I am getting increasingly angry at the UK government throwing taxpayers' cash down the drain to bail out failed banks. Lots of it. In spite of all the commentary I have read from numerous analysts, I remain totally unconvinced that it is the right thing to do. Some banks are failing because they made some very stupid deals. Others are not failing, because they didn't. Building societies that didn't get involved in buying bad debt are doing fine. The obvious solution is to let market economics run its course. Companies that make enormous mistakes go bust. So let them. It's a tough world out there, and no company should have a god-given right to success. Most companies only last a few years before they die, but although that is sad, it leads to better companies, a better deal for customers, and a more efficient economy. The banks are bigger, but the rules should still apply to them.
The government (and many others) believe we need to bail them out because the economy cannot work without them. Why? Why not just let the surviving banks pick up the customers as their failed competitors collapse? Surely building societies would naturally grow back to their positions before their cousins mistakenly decided to become banks and surviving banks could apply their proven better practices to the rest of the industry. People would be able to borrow and lend via surviving banks. Since survivors would presumably be able to pick up staff and computers and buildings, and even some of the better managers, surely it would all return to reasonable normal efficient working in no time? By offering bail-outs even as a distant possibility, the government has encouraged banks to forfeit responsibility for their own survival. The result has been disastrous, with many people kept in lucratively rewarded jobs who deserved fully to be unemployed or even prosecuted for negligence, while the enormous consequences of their actions are paid for by wholly innocent people who in most cases can ill-afford to help.
Much of the commentary is about the failure of capitalism. I think that is mis-stating the situation. It is a failure of part of the banking system to apply due care and diligence in a free market. Like any market, some of the produce on offer was good, some bad. Companies that failed to take the effort to inspect products before purchase deserve to suffer the consequences, up to and including their own demise it the mistakes are big enough.
As for the shareholders of the banks, the same law applies. Don't buy things you don't understand. It is no defense to argue that these companies appeared to be sound. Banks were involved in very tricky business. Investing in them without understanding the risks of that business was unwise. The rewards were attractive when times were good, but that came at the price of risk, and it is unreasonable to demand protection from that risk while reaping the rewards while all is well.
The only people for whom I think protection should exist are the ordinary people who deposited their money in the banks. It is right that the government should protect them, certainly up to the celing level, above which it could once again perhaps be argued that the owners should know better than to have all their eggs in one basket.
The market is a jungle. There are tigers and cute little bunnies. Animals quickly learn to distinguish them, or they get killed. But jungles work very well, and support a rich diversity of fauna and flora. Human markets are just the same, but the same care is needed, because similar rules apply. Banks should have known better. They didn't, so they should have been allowed to die, with the market ecosystem quickly adapting to their demise, followed by a rapid return to normal healthy operation. Interference by government has wrecked it.
Tuesday, 17 February 2009
Monday, 3 November 2008
BT
I used to work for BT for 22 years and still feel quite loyal to them, though increasingly frustrated at the apparent determination to die. BT is a good company in many ways, dumb in others. But overall, it has missed out on the IT boom, and the share price has tumbled in recent years, so many of us loyal shareholders have lost a lot of money by staying optimistic about its future. In an industry packed with potential, it has consistently avoided capitalising on the many opportunities it has had.
BT has had a lot of CEOs over the years, and most have missed their main opportunities. Though I am sure some people would disagree, here is my take: Michael Heiffer came from the finance industry but completely failed to understand BT's potential to use its transaction management capabilities in the banking market. Peter Bonfield came in from the computing industry, but totally failed to understand the potential from telecomms-computing convergence, passing over lucrative opportunities worth tens of billions, while wasting tens of billions instead on 3g licenses and incomprehensible company purchases that almost took the company into bankruptcy. The less said about Cockburn the better. Finally, Ben Verwaayen was at least competent. He stopped the fall for a few years by selling off much of the company's most valuable assets, although he failed to dump the network when given the chance, which would have liberated the company to concentrate on what it does best. But although he was good at stopping the rot for a while against tough odds, he was never the right manager to capitalise on growth opportunities. But at least he had the good sense to go when he'd done his bit, to let someone else take BT into the growth phase. But once Ian Livingston was identified as the man likely to take over, there was never any prospect other than doom.
I believe the main problem in BT is accountancy drive. Accountants dominate many blue chip companies because the perception is that since the company exists to make money, people who can manage money ought to be able to run the company better than others, such as engineers. In some industries, perhaps that is true, I won't comment here. But in a high technology company such as BT, it is not at all appropriate. So I warned my friends to sell their BT shares when Ian Livingston was marked to take over. Since then, the price has fallen by about two thirds, proving I was right.
Accountants count beans, but usually only some of the beans. They look at those things that appear on the balance sheet, such as costs, and income, but don't look properly at things that are hard to measure, such as engineer productivity, creativity, or staff loyalty, and rarely look at potential revenue. So they put in place micromanagement systems that greatly reduce productivity by using up staff time to get small quantities of useful information worth a fraction of the costs of acquisition, but since those costs are not directly measured, they are ignored. The result is a very precise but very inaccurate figure for the numbers of beans.
They also have much less understanding than engineers of what it is that the company actually could do, what its skills are, or what the industry could offer. So while BT sits in a field full of promise, surrounded by gold, its focuses on headline cost reduction as the main route to profits, while splashing out heavily on low-potential investments such as BT Vision. Ignoring enormous revenue sources while putting too much effort into cost reduction is folly, but it is sadly a problem that has affected BT for many years. Its single strategy has been hiding in the corner, leaving new opportunities to other companies, while technology progress erodes the potential income from traditional sources, and then trying to stay in business by reducing costs.
This strategy hasn't worked so far and it won't start working in the future. It is long overdue for the scrapheap.
