, Placer, Sacramento, Solano, Sutter, Yolo and Yuba counties. I'm planning to attend a couple of their events in the next month or so to learn more about them.

More to come on this. Now that I'm getting settled in the area, I'm excited to get more proactive helping out and contributing to the technology and start-up efforts out here. With the state government situated in Sacramento, the inherent industries (food, agriculture, energy), and a number of research and state colleges nearby, it's seems to be a natural extension of Silicon Valley to diversify the economic base locally.

Indulgences & Seigniorage

(Note: My thoughts on this aren't completely formed, but I felt it important to record as a start to the formalization process...)

Trolling through TED.com, I came across Jay Walker's presentation about his Library of Human Imagination. One of the artifacts he displayed during his talk was a Gutenberg Bible (about 90 seconds into the video) - the first substantial book to be mass produced using the printing press. Walker shared some insight about the reason behind the Catholic Church's reproduction of the bible - it wasn't so much for individuals to read the bible for themselves. Instead, the Gutenberg Bibles were reproduced so the Church could sell "indulgences" to the masses in order to raise money. The Church was struggling for cash, so in a sense, they financed their operations by issuing indulgences as currency, eventually printing millions of these and distributing them. In economic terms, this is known as "seignorage.")

It was this action by the Church that led to Martin Luther's 95 Theses, questioning the Catholic Church's operations and motivations beginning the eventual downfall of the Catholic Church in Europe during the Renaissance Period.

An oft-cited definition of seigniorage - "The amount of real purchasing power that [a] government can extract from the public by printing money" - presented by Alex Cukierman, Sebastian Edwards and Guido Tabellini in their 1992 paper published in the American Economic Review - "Seigniorage and Political Instability." The abstract of his paper explains more:

The importance of seigniorage relative to other sources of government revenue differs markedly across countries. This paper tries to explain this regularity by studying a political model of tax reform. The model implies that countries with a more unstable and polarized political system will have more inefficient tax structures and, thus, will rely more heavily on seigniorage. This prediction of the model is tested on cross-sectional data for seventy countries. The authors find that, after controlling for other variables, political instability is positively associated with seigniorage. (my emphasis added)

Christopher Adam, Benno Ndulu, and Nii Kwaku Sowa also study effects of government seignorage in their 1996 article - "Liberalisation and Seigniorage revenue in Kenya, Ghana and Tanzania" - published in the Journal of Development Studies.

The revenue consists of two parts, the first flowing from the willingness of the private sector to hold government financial liabilities (which we shall refer to as the real balance effect) and the second part from the taxation through inflation of the outstanding stock of real balances (the inflation tax effect.) Seigniorage is particularly attractive in economies where the traditional tax base is narrow and the costs of other forms of revenue collection are high. Moreover, in economies where the policy regime limits the portfolio of domestic financial assets available to the private sector, for example where there are limited possibilities for currency substitution, the potential for raising seigniorage revenue may be expected to be high. In addition, by exploiting the high adjustment costs faced by the private sector in such economies, revenue can be increased in the short-run as holders of money are temporarily forced off their equilibrium money demand functions and obliged to hold higher than desired money balances. The higher the costs of adjustment, the greater the short run value of the 'surprise' revenue.

Breaking this down in parts:

• "the willingness of the private sector to hold government financial liabilities" - This refers to the issuance of US Treasury bills and bonds, in the current case, to finance deficit spending and debt.
• "taxation through inflation of the outstanding stock of real balances" - This refers to the decreased value of current debt due to inflationary effects from issuing new currency via seigniorage.
• "Seigniorage is particularly attractive in economies where the traditional tax base is narrow" - The United States faces the primary problem of a shrinking tax base. As this CBS News article from April 15, 2009 notes that an "astonishing 43.4 percent of Americans now pay zero or negative federal income taxes. The number of single or jointly-filing 'taxpayers' - the word must be applied sparingly - who pay no taxes or receive government handouts has reached 65.6 million, out of a total of 151 million.
• "the costs of other forms of revenue collection are high" - Other forms of revenue refers to income taxes or VATS. Certainly the US qualifies here.
• "economies where the policy regime limits the portfolio of domestic financial assets available to the private sector" - Congress (and the administration) is placing restrictions on securitization and considering other financial regulations under consideration. Using the housing market as example, it's the GSE's and the Federal reserve buying mortgage securities and loan portfolios, not the private sector as would be more efficient and economically sound.
• "revenue can be increased in the short-run ... The higher the costs of adjustment, the greater the short run value of the 'surprise' revenue." - The net result is a short-term bump in GDP to the long term detriment of the economy. That's what we saw in Q3, 2009.

As described in the Abstract of the Adam, Ndulu, Sowo article, the "implication is that countries that have relied on seigniorage revenue need to undertake deeper-than-anticipated fiscal adjustment in order to maintain macroeconomic balance following liberalisation programmes."

This is often why prominent economists and thought leaders (including Steve Forbes) advocate the United States returning to the gold standard - so that the US Dollar is backed by an intrinsically valuable item. Additionally, Forbes backs the "flat tax" to make revenue collection by the government simpler versus the current income tax system or proposed VAT included in tax proposals of the 111th Congress.

I don't know what the answer to all of this is. I do know that rigorous academic work clearly shows that a government's use of seigniorage leads to long term pain for an economy and that current policies under pursuit work in strong opposition to these economic findings - financing government programs such as the American Recovery and Reinvestment Act, the proposed health care reform legislation, TARP, TALF, and others.

