Wednesday, October 26, 2016

Why does Lloyd Blankfein's interview with Fareed Zakaria sounds weird to me?

Fareed Zakaria interviewed Lloyd Blankfein, CEO of Goldman Sachs, for his GPS program. Here is the video. There are so many weird things with this one. But I came away ith a feeling that if Elizabeth Warren were to cross-examine him in Court, Lloyd Blankfein would be toast. But first watch this (transcript of full show here):


The interview basically talks about few key concepts:
  1. State of the Economy
  2. Accountability of top management of Banks - context of Wells Fargo scam.
  3. Closeness with Clintons
  4. Why wouldn't Hillary Clinton release the transcripts of the talks at Goldman Sachs
I found many weird things. Let us look at the interview in detail (highlights and in-quote comments are all mine).

I start from first question leaving hi's and hello's out.
ZAKARIA: From your vantage point, what does the economy look like? You know, how strong is growth? Because it still seems steady but tepid. 
BLANKFEIN: Well, it feels steady but tepid. But that being said, it is steady and there are a lot of advantages that the U.S. economy has. So for example, the consumer has deleveraged banks -- the banking system is in excellent shape. If you look at energy, there's a lot of tailwind in the U.S. economy and the fact of the matter is, we went through a big trauma, which included a banking system trauma and it took a while to work itself through. So the answer is, it's tepid but we're definitely growing and it's established, and the latter point is the more significant point. 
This is the first question. Nothing special here. Though as a CEO of Goldman Sachs I would have expected Blankfein to be sharper about his analysis. Instead he comes across as pedestrian.

"Banking is in excellent shape" is the wrong thing to say if you ask me, particularly in the world which wants your head. He could have said Banks are in much better position to support entrepreneurial activity - small businesses and the like, than the time just after the crisis. That will kickstart recovery.

Look at this first part:

ZAKARIA: A lot of people say, though, there's a lot of economic anxiety. People don't feel like these numbers are right, that unemployment is down, but at the same time, you know -- so for some reason, they remain as great sense of economic anxiety, what do you attribute that to? 
BLANKFEIN: Well, I'd say, there's economic anxiety but I'd say there's a more generalize anxiety and a very negative sentiment and I think it's fed and feeds into the political cycle. I have trouble explaining. If you look at the metrics, you talk about unemployment -- unemployment is not just down, we're virtually at full employment.   
Now, you'd say that there's some degree of underemployment or wage (earning) that was always the case. 
I'm not minimizing the consequence to people who should have -- who feel their jobs should be higher paid and legitimately so, and the legitimate issues about minimum wages, but at the end of the day, these problems always existed to some extent. They're less -- people should feel better than they may actually do. I'm not saying they should feel good or there aren't challenges to try to surmount or other objectives to strife for. But the sentiment is a lot worse than the economy.  [Mr. Blankfein, you just trivialized the problems facing normal people across the world who have never felt this way before]
If you knew all the numbers and you are teleported here from two years ago or three years ago and you're told where employment was, where the price of energy was. What the federal deficit was looking like is a percentage of GDP, the strength of the consumer, a lot of other metrics and you heard that. You would think that sentiment would be a lot better than it is today. 

Blankfein sounds like he meant people should stop whining. They are whining for no reason. The people are unhappy because their jobs (a) don't pay them as much as they think they deserve, (b) their jobs cannot be counted on as stable for forseable future, (c) they do not see Government or policy makers doing anything to help the situation AND more importantly (d) they see policy makers going to great lengths in aiding bankers to create more profit through dubious policies when they don't seem to need any help. In this context, Blankfein comes across very insensitive.

Under-employment was always the case? Really? Not correct! It is one thing to argue that the wages were unreasonably high and they have come to normal or that there was over-employment and now it has reverted to mean. But this plain denial. 

To how many did the comment "and I think it's fed and feeds into the political cycle" sounded like he started to blame the US FED and then turned it elsewhere? It did to me. I know it is sly to infer that. But if he wanted to say "anxiety is fed by the political cycle and also feeds the political cycle" then he should have been more clearer. He is CEO of Goldman Sachs, you should speak deliberately and precisely, and more so when you speak to the media. Didn't he get media training? He can't give excuses.


We continue:
ZAKARIA: The one thing that people are sure of still is that they are suspicious of the banks. If you listen to Donald Trump, you know, he varies on lots of different things but the one consistent thing he keeps hitting is that the banks are bad, that they're in cahoots, that they're -- you know, the big banks are part of the group of things he attacks, big media, big government, you know, the Clinton machine, the banks and he always gets wild cheers.   
BLANKFEIN: Well, I think you're being generous. I think it's not suspicious, it's outright accusations and it's not just Donald Trump, you know, frankly. I mean, I don't like telling -- I don't like the fact that I don't like saying it to you but, you know, we're not -- at times, people think of us as, you know, bankers is tone deaf. Believe me, I read the papers everyday and I hear it.  [what are you so stressed about? There is nothing you can't like telling the media that they are unfairly targetted]
Look, variety of reasons. Let me just start out. One of which is, I think, some of the behaviors that have been, you know, highlighted and visited, you know, are real and justify some negative response. And then, other parts of it are just a general -- and I don't want to minimize it so let me pause for a second and say, there has been -- bankers have played an important role in the system, generally, get rewarded for the risks they take. And some of those risks were poorly managed and some of the behaviors were not, you know, recorded as bad behavior. And so, there's a legitimate reaction to that, full stop.
[Ok, Good! That is true - good to admit it.]
Other things also -- let me tell you, bankers are no better at predicting the future than anybody else. And most of what we do are trying to get the future right, trying to make good decisions of how to allocate capital, trying to lend money to people who pay you back, trying to finance winners and not finance losers and guess what, you don't always get it right and you get drawn into the same mistakes and the same confusion that anybody would and everybody does in connection with their efforts to try to figure out what the future is going to be. [This has been debunked, ridiculed so many times cannot believe Blankfein is using this defence.]
So, good to have Blankfein admit that there are bad apples. These bad apples should be punished heavily - in accordance with law. That is where a leader would take it. Blankfein could also say because it is such a complex system ascribing blame is very difficult and it takes time. But Banks don't want bad apples in their system as much as the general public does. 