BT has a network that is very expensive to maintain, and is wholly inadequate to run modern services. Its strategy director was quoted in the weekend papers saying that she can't see why anyone would need more than 20Mbit/s to the home. Such comments will go down in the infamous quotation books alongside Bill Gates' comment than no-one could ever need more than 600k of memory in a computer.
The company must start to explore the modern telecoms and IT marketplaces, look around the find the services it could offer, quickly develop them, and then sell them at a reasonable price without its usual confusion marketing. This will cost money, but it will be a sound investment. Saving money ad-infinitum will eventually lead to a tiny company with tiny value. Investing heavily to create adventurous new products and services would create new income streams that will take the company to its full potential.
BT still has a lot of high quality staff, though many have left in recent years in management -induced despair, having offered the company the ideas it needed and having them rejected by accountants and managers with little or no real understanding of telecoms or IT. It is not too late yet, but it soon will be. Identifying key technology-enabled opportunities and financing them will lead to recovery. Counting beans will lead to oblivion. Livingston has to go, and go soon. In my opinion, he just doesn't understand the business he is in, and should never have been at board level, let alone CEO. Francois Barrault has gone as a scapegoat, but I think he had a far better understanding of BT's business than Livingston ever will. BT was once a great company and could be one again with the right policies. Sacking good people and over-promoting fools will not help. Nor will counting only a selection of the beans.
But I haven't sold my shares. I am hoping in spite of everything that one day, BT will appoint a CEO who understands the business, who is prepared to take risk and invest heavily in the right areas, with huge injection into R&D. With the courage to identify and remove some of the thoroughly incompetent managers dotted here and there, and to reward the better ones, BT could once again be a world leading company. But BT can only be a good investment in the long term, and it might not survive that long.
Very risky, but potentially a good buy for the long term.
BT has had a lot of CEOs over the years, and most have missed their main opportunities. Though I am sure some people would disagree, here is my take: Michael Heiffer came from the finance industry but completely failed to understand BT's potential to use its transaction management capabilities in the banking market. Peter Bonfield came in from the computing industry, but totally failed to understand the potential from telecomms-computing convergence, passing over lucrative opportunities worth tens of billions, while wasting tens of billions instead on 3g licenses and incomprehensible company purchases that almost took the company into bankruptcy. The less said about Cockburn the better. Finally, Ben Verwaayen was at least competent. He stopped the fall for a few years by selling off much of the company's most valuable assets, although he failed to dump the network when given the chance, which would have liberated the company to concentrate on what it does best. But although he was good at stopping the rot for a while against tough odds, he was never the right manager to capitalise on growth opportunities. But at least he had the good sense to go when he'd done his bit, to let someone else take BT into the growth phase. But once Ian Livingston was identified as the man likely to take over, there was never any prospect other than doom.
I believe the main problem in BT is accountancy drive. Accountants dominate many blue chip companies because the perception is that since the company exists to make money, people who can manage money ought to be able to run the company better than others, such as engineers. In some industries, perhaps that is true, I won't comment here. But in a high technology company such as BT, it is not at all appropriate. So I warned my friends to sell their BT shares when Ian Livingston was marked to take over. Since then, the price has fallen by about two thirds, proving I was right.
Accountants count beans, but usually only some of the beans. They look at those things that appear on the balance sheet, such as costs, and income, but don't look properly at things that are hard to measure, such as engineer productivity, creativity, or staff loyalty, and rarely look at potential revenue. So they put in place micromanagement systems that greatly reduce productivity by using up staff time to get small quantities of useful information worth a fraction of the costs of acquisition, but since those costs are not directly measured, they are ignored. The result is a very precise but very inaccurate figure for the numbers of beans.
They also have much less understanding than engineers of what it is that the company actually could do, what its skills are, or what the industry could offer. So while BT sits in a field full of promise, surrounded by gold, its focuses on headline cost reduction as the main route to profits, while splashing out heavily on low-potential investments such as BT Vision. Ignoring enormous revenue sources while putting too much effort into cost reduction is folly, but it is sadly a problem that has affected BT for many years. Its single strategy has been hiding in the corner, leaving new opportunities to other companies, while technology progress erodes the potential income from traditional sources, and then trying to stay in business by reducing costs.
This strategy hasn't worked so far and it won't start working in the future. It is long overdue for the scrapheap.
BT has a network that is very expensive to maintain, and is wholly inadequate to run modern services. Its strategy director was quoted in the weekend papers saying that she can't see why anyone would need more than 20Mbit/s to the home. Such comments will go down in the infamous quotation books alongside Bill Gates' comment than no-one could ever need more than 600k of memory in a computer.
The company must start to explore the modern telecoms and IT marketplaces, look around the find the services it could offer, quickly develop them, and then sell them at a reasonable price without its usual confusion marketing. This will cost money, but it will be a sound investment. Saving money ad-infinitum will eventually lead to a tiny company with tiny value. Investing heavily to create adventurous new products and services would create new income streams that will take the company to its full potential.
BT still has a lot of high quality staff, though many have left in recent years in management -induced despair, having offered the company the ideas it needed and having them rejected by accountants and managers with little or no real understanding of telecoms or IT. It is not too late yet, but it soon will be. Identifying key technology-enabled opportunities and financing them will lead to recovery. Counting beans will lead to oblivion. Livingston has to go, and go soon. In my opinion, he just doesn't understand the business he is in, and should never have been at board level, let alone CEO. Francois Barrault has gone as a scapegoat, but I think he had a far better understanding of BT's business than Livingston ever will. BT was once a great company and could be one again with the right policies. Sacking good people and over-promoting fools will not help. Nor will counting only a selection of the beans.
But I haven't sold my shares. I am hoping in spite of everything that one day, BT will appoint a CEO who understands the business, who is prepared to take risk and invest heavily in the right areas, with huge injection into R&D. With the courage to identify and remove some of the thoroughly incompetent managers dotted here and there, and to reward the better ones, BT could once again be a world leading company. But BT can only be a good investment in the long term, and it might not survive that long.
