Wednesday, March 12, 2014 - The Next 25 Years

The Next 25 Years

by Sinclair Noe

DOW – 11 = 16,340
SPX + 0.57 = 1868
NAS + 16 = 4323
10 YR YLD - .04 = 2.72%
OIL – 1.96 = 98.07
GOLD + 17.70 = 1368.20
SILV + .43 = 21.42

Let’s run through some of the economic and business news and then we’ll get to today’s anniversary.

Stocks were flat. People are still trying to make heads or tails of this mixed up world. The situation in Ukraine is not improving. The EU agreed a framework for its first sanctions on Russia since the Cold War. Protesters battled soldiers in the streets of Caracas, Venezuela; two more protesters were shot; dozens were injured. Riot police clashed with demonstrators in several Turkish cities for a second day as mourners buried a teenager wounded in protests last summer.

The Senate Banking Committee announced an agreement on legislation to wind down the government-owned mortgage financiers Fannie Mae and Freddie Mac. Share price cratered.

Herbalife says the Federal Trade Commission has opened an inquiry into the company. The FTC confirms the inquiry, but not the nature of the inquiry. Share price cratered.

Copper prices dropped to the lowest level in almost 4 years; this goes back to China, and is a canary in the coal mine for industrial demand. China is one of the metal’s biggest customers and there has been recent poor trade data out of China. Two Chinese solar companies have defaulted in the past week. The general risk from here is that this move in metals prices further destabilizes the Chinese financial system and will raise concerns of a hard landing in China if the authorities can’t get ahead of the pressures and potential contagion effects this move is generating.

A Senate subcommittee plans to hold a hearing in early April on GM's recall last month of more than 1.6 million vehicles with the faulty ignition switches which have been linked to 12 deaths. Most of the affected cars were sold in the United States. Even after the long delayed recall, GM says drivers should not use big, heavy key rings. Not a good repair job.

It is illegal for Tesla to sell cars in New Jersey, other than traditional auto dealerships, which is not the Tesla business model. Guess who pushed that law through the New Jersey legislature; this, even though Tesla does not limit the number of keys you can safely have on a key ring.

Citigroup recently discovered they had made $400 million in fraudulent loans to a company in Mexico, now they’ve uncovered three new sets of problems loans, each at about $10 million.

Fabrice Tourre, the Goldman Sachs trader convicted of defrauding investors in a subprime mortgage product that failed during the financial crisis has been ordered to pay a fine of $825,000. The SEC accused Tourre of concealing from investors how Paulson & Co, the hedge fund of billionaire John Paulson, had helped put together a fund of subprime mortgages called Abacus, and had bet it would fail.  Paulson made a cool $1 billion by shorting Abacus, while investors lost the same amount. Goldman, the company, in July 2010 reached a related $550 million settlement with the SEC. It did not admit wrongdoing but acknowledged and expressed regret that its marketing materials were incomplete. Tourre resigned from Goldman in December 2012, and is pursuing a doctorate in economics at the University of Chicago.

Boeing says the missing 777 Malaysia Airlines jetliner was not subject to a new US safety directive that ordered additional inspections for cracking and corrosion on certain 777 planes. They still have no idea where the jet is.

This week, we’ve been looking at anniversaries: the 5^th anniversary of the bull market, the 14^th anniversary of the bear market, the 3^rd anniversary of the Fukushima disaster. Today marks the 25^th anniversary of the World Wide Web. This is actually a somewhat questionable anniversary; not because of the malware, the misinformation, the internet trolls, the time wasting, and the tedious social media that passes as actual human interaction.

No, this is a questionable anniversary because the world wide web must be differentiated from the internet and even after we had the web, we waited until 1993 to actually have a web page. The web was built on top of the internet. On the internet, the connections are between computers using cables and other physical links; on the web, connections are hypertext links. The web is a way to present information from a software application known as a web browser using Hypertext Markup Language or Hypertext Transfer Protocol, HTML or HTTP. The web was based on a proposal written on March 12, 1989 by Sir Tim Berners-Lee, and then we had to wait until December 1990 for Berners-Lee to release the first web browser, called the WorldWideWeb.

So, what will the web look like in the next 25 years? That is part of the question posed on this anniversary by none other than Berners-Lee in an interview published today in the Guardian; he believes the web should be "accessible to all, from any device, and one that empowers all of us to achieve our dignity, rights and potential as humans." He hopes to re-invent the Web through the "Web We Want" initiative, which would create a universal "Internet Users Bill of Rights"; think of it as an online Magna Carta.

The initiative would build support for national and regional campaigns to create a world where everyone is online and free to participate in the flow of knowledge, ideas, collaboration and creativity over an open Web. Without an open, neutral Internet, we can't have an open government, good democracy, healthcare, connected communities and a diverse culture. And Berners-Lee says: "It's not naive to think we can have that, but it is naive to think we can just sit back and get it."

Among the obstacles to an open, neutral internet, Berners-Lee cites principles of privacy, free speech, responsible anonymity, the impact of copyright laws, and the overhaul of how security services are managed especially in light of American and British spy agency surveillance of citizens.

The web has become an indispensable tool for communications, science, education, health, democracy, entertainment, finance, advertising, and commerce. It has been well argued that the internet is the most significant contribution to spreading knowledge since the introduction of Gutenberg’s printing press, but this web is much faster; Martin Luther’s 95 theses can now be pinned on someone’s Facebook wall and travel round the world in the blink of an eye. The growth of the web has been exponential; actually that is not a strong enough word to describe the growth.

The Web has brought tremendous innovation, but how do we measure innovation’s impact on our standard of living? We can look at the web and easily see that it has been very profitable for many; fortunes have been made, and lost. The most recent fortune will likely go to the innovators behind the Candy Crush game, King Digital; today they announced an initial public offering that values the company at $7.6 billion; and Wall Street analysts immediately started whining that the valuation was low based on trailing 12 month PE of 13.3. This is for a video game. What is the net contribution to economic growth from a video game?

Another way of looking at innovation is price. It is fairly easy to assess the value of innovation if it lowers the price of something, such as a car or food. How do we measure an improvement in quality for something that already exists? The internet has provided people with tremendous information on health and medicine; surgery is more likely to be successful now than before this information was available. How do we measure that?

The financial industry has claimed to embrace innovation. Yes, you can get your bank statement online and businesses can accept digital payments online, but it also led to bankers devising better ways of manipulating markets and the so-called innovation of the vast world of ticking time bombs known as derivative. You can also make the case that the net social contribution from so-called financial innovation was negative.

And for all the good things that we get from the internet, you have to wonder if we’ve squandered this gift of technology. So much effort has gone into advertising and marketing and targeting customers; this makes sense because you have to make money in order for the technology to be viable, but has this emphasis detracted from directing our efforts to improve our standard of living? How can we compare Facebook and Twitter and Candy Crush with the invention of powered air flight, the development of the interstate highway system, the polio vaccine?

This is not to say that social media has a negative social contribution (I’ll leave that distinction to the bankers). Social media can do amazing things: a spike in Twitter posts about upset tummies can alert the doctors to a salmonella outbreak, an amber alert on my phone may save a child’s life, there are massive online campuses that can provide an education comparable to the best universities, great thoughts abound on Redditt, the libraries of the world are now available at the click of a button, and the great cacophony of millions of voices may someday come together in crowd sourced harmony to create beautiful music.

In the past 25 years, we’ve seen some amazing innovation, lots of cool stuff, lots of silly stuff, and a fair amount of bad stuff on the internet. In the next 25 years, maybe we’ll do better.