But then for weird reason, he starts defending bad behaviour. I doubt people think the "bad apples" Blankfein referred to were only people making mistakes. People know you are talking of the cheats. People simply want you to say "we are finding the cheats and sending them to jail". To the lawyer in me, this volunteering of information looks suspicious.

ZAKARIA: One of the criticisms people make about the banks which is playing itself out with this Wells Fargo affair is banks make mistakes. They do bad things. They do things they shouldn't have done and they pay fines in a sense admitting the wrongdoing, whether or not technically they do but nobody at the top gets held accountable. Goldman Sachs has paid fines. Do you think that's a fair criticism? 
BLANKFEIN: I would -- well, let me just say, first of all, I can't own or comment on Wells Fargo situation, you know, I could apply it in abstract. Everyone is looking for someone to hold accountable but sometimes -- the answer is -- look, the short answer is you would like to ascribe malevolence to everything that goes wrong. 
Now there is bad behavior. Someone has cheated or this fraud, well, that's the remedies for that and people go to jail for that. [Para added by me] 
But sometimes, people are just wrong. And they're wrong about things within their area of expertise because I may be in finance and you may be a political scientist but I have views about political science and I may be right, you may have views about where the financial markets are going, you may be right. You just don't know.  
And sometimes, what's going on here is that people are trying to prescribe malevolence for people who were wrong and the evidence that they were simply wrong is look how much money they lost. And at the end of the day, if you still think that their behavior was off, to be punished the way people are saying they should be punished, you still have to find some kind of a criminal intent. 
You know, to this day maybe the law shouldn't be this way. But stupidity is not a crime. Sometimes it's even a defense because if you're merely wrong and you didn't get it right, it's hard to ascribe criminality.
ZAKARIA: But some of the cases -- and again, I know you can't comment about Wells Fargo particularly but there are some cases where it wasn't just being wrong. 
BLANKFEIN: Sure. If there's bad behavior, then bad behavior should be punished. Look, there was nothing -- it was not criminality but there were civil wrongs in Goldman Sachs which we, you know, paid fines with respect to which we paid fines. And so that punishment -- but you're asking something different. You're asking -- 
ZAKARIA: I'm saying that the public sentiment seems to be and you see in the words of Elizabeth Warren which is why the people at the top not held accountable.  
BLANKFEIN: Well, I think people should be held accountable for what they're responsible for. In other words, if somebody has a duty and they didn't fulfill their duty, well, that's a civil wrong.  [Legally correct - but wrong context]
You can fine somebody. The idea, going further and saying there should be criminality, you still have to -- you still have to commit a crime to be a criminal. And to commit a crime, you still have to have some level of intent for what you're doing. So we're talking very abstractly here.  [Legally very smart]
And so I'm not saying look, I'm a citizen, also. Any time there's some malfeasance, I would love to see a head roll, but you have to -- can't -- but once the head starts to roll, it's no longer an abstraction for the person whose shoulders it was on. They have to really have -- there has to be a crime. [Para added here] 
And I -- listen, we were investigated. The people who investigated us, and others, presumably, you know, we were very, very -- a subject of a lot of focus. I would have to say that people looked at a lot of behaviors. And if there was no -- and I'm not talking about myself in particular; [Why did Blankfein want to add this disclaimer] I'm talking about the group -- and the outcome was, was there were people who -- who -- people in the community of people who -- in the enforcement community -- were not going easy. If they failed to bring a case, they felt that there was no case.

This is the part that stumped me. First Blankfein would have done well if he was legal expert. For someone who could't explain why growth is tepid or there is economic anxiety, he breezes through the legal minefield with remarkable ease. He could put a lawyer to shame with his precision. Yes, Mr. Blankfein, people make mistakes and no one in America is against mistakes. 

"People are prescribing malevolence for people" this statement is so ambiguous that it could be a a part of a master confession. It can leave the jury in the "did he or didn't he" zone. Let me clarify what people think. When people see toddler using a semi-automatic gun and kill 20 people, they don't blame the toddler, they blame the parents and the pro-gun lobbies blame the gun manufacturers. So when a whale trader makes $1billion wrong bets, they blame his supervisors and may not necessarily blame him. This is not negligence but criminal negligence and repurcussions are dire - jail. This is not a civil liability but a criminal one. And frankly US Justice Department has dropped the investigations of criminal liability for civil penalties. That looks dubious to people.

Blankfein uses the stupidity argument without being provoked. My ears pricked up when he volunteered that one.

What Blankfein is saying is, in law, called the difference between misfeasance and malfeasance. Misfeasance means a mistake, trying to do the right / acceptable thing but making a mistake leading to a loss. Malfeasance is trying to do the wrong / unacceptable thing and doing it well. Now it may so be that your law and your work are such that they look awfully similar. That is, a mistake while doing normal thing and well-executed bad /wrong thing looks the same. The question then is how to determine which is which. 