Very risky, but potentially a good buy for the long term.
Marks and Spencer share price decline
M&S used to offer the kind of clothes I would wear. I have no fashion knowledge, and effectively used to outsource that to M&S. I buy whatever shirt they have in stock, knowing I can go out in public wearing it without looking daft.
They seem to be in trouble with declining share prices and I wondered why. I hadn't been clothes shopping for a few months since my wardrobe was stuffed. But when we recently got a black tie dinner invitation, I took my wife there to get a new dress. We couldn't find one. We weren't being fussy, it's just that they only had three, all pretty similar. We searched the whole shop assuming we must have missed the appropriate section, but eventually gave up and went elsewhere. And come to think of it, I had the same trouble last year when I bought a new dinner suit, it took ages to find the right section because the layout had all changed, and when I did, there were very few choices. And I couldn't find the shirts I like either.
I think if this problem is a common one for their regular and loyal customers, it would explain why they are suffering. They have simply lost touch with what their customers want to buy, a potentially fatal problem if it continues. Too much trying to invent new styles and cater for new markets has left them alienating many of their existing customers, who want to spend money there, but can't.
Too bad. I'd like to help by buying stuff there, but they'll have to stock it first. My needs are simple - I just want ordinary everyday clothes that are reasonable quality, look OK, feel OK and don't cost a fortune. I suspect that's what the rest of their traditional customer base also wants.
Back to basics then.
They seem to be in trouble with declining share prices and I wondered why. I hadn't been clothes shopping for a few months since my wardrobe was stuffed. But when we recently got a black tie dinner invitation, I took my wife there to get a new dress. We couldn't find one. We weren't being fussy, it's just that they only had three, all pretty similar. We searched the whole shop assuming we must have missed the appropriate section, but eventually gave up and went elsewhere. And come to think of it, I had the same trouble last year when I bought a new dinner suit, it took ages to find the right section because the layout had all changed, and when I did, there were very few choices. And I couldn't find the shirts I like either.
I think if this problem is a common one for their regular and loyal customers, it would explain why they are suffering. They have simply lost touch with what their customers want to buy, a potentially fatal problem if it continues. Too much trying to invent new styles and cater for new markets has left them alienating many of their existing customers, who want to spend money there, but can't.
Too bad. I'd like to help by buying stuff there, but they'll have to stock it first. My needs are simple - I just want ordinary everyday clothes that are reasonable quality, look OK, feel OK and don't cost a fortune. I suspect that's what the rest of their traditional customer base also wants.
Back to basics then.
Friday, 10 October 2008
Tuesday, 30 September 2008
environmental waste
A brilliant piece in today's times by Bjorn Lomborg, one of my favourite environmentalists. While the world goes mad jumping on every passing bandwagon with a climate change banner, there is precious little common sense being applied. Lomborg's simple case that we should cost actions in seems to be ignored by the vast majority of environmentalists. His calculations suggest that for every pound the UK is spending, we will receive roughly 4p worth of good. The money could and should be spent elsewhere.
I can't disagree with a thing he says. His analysis is spot on.
What irritates me more than anything about the whole climate change debate is the almost total ignoring of the effects of future technology with its consequences for business and social change.
All the projections of doom and gloom rely on technology staying similar to today, yet the assumption is that we will still consume more and more. So environmentalists take full account of increasing wealth and consumption, without taking any account of what we will actually be consuming, or how it is made or used. We still see lots of ads telling us how important it is to switch off TVs and other IT and not to leave them on standby. The fact is that these devices don't use 30W on standby any more, it is now more like 0.1W. Recent rises in oil prices have already led to car manufacturers accelerating their plans for electric cars, and caused hundreds of entrepreneurs to get into new energy technology. Panic is not required, solutions are being developed and will be delivered. Not tomorrow, but easily early enough to prevent anything like the doom and gloom being forecast for the long term.
In this light of rapid technology development and the mid term solving of climate change, and the certain aversion of long term doom, Lomborg's criticism of the extreme waste of money on reducing CO2 emissions becomes even more appropriate. Governments are spending extreme amounts of money on very little gain, whereas if they spent much less in the right areas, such as technology R&D, they would accomplish much more.
So why is this in my finance blog rather than my grumpy old man rant? One day, in the not too distant future, the tide will turn, and it will be obvious to everyone that the money has been misdirected. Companies that are developing genuinely useful technologies will flourish, whiloe those sustained by the financial fallout of environmental hype will suffer and most will die.
Time to start looking at your portfolio and weeding out shares in so-called ethical companies, and any that spend a lot of effort to tell everyone how environmentally sound they are. I'd rather have sound financial and business management any day than a CEO whose main effort is to appease the stupid end of environmentalism. The day of reckoning will come sooner than you think.
I can't disagree with a thing he says. His analysis is spot on.
What irritates me more than anything about the whole climate change debate is the almost total ignoring of the effects of future technology with its consequences for business and social change.
All the projections of doom and gloom rely on technology staying similar to today, yet the assumption is that we will still consume more and more. So environmentalists take full account of increasing wealth and consumption, without taking any account of what we will actually be consuming, or how it is made or used. We still see lots of ads telling us how important it is to switch off TVs and other IT and not to leave them on standby. The fact is that these devices don't use 30W on standby any more, it is now more like 0.1W. Recent rises in oil prices have already led to car manufacturers accelerating their plans for electric cars, and caused hundreds of entrepreneurs to get into new energy technology. Panic is not required, solutions are being developed and will be delivered. Not tomorrow, but easily early enough to prevent anything like the doom and gloom being forecast for the long term.
In this light of rapid technology development and the mid term solving of climate change, and the certain aversion of long term doom, Lomborg's criticism of the extreme waste of money on reducing CO2 emissions becomes even more appropriate. Governments are spending extreme amounts of money on very little gain, whereas if they spent much less in the right areas, such as technology R&D, they would accomplish much more.
