New Economics Theories for the new Tech World

When I was doing my MBA (a decade ago), one of the principal theories on why corporations exist was 1) Shareholder Value creation (grow wealth for investors) and a notable second was 2) Stakeholder Value creation- creating jobs for societies, providing tax to countries, providing employees with stable employment and incentives,  and of course creating monetary value for shareholders.

There were two ways you could raise money- debt or equity. Debt had the advantage of interest payments being tax deductible. Debt payments had to be met regularly. Equity had the advantage that equity holders were the last ones to be paid in case of closing the company down, which justified that rate of return on equity is generally higher than cost of debt.  Dividend payouts to stockholders could be deferred in a low revenue year or due to planning reasons.

Or in plain English, over the long term borrowing money from share holders in lieu of stocks was more expensive than selling bonds or borrowing from the banks.

Hybrid combinations of debt and equity were warrants and debentures that started off as one form of instrument and over a period of time gave much more flexibility and risk safety nets to both issuers and subscribers of capital. Another hybrid was stock options (now considered as a default option of rewarding employees in technology companies, but this was not always the case).

The use of call and put options in debentures, and the idea of vesting period in stock options was to promote lone term stability and minimize fluctuations in stock prices, employee attrition, besides of course to minimize the weighted average cost of capital. Venture capital was another class of capital known for both huge rates of return and risk taking (?)

But in today’s world where a Google has three classes of shares, companies trade shares before IPOs, and valuations of technology companies sink and rise by huge % over weeks (especially as they near IPO dates)- I wonder if traditional theories in finance need a much stronger overhaul.

or do markets need a regulatory overhaul, that would enable stock exchanges to have once more the credibility they had as the primary sources of raising capital.

 

Who will guard the guardians? Their conscience- the regulators or the news media?

There are ways of raising money that are not evil.

But they are not perfectly fair as well.

Credit Downgrade of USA and Triple A Whining

As a person trained , deployed and often asked to comment on macroeconomic shenanigans- I have the following observations to make on the downgrade of US Debt by S&P

1) Credit rating is both a mathematical exercise of debt versus net worth as well as intention to repay. Given the recent deadlock in United States legislature on debt ceiling, it is natural and correct to assume that holding US debt is slightly more risky in 2011 as compared to 2001. That means if the US debt was AAA in 2001 it sure is slightly more risky in 2011.

2) Politicians are criticized the world over in democracies including India, UK and US. This is natural , healthy and enforced by checks and balances by constitution of each country. At the time of writing this, there are protests in India on corruption, in UK on economic disparities, in US on debt vs tax vs spending, Israel on inflation. It is the maturity of the media as well as average educational level of citizenry that amplifies and inflames or dampens sentiment regarding policy and business.

3) Conspicuous consumption has failed both at an environmental and economic level. Cheap debt to buy things you do not need may have made good macro economic sense as long as the things were made by people locally but that is no longer the case. Outsourcing is not all evil, but it sure is not a perfect solution to economics and competitiveness. Outsourcing is good or outsourcing is bad- well it depends.

4) In 1944 , the US took debt to fight Nazism, build atomic power and generally wage a lot of war and lots of dual use inventions. In 2004-2010 the US took debt to fight wars in Iraq, Afghanistan and bail out banks and automobile companies. Some erosion in the values represented by a free democracy has taken place, much to the delight of authoritarian regimes (who have managed to survive Google and Facebook).

5) A Double A rating is still quite a good rating. Noone is moving out of the US Treasuries- I mean seriously what are your alternative financial resources to park your government or central bank assets, euro, gold, oil, rare earth futures, metals or yen??

6) Income disparity as a trigger for social unrest in UK, France and other parts is an ominous looming threat that may lead to more action than the poor maths of S &P. It has been some time since riots occured in the United States and I believe in time series and cycles especially given the rising Gini coefficients .