Or, it could be so that banks may be trying to do something bad/unacceptable AND made mistake  and thus blew up the system. In this case the liability is not only criminal but also vicarious - i.e. Firm is also liable. The behaviour of Justice Department let the banks off the hook on this major issue. Clearly, banks were doing something unacceptable - Goldman's internal emails themselves said that in so many words while shorting the derivatives.

The thing is if bad behaviour is being displayed repeatedly, you benefit from bad behaviour (get a bonus) when it doesn't explode into a crisis then you are part of the system when it does explode. So you go to jail along with the perp as a co-accused. Now imagine a series of mistakes leading all the way to the top, taking place repeatedly and all those making mistakes are getting rewarded . This is a conspiracy - the burden of proof shifts from prosecution to the accused. How many times will Blankfein say he made a mistake. At the end it will appear he was only making mistakes at Goldman Sachs - wonder why he kept getting all those bonuses.

ZAKARIA: I have to ask you about the relationship of Goldman Sachs to the Clintons. There was a front-page story in the New York Times alleging that there are very close connections, that Goldman Sachs has done all kinds of things, from give money to the Clinton Global Initiative to creating a partnership between the -- your foundation and the State Department when Hillary Clinton was in office, to, of course, holding fund-raisers for both Clintons at various points. 
How do you respond to that charge?  
BLANKFEIN: Well, Hillary Clinton was the -- was our -- was a New York senator. [Trying to avoid the usage of the word "our" ;)] We're largely a -- well, we're certainly a New York- headquartered firm. The -- when -- when Bill Clinton was in office, obviously, he was the president of the United States -- we're one of the larger banks; we have influence in the financial system; of course we engage. We engage with Senator Schumer. We engage with Governor Cuomo.  
I don't know how to -- we could have -- I know that, you know, in the conspiracy world -- theory-driven world in which we live in, you connect data points, but, heck, [hmm?] I have -- I go out and I meet with editors of newspapers. I meet with Republicans, leaders. I -- we -- it's necessary for us to do that. Part of what we do is -- part of our role requires not just that we're committed to [the word Blanfein used was "permitted" to not "committed to]-- our sense of duty requires that we explain the financial system and the ramifications of what official action would be. And of course we engage our political leaders.  [Finally he found the right angle to give the meeetings]
ZAKARIA: But the implication is that there was a tighter connection. Do you -- do you... 
BLANKFEIN: Well, I'll give you -- I'll give you an example of a tighter part of a connection. In the '08 political cycle, I held a fund-raiser for Hillary Clinton. And I could tell you, throughout our firm and other firms, so did a lot of people and so did a lot of people in our firm hold fund-raisers for people running against her. We had no -- I mean, you can -- you can go on and trace it. [No need to trace it but it would have been better to state this upfront] But, listen, if the fact is that we're identified with Hillary Clinton, who, as we say this, you know, the election is coming up and I'm sure this will -- this conversation will survive that moment, but as we sit here now, we don't know who will win the election. But it looks like the odds are favored Hillary Clinton. If the worst thing was that we had a history of having engaged positively with Hillary Clinton, that's not going to annoy me. [Fair point]

ZAKARIA: But do you personally support and admire Hillary Clinton?  
BLANKFEIN: Well, I've -- I'm supportive of Hillary Clinton, and I certainly -- yes, I do -- yes. So, flat out, yes. I do. That doesn't say that I agree with all her policies. I don't. And that doesn't say that I adopt everything that she's done in her political career or has suggested that she might do going forward. [Fair point]
But in terms of, you know, her intelligence, her, I think, her positioning not only in terms of her ideology but what I regard as a certain -- as a pragmatism that I saw demonstrated when she was our senator and in earlier stages of her political career, when she could cross the aisle and engage other people to get things done, I admire that, and it stands out a little today because it's a little -- because it's a little -- that kind of -- that kind of willingness to engage and compromise -- but let's just stop at engage -- that willingness to engage is a scarcer commodity these days. [Again a fair point]


This was a rather innocuous topic. The way Blankfein answers raises suspicion rather than questions themselves. The way to answer it was first admit there is a connection. Personally, raising funds and so forth, then talk about regular interaction with politicians to put forth our understanding of financial system and so on. Blankfein answers weirdly. I felt he was trying to avoid using the word "our" senator - when referring to Hillary. Why? I wonder.

I was surprised by his use of word "permitted". Clearly Fareed did not imply that he cannot meet Clinton. And Fareed probed rightly. So then comes the issue that Blankfein personally held fund-raiser for Hillary. Fareed says both but Blankfein admits only Hillary. Now if I was asked - this relationship would be the first thing to disclose. Also ties between Goldman (the firm) and the Clintons. Blankfein avoided the question on the Clinton foundation and his own foundation.

By the end though he is comfortable talking about general stuff - why I support Hillary and general stuff like that.