So why is this in my finance blog rather than my grumpy old man rant? One day, in the not too distant future, the tide will turn, and it will be obvious to everyone that the money has been misdirected. Companies that are developing genuinely useful technologies will flourish, whiloe those sustained by the financial fallout of environmental hype will suffer and most will die.
Time to start looking at your portfolio and weeding out shares in so-called ethical companies, and any that spend a lot of effort to tell everyone how environmentally sound they are. I'd rather have sound financial and business management any day than a CEO whose main effort is to appease the stupid end of environmentalism. The day of reckoning will come sooner than you think.
bank collapses and the suspension of logic
I have been asked several times recently to comment on the economic collapse and have refused to do radio shows because I know too little about economics to make any sensible comment. Or so I thought. But the decisions our leaders have been making in response suggest I am not the only one who knows nothing. I am astonished at how much absolutely obvious sense has been thrown away in the panic. Our UK treasurer has responded to the collapse of Bradford and Bingley by selling much of the bank to the Spanish Santander, while keeping most of the debt. Fair enough if the deal was sound, except that the price he sold it at was only sensible if Santander also took on most of the debt. As far as I can tell from the figures in the morning papers, he effectively sold £21Bn of safe cash for £610M, while the UK taxpayer kept all the debt. Sure, the bank shares were worthless, but cash is cash, and debt is debt, and even if the overall sum is low, the cash bit is still cash, bank branches are still branches, and still worth just as much. Banco Santander must be laughing themselves silly at the stupidity of the UK treasury. I am feeling rather let down, having had a large chunk of my hard earned money given away to a bank for no good reason. Along with every other UK taxpayer. Why is our government so panicked into doing something that they will do anything, regardless of whether it makes any sense? Surely in time of crisis, actions need more than ever to be thought through sensibly.
In any case, I am rather puzzled by this whole thing, and I am not alone. Why is it such a big problem if some banks go under? They can't all fail. The world economy is perfectly sound. People are working, generating wealth. Some people have surplus, others want to borrow. If every bank went broke, new ones would spring up on the internet tomorrow to ensure that borrowers are put in contact with savers, for a cut. As it is, some banks have overstretched, and bought bad risks from other banks, and they deserve to suffer the consequences of their own bad decisions. Other banks who haven't done so will survive, since their assets outweigh their bad risks.
Of course, the situation has created an atmosphere of distrust, and slowed liquidity, but throwing away good money at people who have already proven should not be allowed to manage it does not seem a good idea. Capitalism hasn't failed, the companies failed, that's all. If they are allowed to die, no big deal. Life, business, and the flow of money, will quickly return to normal. The real problem is if taxpayers' money is thrown away, taxes increased, and people can't afford to live well. That will certainly collapse economies.
So, I don't get it. Perhaps I am missing something, but I suspect not. I suspect the real problem is that our leaders don't get it, and are far too willing to listen to bad advice from people who stand to gain a great deal of money from it. If I were in power, I would leave the market alone. It will be very turbulent, lots of people will lose money, and lots will gain. And the banks that survive might be a little more sensible in future. Bail them out, and the pain will affect everyone for a very long time, and the banks will still take bad risks, because that is how their executives are incentivised.
In any case, I am rather puzzled by this whole thing, and I am not alone. Why is it such a big problem if some banks go under? They can't all fail. The world economy is perfectly sound. People are working, generating wealth. Some people have surplus, others want to borrow. If every bank went broke, new ones would spring up on the internet tomorrow to ensure that borrowers are put in contact with savers, for a cut. As it is, some banks have overstretched, and bought bad risks from other banks, and they deserve to suffer the consequences of their own bad decisions. Other banks who haven't done so will survive, since their assets outweigh their bad risks.
Of course, the situation has created an atmosphere of distrust, and slowed liquidity, but throwing away good money at people who have already proven should not be allowed to manage it does not seem a good idea. Capitalism hasn't failed, the companies failed, that's all. If they are allowed to die, no big deal. Life, business, and the flow of money, will quickly return to normal. The real problem is if taxpayers' money is thrown away, taxes increased, and people can't afford to live well. That will certainly collapse economies.
So, I don't get it. Perhaps I am missing something, but I suspect not. I suspect the real problem is that our leaders don't get it, and are far too willing to listen to bad advice from people who stand to gain a great deal of money from it. If I were in power, I would leave the market alone. It will be very turbulent, lots of people will lose money, and lots will gain. And the banks that survive might be a little more sensible in future. Bail them out, and the pain will affect everyone for a very long time, and the banks will still take bad risks, because that is how their executives are incentivised.
Monday, 8 September 2008
Oil price $30 per barrel by 2030
Oil is a valuable commodity and the subject of a great deal of panic right now. The panic is based on ill-informed doom-mongering, with little basis in reality. Some long term perspective might be useful.
By about 2030, as a result of technology development, stimulated at least in part by high oil prices today, solar energy farming will be a big business. Already, work is under way to start building solar farms in the Sahara, where suitable land is both plentiful and cheap.
The staring point for a calculation must be the energy equivalent of a barrel of oil, since that is the prime purpose of oil today. Each barrel contains approximately 6 gigajoules of energy.
Assuming that solar panels can be mass-produced, with a sunlight conversion efficiency of about 12%, at a cost of $200 per sq metre, in today's money, a 1 sq metre panel will generate approximately 8.5kwh of energy per day, equating to 1 barrel of oil every 6 months. The land also needs to produce a good income for its developer, who would presumably be happy with a return of $50,000 per hectare for otherwise worthless land, i.e. $5 per sq m per year, and assuming that 50% of the land is covered by panel, that translates into $10 per panel + depreciation costs, of say $50 per year for a 4 year write-off. With total revenue of $60 per panel per year, 6 months is $30.