Gini indices for the United States at various times, according to the US Census Bureau:[8][9][10]

  • 1929: 45.0 (estimated)
  • 1947: 37.6 (estimated)
  • 1967: 39.7 (first year reported)
  • 1968: 38.6 (lowest index reported)
  • 1970: 39.4
  • 1980: 40.3
  • 1990: 42.8
    • (Recalculations made in 1992 added a significant upward shift for later values)
  • 2000: 46.2
  • 2005: 46.9
  • 2006: 47.0 (highest index reported)
  • 2007: 46.3
  • 2008: 46.69
  • 2009: 46.8

7) Again I am slightly suspicious of an American Corporation downgrading the American Governmental debt when it failed to reconcile numbers by 2 trillion and famously managed to avoid downgrading Lehman Brothers.  What are the political affiliations of the S &P board. What are their backgrounds. Check the facts, Watson.

The Chinese government should be concerned if it is holding >1000 tonnes of Gold and >1 trillion plus of US treasuries lest we have a third opium war (as either Gold or US Treasuries will burst)

. Opium in 1850 like the US Treasuries in 2010 have no inherent value except for those addicted to them.

8   ) Ron Paul and Paul Krugman are the two extremes of economic ideology in the US.

Reminds me of the old saying- Robbing Peter to pay Paul. Both the Pauls seem equally unhappy and biased.

I have to read both WSJ and NYT to make sense of what actually is happening in the US as opinionated journalism has managed to elbow out fact based journalism. Do we need analytics in journalism education/ reporting?

9) Panic buying and selling would lead to short term arbitrage positions. People like W Buffet made more money in the crash of 2008 than people did in the boom years of 2006-7

If stocks are cheap- buy. on the dips. Acquire companies before they go for IPOs. Go buy your own stock if you are sitting on  a pile of cash. Buy some technology patents in cloud , mobile, tablet and statistical computing if you have a lot of cash and need to buy some long term assets.

10) Follow all advice above at own risk and no liability to this author 😉

 

TeraData buys AsterData for 260+ million $

Balance sheet venetian method
Image via Wikipedia

This just in! Big party in San Carlos this weekend.

Teradata is acquiring Aster Data‘s business, including its intellectual property and technology product line, through a merger transaction. Teradata plans to support Aster Data’s customers and integrate its employees immediately upon completion of the acquisition, which is expected to occur in the second quarter of 2011. Teradata acquired an 11 percent ownership interest in Aster Data in September 2010, and has agreed to pay an additional $263 million for the remaining ownership interest, net of debt and other expenses. In addition, through this acquisition, Teradata will obtain approximately $21 million of cash which Aster Data is expected to have on its balance sheet at closing.

http://www.asterdata.com/news/110303-Teradata-to-Acquire-Aster-Data.php

 

Data Visualization: Central Banks

Iron Ore Company of Canada
Image via Wikipedia

Trying to compare the transparency of central banks via the data visualization of two very different central banks.

One is Reserve Bank of India and the other is Federal Reserve Bank of New York

Here are some points-

1) The federal bank gives you a huge clutter of charts to choose from and sometimes gives you very difficult to understand charts.

see http://www.newyorkfed.org/research/global_economy/usecon_charts.html

and http://www.newyorkfed.org/research/directors_charts/us18chart.pdf

us18chart

2) The Reserve bank of India choose Business Objects and gives you a proper drilldown kind  of  graph and tables. ( thats a lot of heavy metal and iron ore China needs from India 😉 😉

Foreign Trade – Export      Time-line: ALL

TIME LINE COUNTRY COMMODITY AMOUNT (US $ MILLION) EXPORT QUANTITY
2010:07 (JUL) – P China IRON ORE (Units: TON) 205.06 1878456
2010:06 (JUN) – P China IRON ORE (Units: TON) 427.68 6808528
2010:05 (MAY) – P China IRON ORE (Units: TON) 550.67 5290450
2010:04 (APR) – P China IRON ORE (Units: TON) 922.46 9931500
2010:03 (MAR) – P China IRON ORE (Units: TON) 829.75 13177672
2010:02 (FEB) – P China IRON ORE (Units: TON) 706.04 10141259
2010:01 (JAN) – P China IRON ORE (Units: TON) 577.13 8498784
2009:12 (DEC) – P China IRON ORE (Units: TON) 545.68 9264544
2009:11 (NOV) – P China IRON ORE (Units: TON) 508.17 9509213
2009:10 (OCT) – P China IRON ORE (Units: TON) 422.6 7691652
2009:09 (SEP) – P China IRON ORE (Units: TON) 278.04 4577943
2009:08 (AUG) – P China IRON ORE (Units: TON) 276.96 4371847
2009:07 (JUL) China IRON ORE (Units: TON) 266.11 4642237
2009:06 (JUN) China IRON ORE (Units: TON) 241.08 4584354