ZAKARIA: Why won't she release the transcripts? 
BLANKFEIN: OK, well, you'll have to ask her -- you have to ask her that. I would say -- and the answer is I don't know. [Why so defensive] 
But if it were me in her position, I would have wanted to reveal -- I'm not sure what she's afraid -- you know, these transcripts were her -- somebody who had left office as secretary of state giving a tour of her impressions of the world. They weren't given to Goldman Sachs -- you know, the press talks about Goldman Sachs partners. She spoke at our client meetings. These were meetings with -- with hundreds of people. Believe me, she was not saying -- I didn't think she was saying anything untoward. I don't recall specifically. [Again a hedge - hmm] But nothing that she said would have jarred me that she was going into some impermissible or revealing some secrets. I don't know what secrets she would have had about the financial market that she could have revealed.  [So myopic is Blankfein, doesn't think Hillary may be more smart than he understands]
ZAKARIA: There's a poll out, I think, a couple of months ago. Sixty percent of Americans worry that Hillary Clinton would not be able to properly regulate the financial industry because of her ties to it. What do you say?  
BLANKFEIN: You know, I don't know how to -- I don't know how to -- I'm not sure how to respond to that. People say that. I would say that the financial system today is so much more tightly regulated. The regulators in their seats are so vigilant and so tough and their reputations depend on that toughness. Everyone is -- it's not a place where everybody is disarmed; everybody is armed. And the consequences of any kind of breach are so severe, I think -- I think we've -- I think we've handled that aspect of it. [This is a repeated many times by bankers]
I think -- look at the, you know, it's something I -- you know, frankly, I'm scared to death of mistakes that are made in my organization, and guess what? The world wants me to be scared to death of that and they want me to be vigilant at the end of the day. And they've accomplished their purpose. They have me on edge all the time. [So you weren't vigilant? Weren't scared? And if you have confidence in your risk management systems then why should you be scared?]
My biggest -- I am not -- I don't live in fear that I'll do something wrong. I know I won't. Of course, there are accidents can happen, but I know I'll never do something wrong intentionally. [Again hedging himself] I live in fear that one of my tens of thousands of employees -- and for other people who run big companies, it's hundreds of thousands of employees -- will do something wrong and their bad behavior will be ascribed to me, not simply because I failed to supervise, but in this current milieu, it will be ascribed to me as if I intended that act that was accomplished by somebody in the organization, or even if it's multiple people in the organizations. 
And that's a very -- that's a very hot -- we're talking about an anxious economy. Guess what? You have an anxious industry. And guess -- you know, and I'll say, go further, I'm sure that people are happy that it's that way. [Interesting victim's position he is taking]
These were fairly innocuous questions to which parrotted answers were expected. But Blankfein is unbelievably circumspect. In the entire interview the tone of Fareed Zakaria is quite neutral. Fareed doesn't seem to incite anything. Yet, voluntarily Blankfein is quite shaken up. Why? So if this is the case now, imagine what will happen if Blankfein were to be interrogated (i.e. cross examined) in Court by Elizaebth Warren. She will roast him alive. No before the senate/congress because there he is not obliged to share everything. But in court where adverse inference can be drawn.

I thought for CEO of Goldman Sachs, Lloyd Blankfein did not look one bit of the industry captain he should have been. He looked like a normal trader opining on various things. This opinion I deduce from watching John Mack, CEO Morgan Stanley, in the teeth of the crisis, or Jamie Dimon during his various media interviews since the crisis. He sounds more like a lawyer - which itself makes me suspicious.

Time and again words of Peggy Noonan - protected and unprotected ring in my mind. These people do not have any sense of ground reality. That is both sad and catastrophic.

Monday, October 24, 2016

What should Twitter be?

Twitter is in the news for the wrong reasons. On one hand, the subscribers growth is slowing, and profits are not up to the mark. There is confusions as to the business model and if it can ever make money. Google, Salesforce, Disney and others were mulling acquiring Twitter. I think Twitter is more valuable than even Facebook (if you ask me) and it will be a core-architecture for the social web. Here are my thoughts on Twitter's business model and how. 

[Shameless plug: The background for the discussion is my interest in business models and my ideas of firms and how they create value. The frameworks are detailed in my book "Understanding Firms: A Manager's model of the Firm" - please buy it. ;-)]

About my twitter use first
I have been a twitter user for some years now. I don't over-tweet but I guess I should be in the approximate middle as to tweeting. But when it comes to consuming the tweets, I think I am a super-user. I have neatly segregated lists and I scan them using Flipboard and Tweetdeck. I also like to share what I read on / through Twitter. You can find/follow me @rahuldeodhar by clicking my username. So let us begin.

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Tweets fall into following categories -
  1. Link to content from the web - example linking to videos etc. [Sharing domain]
  2. Comment on content on the web (on twitter / outside twitter) [ Commenting domain]
  3. Opinion/Views about things - including witness view, etc. [Content domain]
  4. Personal updates - status updates [ Personal domain]

The Twitter Stream is like a river with all these mixed up from various sources. It is impossible to make head or tail of it if you want to read it. It is like watching the river from a bridge. It is all ok for some time but is not critical - it is a leisure activity. If you really want to do something interesting with it - you can't. If you want to track trouts - well from your perch you cannot. If you are a master user you are like a diver facing the current trying to analyse the water. Whatever analysis you do is useless because the stream has changed by then. 

So that is why advertising on Twitter is so damn difficult. As difficult as it is to interrupt a diver studying water with a TV commercial. The diver doesn't dive that often, and when he does, he doesn't want to look at your TVC. It is very difficult to read the twitter stream - ads make it worse.

Twitter is like a monologue for most of the people, most of the time till others start commenting, sharing and you start getting reactions (not the button based reactions but real comments). Then it becomes interesting. If you are too popular, it turns nasty (sometimes) and resembles a bar fight or a cake fight from Charlie Chaplin movies.