If the energy equivalent of a barrel of oil can be generated for $30, it is reasonable to set this as an upper limit on the market value of oil, when used for fuel. Prices of oil for other purposes such as plastics manufacture or specialist industries may be higher.
However, since oil is mainly used for fuel, substitution in this market by cheaper alternatives such as solar power will lead to a gradual collapse in the oil market as supply far outstrips demand. Therefore, most oil will probably be left in the ground, and it will be much cheaper than today in real terms.
By about 2030, as a result of technology development, stimulated at least in part by high oil prices today, solar energy farming will be a big business. Already, work is under way to start building solar farms in the Sahara, where suitable land is both plentiful and cheap.
The staring point for a calculation must be the energy equivalent of a barrel of oil, since that is the prime purpose of oil today. Each barrel contains approximately 6 gigajoules of energy.
Assuming that solar panels can be mass-produced, with a sunlight conversion efficiency of about 12%, at a cost of $200 per sq metre, in today's money, a 1 sq metre panel will generate approximately 8.5kwh of energy per day, equating to 1 barrel of oil every 6 months. The land also needs to produce a good income for its developer, who would presumably be happy with a return of $50,000 per hectare for otherwise worthless land, i.e. $5 per sq m per year, and assuming that 50% of the land is covered by panel, that translates into $10 per panel + depreciation costs, of say $50 per year for a 4 year write-off. With total revenue of $60 per panel per year, 6 months is $30.
If the energy equivalent of a barrel of oil can be generated for $30, it is reasonable to set this as an upper limit on the market value of oil, when used for fuel. Prices of oil for other purposes such as plastics manufacture or specialist industries may be higher.
However, since oil is mainly used for fuel, substitution in this market by cheaper alternatives such as solar power will lead to a gradual collapse in the oil market as supply far outstrips demand. Therefore, most oil will probably be left in the ground, and it will be much cheaper than today in real terms.
Thursday, 1 May 2008
oil and recession
I'm not an economist so maybe I should keep my mouth shut, but...
The subject of rising prices has already been done to death in the media recently, but I do think that too little has been said on the underlying effect of the rise of India and China on our relative wealth. Common opinion seems to be that this is a short term recession that will fix itself soon with the right amount of government stimulation. I don't think so. I think it is a much bigger and longer term trend.
For many years (even before I came on the futures scene), futurists were speculating about the fact that there are only so many resources in the world and as other countries develop, so the developed countries would have to decrease their consumption. But common opinion resisted this and insisted that rich countries would stay rich and that other countries would just have to live with what was left.
I think we are now finally seeing the consequences of the irresistible pressure of the market, which will re-level the global playing field. Developed countries will find their populations having to take a drop in standard of living as people elsewhere become relatively richer.
Of course, we are not yet in the business of reducing salaries, and I don't think that is likely to happen any time soon. The market doesn't need that to rebalance things. All it needs, and we are seeing this happen abundantly now, is for prices to change. As people in other countries get richer, so demand rises and the market ensures that global prices rise. This already conspicuously applies to oil and grain and will affect other commodities in due course too.
As these basics become more expensive, the cost of everything else increases. So even though our wages stay the same, our spending power decreases sharply. Falling exchange rates (just another way of rebalancing prices according to relative national efficiency, power and influence) makes imports of commodities still more expensive.
People will not stop developing and getting richer. That will continue. Demand for resources will increase and prices will rise further. Of course this slows the rise of buying power for the newly rich too, but a free market ensures that resources go to people according to their ability to pay, and if they are willing to pay more, you will have to as well if you still want that resource.
Of course, it is not a free market. There are political influences, and powerful countries can and do strike deals with resource providers to ensure preferential treatment. This reduces the resources left to the rest of the world and consequently amplifies the interaction of price with demand.
The losers as always are the billions on low incomes. As rich people can afford to feed grain to livestock to make meat, there is less left for the poor for whom it is their only food supply, and the increased prices make it impossible for them to feed their families. Compound that with increasing pressure from the stupidity of using limited agricultural land to grow fuel for rich people's cars, and we create food riots.
So, where will it go? The world is getting richer. Improving technology means that we can take more resources from the environment and add more value to them with the same human effort. We can educate more people to a higher standard and create more wealth generating potential. So however the wealth is distributed around the world, we will simply have more people with money than we had before. Demand on basic resources will increase steadily for several decades to come. Commodity rices will rise and rise as more and more people can afford to pay.
Away from basics like oil and grain, it is far more complicated. Technology will also increase automation, and the resulting derivative products will become relatively cheaper. So although the price of raw materials may increase, it will cost less and less to turn them into final products such as TVs or cars. Automation will affect resource extraction too. Costs of production will decrease while there is abundant resource available, since robots can make robots to make robots to make mining equipment and staff mines and deliver, refine and process the extracts. Of course, as we use up reserves that are easily accessible, the costs of extracting will eventually increase again, as we are seeing with oil now. But new technologies can often create substitutes. Copper hasn't run out mainly because we don't need so much of it now for plumbing or communications, as fibre and plastics have substituted.
Automation reduces the need for human involvement and forces people to find alternative work too. This is another way of reducing people's wages of course, albeit indirect.
The only real hope in all of this is that we can somehow make the same resources go round efficiently enough to satisfy everyone's needs. This might just be possible with advancing technology. Nanotechnology will create wonderful new materials that are stronger and lighter and use less basic resources. With enough high-tech and automation, they might even cost less. Improving recycling and mining of landfills will enable easier recirculation of resources. Miniaturisation of IT will allow today's large devices to be replaced by electronic jewellery. Even large screen displays can ultimately be replaced by active contact lenses. If we can create enough cheap energy, for example by using enormous solar farms in the world's deserts, then agricultural techniques such as multi-layer farms might become feasible, and together with genetic modification, precision farming, and abandonment of the rich world's self-indulgent organic farming, we may easily be able to grow enough food to supply the whole world at low prices. Even meat can theoretically be cultured in factories instead of using real animals, which are an extremely inefficient way of turning sunlight into meat.