The questions that persists in my mind - is the government selling indulgences to get us out of economic purgatory only to cause a future collapse of our financial system? Watching Walker's presentation on TED.com sparked an immediate parallel in my mind that I can only hope is a result of my background as a history major and Catholic, and not founded on real economic principles. I sure hope I'm wrong on the one.

Sixth Sense Computing - Pranav Mistry on TED.com

Working from the in-laws basement this week and took a little retreat time to watch a few TED.com videos. If you want to get blown away by things like dialing cell phone by touching your fingers or seeing if you flight is on time by looking at your boarding pass, this is for you. (And I am really not doing this justice...) It's interesting that Mistry talks about bring the computing world into the objects world. His concept, to me at least, is bridging the gap between reality and the virtual world.

Linked Data - Tim Berners-Lee

On the business side of life, there's been an active discussion this weekend about a new initiative led by the National Association of Realtors called the REALTORS® Property Resource (RPR) which is designed to provide a national property data exchange for agents to provide to clients. Yes, snooze-fest if you're not in the real estate industry. Our CEO does an excellent job describing the RPR project and its affect on the real estate industry.

On a personal level, the current industry discussion reminded me of a recent TED presentation by Tim Berners-Lee on Linked Data. As described on the TED website:

20 years ago, Tim Berners Lee invented the World Wide Web. For his next project, he's building a web for open, linked data that could do for numbers what the Web did for words, pictures, video: unlock our data and reframe the way we use it together.

The first step to the Linked Data project is DBPedia, which is extracting data from Wikipedia to make it fully linked and available. A more detailed description about Linked Data is available from this PDF document.

This topic is of particular interest because our services and applications at Altos Research is to provide unique data and transparency to real estate market participants. Our service has been tepidly received by MLS Boards across the country because the level of information and transparency is far advanced beyond has historically been available. Berners-Lee discusses how luddites tend to hug their data in silos, refusing to share the data with others to advance market processes.

Google's "Brain Drain"

Came across an interesting presentation today on The Business Insider that they posted back in September - "The Google Brain Drain Goes On And On."

Interesting because it augments what I wrote back in June 2008 about Google's Employee Retention. The mental infrastructure of Silicon Valley encourages this behavior to the betterment of the technology, venture capital, and related industries. This trend is what makes Silicon Valley a great place - employees learn that their personal and professional growth becomes limited within a large organization, so they take what they learned and move on to the next big opportunity.

"Too Big to Fail" & Charlie Rose

A recent issue of Fortune Magazine included a nice piece about Charlie Rose - "Why business loves Charlie Rose." I'm thankful for the article because it reminded me how much I enjoy his program so I've now set my DVR to record these episodes. Heck, if Warren Buffet watches it, I probably should.

Mr. Rose interviewed Andrew Ross Sorkin this week, author of "Too Big to Fail" - a book about the events and people surrounding the financial market crash, and I found myself completely engrossed with the conversation between Rose & Sorkin on the program. Lots of intricate details about Hank Paulson, Richard Fuld, Tim Geithner, and others. I just ordered a copy of the book from Amazon...

The discussion quickly reminded me of "Barbarians at the Gate" by Bryan Burrough and John Hely on the leveraged buyout of RJR Nabisco in a previous decade. I finally got around to reading this book over the summer.

While it's hard to believe how Wall Street deals sometimes go down, it's really not when you read about the people behind the deals. In the interview with Rose, Sorkin described his book as a recounting of people and their personalities as much as it is a book about the events themselves.

Greenspan on "This Week" with George Stephanopoulos

Was fortunate to flip on the TV the morning to catch Alan Greenspan on "This Week" with George Stephanopoulos. Here are some key statements during the interview with some additional explanation in parenthesis that I've added.

• The economy loses skills with elongated unemployment (When workers are not working and keeping up with new technology, new processes, and deploying new innovation, the skills of the worker deteriorate and fall further behind competition in the global economy.)
  

• Just after the financial crash, business (defined as economic participants) expected production and consumptions levels to fall off far more than they did. This spurred business to cut employment and production more than could have been economically supported. As a result, we're getting "horrendous" labor productivity numbers, meaning that the output per worker is declining.
  

• On unemployment, Greenspan noted that unless there are more than 100,000 new jobs a month, the unemployment rate will not improve.

• On government intervention and the stimulus package, the focus should continue to be on trying to get the economy going, but don't be counterproductive. As Greenspan stated, "we're in a recovery, his is what a recovery looks like. Looking back after this is over, we'll see ups and downs on a graph but look right through them right through them." The stimulus package is only 40% spent, so before considering a second package, the remainder (Evan Bayh on Fox News Sunday with Chris Wallace said he would have liked to have the stimulus go into effect sooner.)

• On GDP growth, Greenspan predicted 2.5% GDP growth in the third quarter and sees the numbers coming in higher than that once the estimates and revisions are completed. We're getting close to end of job loss, "but this is not the same as unemployment going done. We'll get to 10% barrier and stay there for a little while."

• On temporary actions, he feels that measures such as extended unemployment benefits are needed in the short term and is not a stimulus activity but may have some stimulus effects.

• On health care, the real problem exists in health care because of the huge fiscal hole as seen in Medicare. There is significant issuance of treasury bonds to finance the budget deficit. Historically we have kept our debt well below the borrowing capacity but that cushion is being tested which will affect LT interest rates. "Budget neutral is not adequate, weed to have address the long term."
  

Acquisition Price - FriendFeed/Facebook

I wish I was always this good... I guessed somewhere around $50 mln in an earlier post today about Facebook's acquisition of FriendFeed.

Turns out I was pretty close according to this post in the WSJOnline late today.

So it didn't take linear algebra to make the guess, but what the heck...