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But Twitter can become more relevant
Twitter can become the default commenting engine of the web - become disqus++. Twitter sits at the junction of comments and sharing. This is win-win for websites that generate comments as well commentators and for twitter. If someone is posting a long form comment, the first 140 characters will only form part of the tweet. This will force people to summarise their comments and it will be easier for authors and really interested parties to parse the detailed long-form reply at the web-page itself. [swelling the stream]

It can also become default Reviewer of choice. Reviews are essentially comments to something - either product, services etc. Ease of being able to pinpoint what we are reviewing remains a challenge. So say when you are reviewing a Phillips table lamp should it be tagged to product page in your country or to product page of Phillips international - well those things is what Twitter R&D spend of $800m should be used for. It can substitute product reviews in amazon, sites like good reads etc. [swelling the stream]

But it may be better to avoid hosting content. A few good things Twitter has done is to integrate photographs and videos into the stream. Twitter can choose to partner with YouTube and Google Photos or say Flickr for it or it could go on to become a content development platform - like medium (say). To me, there is value in letting content reside with YouTube or Flickr and using the Tweets itself to gather data. There are many arguments as to whether sequestering content behind login walls is good or bad. (Facebook likes it, google is fairly open). I prefer open architecture. It is like building cities v/s building walled communities - cities are much nicer. [swelling the stream - though not too much]

If you note carefully, Twitter can address two strong models - create once publish everywhere (COPE) and Diverse Information Sources in one stream (DISOS). I concocted the last one so apologies if it sounds clumsy. While the first allows easy of creating content, second allows ease of consuming content. Remember for advertising models consuming content is important. 

Twitter also need to universal Tweeting, specialised Stream reading. It already has universalised tweeting. You can tweet from any app/webpage etc from phone or computer. Or you can go to the Twitter website or its app and tweet from there. I use the Twitter website / App for reading the stream rather than tweeting itself. But reading is cumbersome. Tweetdeck is one way of segregating content based on usernames and hashtags. But even Tweetdeck is difficult to parse. Flipboard is easier to parse but a  bit weird in formatting. Twitter needs to develop apps that help user read the twitter stream better. [Reading the stream]

Twitter stream-reader, must complete the information picture the way Microsoft's Photosynth compiles the photographs from various sources. Twitter is it's information equivalent. If I pivot the twitter stream on a person, it should give me the subject-clustering of tweets of that person. If I pivot the twitter stream on a topic, it should people-cluster the tweets into groups - my followers and within that based on my lists. In both these views we should have ability to go back at least one day (for consumers). [Reading the stream]

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How to Generate Revenues
Twitter has been a platform of choice for news-dissimination. Twitter must take it to its logical conclusion. Twitter can replace the newswires - all of them in one go. For this, Twitter needs to use pre-identified usernames. It already does that with verified accounts. It will need a customised App for distributing and reading newswires. I cannot see why it cannot be done. By itself newswire business is about $3-5 billion with possibly about 12-14% profitability. For twitter, it may be more profitable. [separate newswire business]

Twitter based News channel is also a possibility since the news is there in the stream, videos are there and you can combine those using pre-selected usernames (handles) and tags. It can set up programming automatically just by relevant people tweeting about it. Facebook and YouTube have started live video dissemination, but in a stream they make no sense. But curated videos allow you to create topical channels. Twitter should also be able to hash YouTube existing video library into a proper playlist of sort. Advertising through this will be easier. [reading news stream]

Twitter Stream-Reader Pro can be a fully loaded stream-reader that can help clients get easier view on the data stream in terms of their relevance. Imagine Ford Mustang Twitter Stream-REader Pro (FMTSR Pro), it will read the streams about Ford Mustangs and then give you detailed analytics. If I was Twitter, I would hard code "Ford Mustang" into the this FMTSR-Pro and charge Ford for yearly use. The same App with modified hard codings can be deployed for others say Lego. For Glaxo or Pfizer it can drill down doctors and non-doctors into the categories. Twitter currently does sell the stream analytics but the revenues from that is quite low - about 10% of the revenues. I would presume it should account for 80% of the revenues. So there is a lot of potential in this. [ corporate stream reading]

Customer Service Pro can mine the stream for companies listen for customer complaints and engage the customers using DM. This can be even now but I can see Twitter being able to add analytics to aid the customer services. Personally I had super experience from Hyatt who solved my problem through twitter. From then on I personally air my grievances on Twitter so that if any company is listening then I can get help quickly. Indian ministers use twitter to solve emergencies - Railways and External Affairs ministries are quite active. I presume companies would love to use Twitter to solve their customer's problems. This function should ping companies when a customer tweets about bad experience he is having with the company. It should allow the companies to set criteria as to when alerts are triggered from the stream reader.

Twitter Topic Tracker can be a reader that tracks specific topic - say wind surfing, pottery or something. At present users have to create the lists as per their own specification and these lists can be public. The problem is in a list of economics we get general tweets (say happy birthday to my daughter) by economists but miss the economics tweets by other people who are not in the list. There should be some way of fixing this. Advertising in the viewer of this Topic Tracker will be more relevant and therefore more lucrative and sensible. [ to curate better advertising]

Twitter can create publicly sourced Subscription Magazines just like Flipboard or Paper.li with relevant tweets compiling into readable magazine. Twitter can take share of these subscription through a twitter-owned store and distribute subscription to contributors (original and those sharing them), using some acceptable equation. (So content creators take 75% of the revenue based on reads, clicks, shares etc. the individual share of creators can vary While those sharing get 1% of share of the content creators and Twitter takes 20%). Using the stream, Twitter can compile edited-book like special editions giving complete spectrum of opinions on selected topics. There can be advertising within these magazines and revenue sharing with content creators. So for example, Twitter can compile a special edition on "Manufacturing Policy" or "Dodd-Frank Bill" by experts and add value to the journalistic discourse. [content curation and advertising]

Twitter can also give a Event Live-view using tweets by general public (those by reporters go through the wire I am presuming) and create a Stream reader view that gives overall picture based on live tweets as to what exactly is happening. This might require integration with AI algorithms to parse value of information shared by a particular Tweet. Currently, search results that give "top tweets" tends to tell us this but it needs improvement. [Stream Reading] 

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Now with all these developments, I think Twitter should have been more valuable to news websites. It is indeed sad that Twitter cannot monetise itself better. In the present post I did not want to consider the operational parts of Twitter strategy because John Hampton has already considered them in his two fantastic posts Some comment on the Twitter buyout rumours and here Measuring how bad Twitter is. I hope Twitter heeds them. John Hampton is seldom wrong. Fred Wilson and Union Square Ventures were early investors in Twitter. I hope they understand the possibilities and take corrective actions.
 