So let's hope that technology will catch up with its potential quickly, because it is only highly advanced technology that can provide a solution that allows everyone in the world to have a reasonable standard of living. Otherwise, market forces will continue to increase prices until our standard of living in the developed world has been levelled down to meet the increasing standard of living in developing countries. This is no short-term recession. Development is here to stay and historic privileges are not sustainable.
The subject of rising prices has already been done to death in the media recently, but I do think that too little has been said on the underlying effect of the rise of India and China on our relative wealth. Common opinion seems to be that this is a short term recession that will fix itself soon with the right amount of government stimulation. I don't think so. I think it is a much bigger and longer term trend.
For many years (even before I came on the futures scene), futurists were speculating about the fact that there are only so many resources in the world and as other countries develop, so the developed countries would have to decrease their consumption. But common opinion resisted this and insisted that rich countries would stay rich and that other countries would just have to live with what was left.
I think we are now finally seeing the consequences of the irresistible pressure of the market, which will re-level the global playing field. Developed countries will find their populations having to take a drop in standard of living as people elsewhere become relatively richer.
Of course, we are not yet in the business of reducing salaries, and I don't think that is likely to happen any time soon. The market doesn't need that to rebalance things. All it needs, and we are seeing this happen abundantly now, is for prices to change. As people in other countries get richer, so demand rises and the market ensures that global prices rise. This already conspicuously applies to oil and grain and will affect other commodities in due course too.
As these basics become more expensive, the cost of everything else increases. So even though our wages stay the same, our spending power decreases sharply. Falling exchange rates (just another way of rebalancing prices according to relative national efficiency, power and influence) makes imports of commodities still more expensive.
People will not stop developing and getting richer. That will continue. Demand for resources will increase and prices will rise further. Of course this slows the rise of buying power for the newly rich too, but a free market ensures that resources go to people according to their ability to pay, and if they are willing to pay more, you will have to as well if you still want that resource.
Of course, it is not a free market. There are political influences, and powerful countries can and do strike deals with resource providers to ensure preferential treatment. This reduces the resources left to the rest of the world and consequently amplifies the interaction of price with demand.
The losers as always are the billions on low incomes. As rich people can afford to feed grain to livestock to make meat, there is less left for the poor for whom it is their only food supply, and the increased prices make it impossible for them to feed their families. Compound that with increasing pressure from the stupidity of using limited agricultural land to grow fuel for rich people's cars, and we create food riots.
So, where will it go? The world is getting richer. Improving technology means that we can take more resources from the environment and add more value to them with the same human effort. We can educate more people to a higher standard and create more wealth generating potential. So however the wealth is distributed around the world, we will simply have more people with money than we had before. Demand on basic resources will increase steadily for several decades to come. Commodity rices will rise and rise as more and more people can afford to pay.
Away from basics like oil and grain, it is far more complicated. Technology will also increase automation, and the resulting derivative products will become relatively cheaper. So although the price of raw materials may increase, it will cost less and less to turn them into final products such as TVs or cars. Automation will affect resource extraction too. Costs of production will decrease while there is abundant resource available, since robots can make robots to make robots to make mining equipment and staff mines and deliver, refine and process the extracts. Of course, as we use up reserves that are easily accessible, the costs of extracting will eventually increase again, as we are seeing with oil now. But new technologies can often create substitutes. Copper hasn't run out mainly because we don't need so much of it now for plumbing or communications, as fibre and plastics have substituted.
Automation reduces the need for human involvement and forces people to find alternative work too. This is another way of reducing people's wages of course, albeit indirect.
The only real hope in all of this is that we can somehow make the same resources go round efficiently enough to satisfy everyone's needs. This might just be possible with advancing technology. Nanotechnology will create wonderful new materials that are stronger and lighter and use less basic resources. With enough high-tech and automation, they might even cost less. Improving recycling and mining of landfills will enable easier recirculation of resources. Miniaturisation of IT will allow today's large devices to be replaced by electronic jewellery. Even large screen displays can ultimately be replaced by active contact lenses. If we can create enough cheap energy, for example by using enormous solar farms in the world's deserts, then agricultural techniques such as multi-layer farms might become feasible, and together with genetic modification, precision farming, and abandonment of the rich world's self-indulgent organic farming, we may easily be able to grow enough food to supply the whole world at low prices. Even meat can theoretically be cultured in factories instead of using real animals, which are an extremely inefficient way of turning sunlight into meat.
So let's hope that technology will catch up with its potential quickly, because it is only highly advanced technology that can provide a solution that allows everyone in the world to have a reasonable standard of living. Otherwise, market forces will continue to increase prices until our standard of living in the developed world has been levelled down to meet the increasing standard of living in developing countries. This is no short-term recession. Development is here to stay and historic privileges are not sustainable.
Saturday, 29 March 2008
Likely civil rebellion in the UK in 2-3 years
There is a great deal of commentary recently about the poor health of the UK economy, with rapidly rising prices and taxes, falling disposable incomes, reducing access to credit and so on. People of middle incomes are feeling most of the pain, targeted as they are with most of the new tax burden, but not rich enough for it not to matter. In parallel, seemingly every newspaper carries daily gripes about the poor public service value-add for the increased taxes, with appalling health, education, policing, and transport systems. The relatively generous public sector pay, especially pension costs, which are far more generous than most private sector employees receive, will steadily become a bigger issue until it is tackled. Poorly targeted and imbalanced welfare is making too big a drain on middle earners, who see too little reward for working hard. And a wide range of poorly thought-through policies have resulted in a very degraded social fabric.