Source : DGCI & S, Ministry of Commerce & Industry, GoI

 

You can see the screenshots of the various visualization tools of the New York Fed Reserve Bank and Indian Reserve Bank- if the US Fed is serious about cutting the debt maybe it should start publishing better visuals

America's Data Book: Census Abstract 2011

U.S. Census Bureau Regions, Partnership and Da...
Image via Wikipedia

An excellent summary of 2011 Census Statistical abstract was given by NYTimes at

http://www.nytimes.com/interactive/2011/01/07/us/CENSUS.html?hp

Like more white people now enjoy jazz than black people now (presumably who have got rap music), but not details enough on ahem country music

The Data book is at http://www.census.gov/compendia/statab/

What is the Statistical Abstract?

The Statistical Abstract of the United States, published since 1878, is the authoritative and comprehensive summary of statistics on the social, political, and economic organization of the United States.

Use the Abstract as a convenient volume for statistical reference, and as a guide to sources of more information both in print and on the Web.

Sources of data include the Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, and many other Federal agencies and private organizations.

Tables of Interest

1060 – Shopping Centers–Number and Gross Leasable Area [Excel 31K] | [PDF 59K]

1170 – Flow of Funds Accounts-Liabilities of Households and Nonprofit Organizations [Excel 41K] | [PDF 66K]

1172 – Amount of Debt Held by Families-Percent Distribution [Excel 29K] | [PDF 66K]

1173 – Ratios of Debt Payments to Family Income [Excel 857K] | [PDF 64K]

327 – Law Enforcement Officers Killed and Assaulted [Excel 34k] | [PDF 468k]

From the last table you can see , while the number of officers killed or feloniously killed decreased by 20% in past five years, the number of officers assaulted by firearms grew by 20% in the same period.

China -United States -The Third Opium War

U.S.troops in China during the Boxer Rebellion...
Image via Wikipedia

A brief glance through http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

shows that while US added 600 billion of debt during the past one year, the Chinese actually reduced their exposure by 50 billion Dollars.

so who has been financing the debt for the US for the past one year- It is Japan- eager to keep its currency down and United Kingdom which has pumped in an extra 300 billion of T Bills.

See the whole table at official link above or at goo.gl/qMugp

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China still remembers the Opium Wars in which the then ruling Anglo Saxon superpower used naval superiority to enforce trade and eventual political dependency. Is China unsure of the United States brotherly nice  intentions? They certainly seem to be putting their money that way.

http://en.wikipedia.org/wiki/Opium_Wars

Britain forced the Chinese government into signing theTreaty of Nanking and the Treaty of Tianjin, also known as the Unequal Treaties, which included provisions for the opening of additional ports to unrestricted foreign trade, for fixed tariffs; for the recognition of both countries as equal in correspondence; and for the cession of Hong Kong to Britain. The British also gained extraterritorial rights. Several countries followed Britain and sought similar agreements with China. Many Chinese found these agreements humiliating and these sentiments contributed to the Taiping Rebellion (1850–1864), the Boxer Rebellion (1899–1901), and the downfall of the Qing Dynasty in 1912, putting an end to dynastic China.

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The Koreans can always be depended on provide the first shot in any conflict- and though Anglo-US-Chinese conflict would be expensive- I guess as long as the cost of outstanding debt with China is less than cost of a brief -techno-war , we would see interesting games in this neighborhood. Note China restricts major trade with United States particularly in software, internet services (like Web Advertising, Facebook, Twitter ) and represents a lucrative market for big pharma (especially in psychiatric drugs) and big tech once it reforms its intellectual property rights. Software would be the opium of the 21st Century- if Chinese resist the Treasury Bills as their poppy flowers. The widespread Western media coverage of school kids murders by pyschopaths is also a trade tactic to encourage flow of more US made medicine in the Chinese market.

It would also help create an economic revival in the United States to exaggerate the Chinese threat (remember Sputnik) and build up its own cyber spending. Any military or cyber humiliation for the ruling party in China can help create a political vacuum for more malleable and agreeable alternatives to emerge.

(to be continued)