Disclosures: I have no investment in twitter. 



Wednesday, October 19, 2016

Can MTNL and BSNL be salvaged?

I happened to look at the websites of MTNL and BSNL for seeking out their annual reports and financials. Long ago, I don't remember exactly when I concluded that it is a waste to invest in public sector telecom companies - MTNL (BSNL is not listed). It was so far back in antiquity that I thought may be it is time to revisit the decision. After all MTNL is a nav-ratna company - meaning it is prized Government PSU. Alas I was horribly wrong.

Where are the financials?
MTNL or Mahanagar Telephone Nigam Limited is listed for 20 years at least. But I could find only 2 annual reports. No quarterly information was available on the site. The website links to some other mtnl sites but the links on the site did not work.

The first rule of getting investor interest is to make all financial and operational data available. I was expecting to look at ARPUs of land lines, mobile, their satellite network subscribers etc. 

Shameful numbers! 
The two annual reports reveal pathetic situation. MTNL has employee cost 76% of revenues. Yes 76% [Seventy-Six] - no it is not a typo. The report talks of legacy issues with the government employees who cannot be sacked and do not work. These numbers make BSNL cost structure of employee costs at 52% of revenue look respectable. 

As a comparable IDEA Cellular has employee expenditure of ~4% of Total revenue.

How to fix MTNL / BSNL?

So can these companies even be salvaged? I think we need radical reform.

  1. Disclose all information - no matter how ugly. Go back and disclose everything. Let us have ARPUs, Segment-wise, detailed costs as much drill-down as possible. From these numbers someone may be able to gather the strengths of the companies.
  2. Ground Realities - corruption and compromised staff: The sad reality is that the staff of MTNL works for private companies. They take bribes and ensure poor service quality thereby herding the customers in droves in the arms of private telecom service providers. I have also seen MTNL linesmen working for private land line operators in Mumbai. They take home dual incomes. 
  3. Staff Costs are too high: MTNL costs at 76% of revenues and BSNL are at 53% wheresa idea cellular is at 4%. There cannot be any rational justification for this mess. More than MTNL, the government of India should take a decision and remove this staff. It will be difficult for MTNL to bear the burden of this. Let the staff be transferred to some other productive work - which they are incapable of. Just pay them and let them go. At least they won't damage the government elsewhere.
  4. Asset sweating and location leverage: Both BSNL and MTNL have superb location from where they operate. These locations can work for telecom base stations, interconnection zones and network switches for all firms. Such operational asset sweating can release vital cash for operations.
  5. Good Telco - Bad Telcos solution:  Create a new listed Telecom entity - say National Telecom and sell MTNL and BSNL assets to that entity and order closure of MTNL and BSNL under Companies Act. There is no reason to have two telecom companies in the same business with different geographic coverage.
  6. Keep transparent pricing plans and decent customer service and customers will flock to PSUs. Those with customer service of private telcos will agree whole-heartedly. With complicated subscription plans and bill discrepancies private telcos are sitting ducks.
  7. Telecom-Internet-TV Fibre bundles: The current landscape allows for one state-owned voice-focussed player. After 5 years there wont be any such opportunity. However the PSU Telco will have to quickly shift to data and preferably internet and TV offerings together. It will be easier for this entity to operationalise this than other private operators.

If you let me run these two, I can make them profitable in 3 years. 


Wednesday, October 05, 2016

Counter intuitive = Low rates / ZIRP/NIRP policies are actually bad for economy

We are told that when interest rates are too low, they are encouraging entrepreneurs to take risk. So we have low interest rate policy LIRP, Zero interest rate policy, ZIRP and negative interest rate policy NIRP.

However, these policies impacts the business models differently. At one end are business models, like infrastructure projects, that cannot add threshold value in the initial years of the venture. The low interest rate regime, allows a valuable gestation period for such business models. Often, government artificially lowers interest rates for such projects. At the other extreme, there are weak business models, those that are viable only in low return scenario. These business models, however, die out once the interest rates start rising. In between, there are experimental and innovative business models. Some of these use the low interest rate period to forge better, more robust models. Such businesses thrive later. Others, however, end up going bust. The role of banks is to identify each of these business models and fund them while appropriately mitigating the risks. 


How low interest rate leads to mal-investment 
A bank takes risk by investing in a venture. Interest rate is also a reward bankers get, for taking the risk. Ideally, even in lower interest rate scenario, those projects with best risk-return trade-off should get financed. 

However, in reality, lower yielding large borrowings backed by reputed corporates get access to financing more easily than new ventures. This means, irrational mega-projects or mal-investments of large corporates get financed at the cost of genuine investments of new ventures. Typically, such irrational mega-projects consume a lot of credit requiring load syndication. This has twin benefits for bankers. 

First, there is a higher degree of comfort in being with the herd. Secondly, bankers do not have to go through credit appraisal of many small entities of questionable risk profile. This makes them assign a lower risk to these projects than appropriate. Intelligent investors will find that this contradicts with the "diversification as risk management" strategy. But being with herd has a stronger lure and is treated as risk mitigation (though wrongly).