People have little choice over this system, with their politicians unwilling or unable (or both) to address the problems. Some of the more able and mobile just emigrate, and we are already seeing a serious brain drain again, but most people can't just leave, they have commitments here, or don't want to uproot and move to a strange new place. So the UK socio-economy is effectively a fairly well-sealed system, only slightly leaky (in fact, with the added pressures caused by immigration, it is worse than that, with an effective one-way valve). Pressure can build and build in a sealed container with little obvious activity until it reaches a certain level, and then a sudden release occurs.
I believe that we are not very far away from a backlash. This is not a party politics issue -many people don't like the existing government and think they are incompetent, but have little faith in the opposition either. They are very disillusioned with our supposed leaders, of all flavours. But while the British population is notoriously tolerant, and will put up with huge amounts of discomfort before saying or doing anything, there is a breaking point.
When people feel that they are being steadily squeezed from all directions, that their own needs are seemingly always ignored, that their government seems to treat them as an enemy, that their own quality of life has been eroded by legislation and taxation for too long, so that they feel abused, neglected, and that in spite of all their best efforts they can no longer sustain a reasonable quality of life, then they no longer feel any allegiance to the state, nor any civil duty to stay calm and respect the authorities.
The pressures are not just financial. People are certainly feeling much poorer, although they are working harder. But there is also an increasing perception of too much state-imposed cultural change. There is too much uncontrolled immigration. There is too much surveillance, too much erosion of privacy. There is too much serious crime, while the police and local authorities pay most of their attention on minor offences by the largely law-abiding majority, such as speeding offences, or leaving a bin lid open. In short, the state has become too big, too invasive, too controlling, too expensive, and coupled with serious and frequent incompetence, that is rapidly building resentment in middle class Britain. The state is becoming people's enemy instead of their friend.
We saw disorder during the poll tax mishandling in the 80s. There were many demonstrations and some violence. But technology has moved on more than a little, and it is a better educated class that is affected this time. The potential for organising rebellion via today's and future IT is vastly greater. My own perception is that we are now about 2 to 3 years away from a serious backlash, which will include widespread and well coordinated civil disobedience, demonstrations, and probably significant violence.
Such widespread and effective disruption will of course have enormous implications across the board. We should expect some major changes in government policy to be imposed by a new government, a wholesale redesign of taxation and welfare, reforms of the public services and the pay and conditions for public sector workers, and generally a great deal of legislation abolished or rewritten.
People have little choice over this system, with their politicians unwilling or unable (or both) to address the problems. Some of the more able and mobile just emigrate, and we are already seeing a serious brain drain again, but most people can't just leave, they have commitments here, or don't want to uproot and move to a strange new place. So the UK socio-economy is effectively a fairly well-sealed system, only slightly leaky (in fact, with the added pressures caused by immigration, it is worse than that, with an effective one-way valve). Pressure can build and build in a sealed container with little obvious activity until it reaches a certain level, and then a sudden release occurs.
I believe that we are not very far away from a backlash. This is not a party politics issue -many people don't like the existing government and think they are incompetent, but have little faith in the opposition either. They are very disillusioned with our supposed leaders, of all flavours. But while the British population is notoriously tolerant, and will put up with huge amounts of discomfort before saying or doing anything, there is a breaking point.
When people feel that they are being steadily squeezed from all directions, that their own needs are seemingly always ignored, that their government seems to treat them as an enemy, that their own quality of life has been eroded by legislation and taxation for too long, so that they feel abused, neglected, and that in spite of all their best efforts they can no longer sustain a reasonable quality of life, then they no longer feel any allegiance to the state, nor any civil duty to stay calm and respect the authorities.
The pressures are not just financial. People are certainly feeling much poorer, although they are working harder. But there is also an increasing perception of too much state-imposed cultural change. There is too much uncontrolled immigration. There is too much surveillance, too much erosion of privacy. There is too much serious crime, while the police and local authorities pay most of their attention on minor offences by the largely law-abiding majority, such as speeding offences, or leaving a bin lid open. In short, the state has become too big, too invasive, too controlling, too expensive, and coupled with serious and frequent incompetence, that is rapidly building resentment in middle class Britain. The state is becoming people's enemy instead of their friend.
We saw disorder during the poll tax mishandling in the 80s. There were many demonstrations and some violence. But technology has moved on more than a little, and it is a better educated class that is affected this time. The potential for organising rebellion via today's and future IT is vastly greater. My own perception is that we are now about 2 to 3 years away from a serious backlash, which will include widespread and well coordinated civil disobedience, demonstrations, and probably significant violence.
Such widespread and effective disruption will of course have enormous implications across the board. We should expect some major changes in government policy to be imposed by a new government, a wholesale redesign of taxation and welfare, reforms of the public services and the pay and conditions for public sector workers, and generally a great deal of legislation abolished or rewritten.
Friday, 14 March 2008
Garbage disposal unit manufacturers
Rubbish taxation is extremely likely in the next few years in the UK, and perhaps around Europe. If taxation is by weight, as many expect, then expect to see a lot of people buying garbage disposal units since a lot of the weight in rubish is from waste food and vegetable peelings. Many households won't want to bother separating everything into the appropriate recycling bin, so a lot of vegetable peelings and waste food will simply be washed down the drain.
Of course, this will increase water use dramatically so water companies will also benefit, and more treatment of water will be needed, increasing their costs and justifying price rises.
Plumbers will also pick up business in installation, as will kitchen manufacturers.
The net effect is that everyone will pay more for water, pollution will increase, and garbage disposal unit manufcaturers will flourish.
If waste taxation is partly by volume, or if loony councils refuse to empty bins where the lid is even slightly open, this will also create a need for rubbish compression devices.
It's an ill wind that blows nobody any good.
Of course, this will increase water use dramatically so water companies will also benefit, and more treatment of water will be needed, increasing their costs and justifying price rises.
Plumbers will also pick up business in installation, as will kitchen manufacturers.
The net effect is that everyone will pay more for water, pollution will increase, and garbage disposal unit manufcaturers will flourish.