Further, at lower interest rates, debt starts being used as an instrument to amplify equity returns. With unchanged return on capital employed, you can have higher return on equity when return on debt reduces. Return on debt is function of interest rates and lower share it claims from the total returns made by the firms. 

Thus the second blow to new ventures comes from crowding out. It implies that even in a low interest rate environment, small businesses and entrepreneurs may not have access to lower cost capital. Therefore this impacts the long-term strength of the economy. 

In high interest rate scenario, the irrational mega-projects seem less promising. Hence, contrary to popular belief, it may be easier for smaller businesses to compete in high interest rate scenarios.

This is particularly true when there is some demand in the system.

What happens when there is no demand?
When there is no demand in the economy, low interest rates / ZIRP / NIRP etc are said to stimulate this demand. This, to my simplistic mind, sounds like offering desserts to the already overfed diner  (AOD) with the hope to eliminate world hunger. Let me explain.

We hope this AOD, when offered with a free desserts will take them and pass them along to the hungry. In this method we depend on the magnanimity of intentions of our already overfed diner. Then we presume he shall act on his instincts and find worthy hungry who can transmit the benefits to others. It is quite possible our Glutton may pass the desserts to his friends or family and each can be a little more fatter. Are we, then to wait for all the gluttons to be severly beefed up or porked up before the trickle down starts to the hungry?

It sound like bull-shit method to me. Particularly I cannot understand why you are preventing the hungry from feeding themselves - either by employing them or letting entrepreneurs do it by financing them with reasonably priced debt/credit. These entrepreneurs are left to finance their ventures with credit cards, overdrafts and other very high cost financings at considerable peril. Now since these financing schemes are not on the business side, they are paid out of the post-tax income generated by the firm (but they should have been tax deductable at firm stage itself). This is doubly onerous for the entrepreneurs. 

Treat Interest rate like friction
A better model is to think of interest rate like engineers think of friction. Some is good, too much is bad, too little is bad too. In fact friction analogy should be best suited for determining neutral rate of interest. 

Economist too think of interest rate as friction. To the economist - road mileage of the car represents growth, fuel represents capital availability or liquidity. The economists' metaphor of friction is flawed. They need to get their metaphor right.

Engineers will tell you - you need to maximize friction at the tyres and eliminate it from the engines. At the clutch and brakes too you need friction. So you need interest rates high at some places and low at some others. So Economists better figure out where you want low interest rates and where you want high interest rates. Note the question is where not when. 


In Sum
The hazards of the LIRP, ZIRP and NIRP far outweigh the benefits. These policies do not pass the smell test. We need a better understanding of interest rate as a tool for improving economic growth.


Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms". A version of this argument was made in Subverting Capitalism back in 2010 and also posted on this blog in 2012. Nothing, it appears, has changed.

Monday, October 03, 2016

Destabilised Eurasia and possibility of War - The SE Asia - East Asia equation

The events of the past few weeks and years have had a decisive geo-political point to them particularly concerning South-East and East Asia. Let me enumerate a few here. 
  1. In 2015 Japanese parliament permitted their army to go aggressive( with US blessings). They have been making ships and aircraft carriers since few years ago  displayed in Aussie, Singapore, Japan and US joint exercise - small allegedly helicopter carrier or something.  
  2. Last week I was seeing Singapore Air Force Fighter planes on evening patrols. Also every day they have the another surveillance plane - it is not the boeing posiedon in the air. 
  3. On friday, India announced surgical strikes on terror bases in Pakistan Occupied Kashmir. 
  4. Last week, Singapore PM met Japanese PM Abe. Last month he met Obama. Chinese news paper is accused Singapore of siding with US. This week Singapore PM is meeting Narendra Modi.
  5. Last week Japanese PM Abe met Narendra Modi and promised him some military tech and other assistance including manufacturing assistance.
  6. Phillipines has abandoned US and is courting China. Durtete made a statement that he received encouragement from China and Russia on his anti-US remarks.
  7. Last month the International Arbitration Tribunal restrained China from claiming rights on South China Sea.
  8. Last month Austrailia published a white paper on maritime defence highlighting the need to protect the interest in the northern coasts and in the Pacific. Australia does not have any threat from any country in the Pacific save China. It is way far out and super friendly with most of the major powers. It has a love-hate relations with some island countries where China has become active.
  9. US is offering F-16 (yeah the old ones) to India for make-in-India option. (The tech is old but the offer is quite lucrative)

So what is happeneing?
China is being encircled. Japan south Korea Taiwan Singapore, Australia and India are coming together step by step. South Africa is in the mix too. Philippines has chosen to side with China - or so it seems. Vietnam is on the fence blowing hot and cold. Laos is stuck between Vietnam and China but I sense it is more pro-china. Thailand is becoming more democratic but depends on their king who is about to die or may have died. 

Since China is being encircled, it thinks it can break the mix by encircling India. China thinks it can corner India because of its alliance with Pakistan. So Pak will keep India engaged on west and china will keep it busy on the east taking India out of the equation. So a day after announcement of surgical strikes we had reports of China reducing Bramhaputra waters for dam construction.

But, on day of surgical strike Iran attacked pakistan (which is weird). Afghanistan is already sick of  Pakistan. Now Pakistan thinks it too is being encircled by adversaries. Tajikistan is not really happy with Pakistan either. But it is more worried about China. So goes for Kyrgyzstan and we come to Mongolia and Russia which surround China. 

Within China too,  in Hong Kong separatist sentiment is acting up, mostly without encouragement of the west. Then there are other prennial problems in China - including Tibet, Uyghurs and others.

So we have China trying "string of pearls" strategy around India. World trying "string of pearls" around China. 

Why India is crucial element in the mix?
India is important because it is a navy that controls the major trade routes to Europe and East america. It saves a trip across Africa. So China wants to circle indian ocean by involving Africans - twin benefits resources and strategic support. So this is a move-counter move strategy. India is but small player if you ask me. I think US is the big bro here. We are seeing Obama's east pivot in action. 

Why is China all riled up?
China is being choked economically by all - sort of as a payback for its merchentilist begger thy neighbour policy. Actually when Milton Friedman was asked about dumping of low cost products, his argument was simply it benefits the importer. It means (to me, Milton did not say it so) that after the value is over you can reverse the equations by ring-fencing the excess capacity from creating problems for you.

The second narrative Chinese use is that its almost $4Trillion US Dollar reserves may lose value and thus cause wealth loss. This narrative is easy to sell to general pulic and it will make for a good anti-US story.

This has a lot of implications for China. It may wreck it from within. An empowered peasantry   / rural-folk may bring down the corporates to its knees using exactly the same arguments that Mao used. The citizenry may become subversive when faced with no jobs, or rapid decline in wealth as a result of capacity destruction. These will be difficult to control in a country of 1.6 billion. The cost of political unrest for Chinese Communist Party is too high. That could be one reason for Chinese aggression.

The first narrative fits the bill better because of the related developments. There was no reason for announcing a "make in India" policy when there is excess global supply. Not unless the Chinese capacity was suddenly going to be unavailable. And someone could pick up the slack. Indian PM Modi saw an opportunity in this and embarked on the picking up pieces. FYI none of the Chinese investments into Make-in-India have materialized. Foxconn which promised to set up an iPhone factory has backed out. Others are mostly European and american cos who continue on.

Is China a potent threat to US?
At present China is not a threat to the US. 

It does not have a wherewithal to pick up a fight with US. At least that is the public view. China needs at least 5 aircraft carrier units to be as aggressive as they are trying to be. It has none at the moment. Big daddy US has five major assets in Pacific including Okinawa. US also has two Aircraft carrier groups in Mediterranean Sea and Indian Ocean. India has two in the Indian ocean. 

China is a threat to India. It is an ally of Pakistan and has a long border-dispute with India. India needs to be wary and after fall of Soviet Union there is no regional counter-balance. India must ally with US. There is no other way. US knows this and promoting technology transfer to Indian defence. 

China is also a threat in South China sea. It is here that US is more worried. It is claiming more land and nautical area and becoming more assertive.

The least-expected strategy for China will be to challenge US. That will be a surprise and alter the military-power equations. For this it needs some greographical spread. By itself, China has tough geography which makes it difficult for it to create big trouble that could alter global balance of power equations.

The solution - A China circle
The Chinese circle comprises China, Pakistan, North Korea, some countries in Africa, some in Pacific Oceans including Laos. These countries have received heavy Chinese aid and China supports some questionable regimes in certain regions. Phillipines is becoming a China ally. The Burmese junta enjoys some support from the Chinese.

Clearly with this motley crew China cannot take on US or other major country. But what it can do is create strategic assets in these countries from where it can create trouble. The dirty work still comes to China's share. 

The tools
If China wanted to be a credible threat it should be building at least 10 Aircraft carrier units (including cruisers, frigates, destroyers, submarines, logistics ships). A better strategy would be to build them inland somewhere in Hainan (lake) or more likely in Sichuan (totally on dry land). Then one fine day plonk these in the sea. An event like that could alter the geo-political equations quite rapidly.

Yet such kind of shifting of balance of power is not possible easily. There are pretty unpredictable players in the mix.

The no-nonsense player -Russia
Russia is sitting on the fence. The Russian approach is just like in world war 2 - corrupt but away from the mess. It will take sides when it is forced to take sides. It has hinted that it may start supplying aircrafts to Pakistan and may have helped china build their J20 fighter which is copy of the F22 raptor. Russians are playing both sides as of now. They are cooperating with the West in Arabian geographies and counter-balancing them in Asian geographies.

Their problem is that they are too close to conflicts but not too powerful to force a resolution anywhere. Even Soviet Russia would have found difficult to contain China in its present state.

Pakistan the unpredictably-unpredictable player
The issue was easy to solve if Pakistan was not a long-term US ally. Because Nehru sided with Russians, Pak went to the US and US is feeling guilty of abandoning pak even when it housed Osama. If Pakistan was just another country in the equation, the US policy would have tilted pro-India by now and we would have been in a new stable-stalemate situation. The world would be chugging along by now.

The problem is that US would always help build Pakistani capability to counter-balance India. To the US, pakistan-India parity was the policy objective. US realised it late that Pakistan was playing double game. With US technology seeping into China and the inventory falling into the terrorist hands, US realised Pakistan is not a strategic asset but a mere pawn. It is China that was the new threat.

My guess
It is possible that the China is using the uncertainity related to US presidential election to test some destabilisation strategies. They see a window of opportunity and it expires on November with elections in US as the new president (even if Trump wins) will be briefed about all important issues and most likely toe the usual line. The uncertainty will reign till November as Obama may not be able make longer term commitments right now. So we have to sit tight for 1or 2 months. This is peak of crisis as we get to see. Then big daddy will be back in the saddle and world will be back to its normal stalemate situation. If this is indeed correct, then we should see a major policy decision by the new US President immediately upon taking office. It could be a pro-India change or opening of a full-functional base in South East Asia augmenting the one in Singapore and Okinawa.

In Sum
Something is definitely going on in the SE Asia / East Asian region.