If waste taxation is partly by volume, or if loony councils refuse to empty bins where the lid is even slightly open, this will also create a need for rubbish compression devices.
It's an ill wind that blows nobody any good.
Sunday, 9 March 2008
Fleet management
This is a very long term issue, but as government is increasingly tempted to crack down on the fun side of motoring there will be less incentive to own a car.
Firstly, speed cameras are making it harder to enjoy driving quickly, as does increasing congestion. Within ten years, you should expect that engine speed will be electronically limited as you enter speed-restricted zones. The justification will be safety and climate change, and it seems inevitable that government will enforce such a move.
Secondly, there will eventually be a move towards electronically driven cars on electronic highways, caused by the need to tackle congestion by taking driving out of the hands of people with poor driving skill, who cause most of it.
With these pressures, the personal emotional attachment of a driver to a car will reduce greatly. With all the ego and emotion taken away from car ownership, there will be much less need to buy a car, and much more susceptibility to fleet ownership.
In fact, fleet managed, electronically driven cars would be an ideal substtute for public transport, increasing social inclusivity, greatly helping the environment, reducing congestion and helping the economy. Win win win!
So, private car sales might well fall, with far less choice and variety of cars, simply because there will be far less personal involvement with cars. Good news for fleet managers in the 10 year plus time frame.
Ian
Firstly, speed cameras are making it harder to enjoy driving quickly, as does increasing congestion. Within ten years, you should expect that engine speed will be electronically limited as you enter speed-restricted zones. The justification will be safety and climate change, and it seems inevitable that government will enforce such a move.
Secondly, there will eventually be a move towards electronically driven cars on electronic highways, caused by the need to tackle congestion by taking driving out of the hands of people with poor driving skill, who cause most of it.
With these pressures, the personal emotional attachment of a driver to a car will reduce greatly. With all the ego and emotion taken away from car ownership, there will be much less need to buy a car, and much more susceptibility to fleet ownership.
In fact, fleet managed, electronically driven cars would be an ideal substtute for public transport, increasing social inclusivity, greatly helping the environment, reducing congestion and helping the economy. Win win win!
So, private car sales might well fall, with far less choice and variety of cars, simply because there will be far less personal involvement with cars. Good news for fleet managers in the 10 year plus time frame.
Ian
Risers and fallers - content industry
This blog will list reasons why various industries will go up or down in the future, so may be of assistance in long term investment thinking. However, this should only be one tiny input to your investment strategy. Although I will give my best opinion, it is only an opinion and I cannot accept any responsibility for any consequences. You should read my arguments and then make your own decisions.
Anyway, to start off with something obvious, I will consider The Music Industry.
The music industry is going to struggle even more than today. They have taken almost the exact opposite strategy to what they should have done. They have alienated almost their entire customer base by treating everyone as criminals, while still doing their best to fleece honest customers with ludicrously high prices and often selling padding in place of decent content. They have squandered their customer good will and few will miss the big players when they die.
The simple fact is that music no longer needs the big providers. Music is something that most people have some capability to create and in which very many people are extremely competent, and often want no more reward than a round of applause. Whereas aspiring bands and singers once had to go to the music producer companies to be heard, they can easily do so today on the net. Youtube is just one site, but is easily the place to publish new music for amateurs and small bands. Recording equipment is mostly just IT so is falling in cost exponentially.
Hiring a quiet room and decent equipment and getting a good recording on-line is now well within the means of most bands. Who needs the big players any more?
As for quality, the bands in the charts are not very different from many you have never heard of. If you hear a song you like, you can easily find others in similar style using music search engines. Why pay a fortune for a couple of decent tracks and a lot of padding on a CD in a plastic case, when you can download many hours of high quality free stuff that sounds similar?
And the music business model is evolving. Giving music away for free is a good way to get rich. The more people that hear it and like it, the more will buy tickets for the next concert, and T-shirt and whatever. The track download is becoming just an advert for the real thing. So what if most people never pay anything? If a few thousand buy concert tickets, there is still enough potential reward to justify production.
So, the music industry is fighting hard in the courts and trying to force regulators to protect it, but no-one needs it any more and even if they haven't noticed yet, they soon will. It can roar and even bite a few more heads off, but it is dying. Disinvest.
Anyway, to start off with something obvious, I will consider The Music Industry.
The music industry is going to struggle even more than today. They have taken almost the exact opposite strategy to what they should have done. They have alienated almost their entire customer base by treating everyone as criminals, while still doing their best to fleece honest customers with ludicrously high prices and often selling padding in place of decent content. They have squandered their customer good will and few will miss the big players when they die.
The simple fact is that music no longer needs the big providers. Music is something that most people have some capability to create and in which very many people are extremely competent, and often want no more reward than a round of applause. Whereas aspiring bands and singers once had to go to the music producer companies to be heard, they can easily do so today on the net. Youtube is just one site, but is easily the place to publish new music for amateurs and small bands. Recording equipment is mostly just IT so is falling in cost exponentially.
Hiring a quiet room and decent equipment and getting a good recording on-line is now well within the means of most bands. Who needs the big players any more?
As for quality, the bands in the charts are not very different from many you have never heard of. If you hear a song you like, you can easily find others in similar style using music search engines. Why pay a fortune for a couple of decent tracks and a lot of padding on a CD in a plastic case, when you can download many hours of high quality free stuff that sounds similar?
And the music business model is evolving. Giving music away for free is a good way to get rich. The more people that hear it and like it, the more will buy tickets for the next concert, and T-shirt and whatever. The track download is becoming just an advert for the real thing. So what if most people never pay anything? If a few thousand buy concert tickets, there is still enough potential reward to justify production.
So, the music industry is fighting hard in the courts and trying to force regulators to protect it, but no-one needs it any more and even if they haven't noticed yet, they soon will. It can roar and even bite a few more heads off, but it is dying. Disinvest.
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