Nostradoofus

Ah, youth. How fondly I remember the endless Monopoly games of summer, in which the winner would loan ever greater sums to the loser, thereby averting bankruptcy and continuing the game.

“You landed on Park Place again? What a shame! And me with hotels there. Don’t worry, I’ll loan you the $1,500, and you just keep right on rolling.”

Evidently the scions of our federal government were similarly raised. Lenders going insolvent? No problem, we’ll loan you more, and cheaper, to keep you going. Borrowers feeling strapped? No problem, we’ll simply tear up your mortgage contract and write a new one where you pay less.

Japan tried this in the 1990s, in case you don’t remember.

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Pundits worry the mortgage collapse may push us into Japan-style deflation. That’s one possibility, but there is a more likely one.

Japan headed into its long deflationary spiral with a mostly balanced federal budget, high trade surplus, immense foreign reserves, immense personal savings, low unemployment, and high educational level. This buys an awful lot of flexibility.

The US teeters on a similar precipice, but with no net underneath: gigantic federal budget deficit, large trade deficit, high personal debt, high corporate debt, net debtor status, and uneven educational level.

The stage is thus set more for Argentina than Japan: banking crisis, hyperinflation, currency collapse. I’m not saying it will happen; only that it’s more likely than the Japan scenario.

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As the thrill of the chase has returned to Silicon Valley, every VC and hopeful entrepreneur is chasing a new version of the old dream: a winner-take-all web community.

This pursuit, now called Web 2.0, has all the things business school taught you to love: network effects, first-mover advantage, etc. And again, the signals of excess have appeared.

First is an abrupt 50% rise in professional fees among top providers in the Valley. An attorney I know there now charges more than $600 per hour — more than I paid my entire team (14 people, half programmers, all U.S.-based) in 2000, the peak of the bubble.

The second signal is that, in the effort to leave no stone unturned, VCs are examining some pretty crazy community ideas. Take, for example, the idea of community-monitored stock investment ideas.

Huh? Think about this for just two seconds. Successful stock picking means finding an idea and quietly investing ahead of the crowd. A stock picking community would collect ideas from the crowd, and let the crowd vote on them — in short, exactly what the markets already do. No edge to be gained there.

After fighting nature for decades, the transition begins with this 20-year-old bicycle, bought in September:

In keeping with my newly overt nerdiness, I will gladly bore you for hours with technical explanations for why this is the fastest non-recumbent bicycle you can buy. But the short answer is rigid wheels, 110psi tires, full suspension, and rigid space frame.

Hard to believe? This exact model holds the world speed record for non-recumbent bicycles, at over 51mph with a full fairing.

This bicycle is a strategic decision, in that it gains a persistent edge by a path that competitors cannot or will not follow. Practically no one will ride this bike, no matter how fast, because it looks weird.

I consistently pass serious athletes in Lycra finery and $4,000 carbon bikes. They stare at the rusty bike, the blue jeans and flip flops, and pump furiously, but can’t catch up. Yet, even after seeing it with their own eyes, they will never make the obvious competitive move, which is to buy this bike. So I keep passing them. That’s strategy.

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For the past four days, I’ve driven a borrowed 2005 Mercedes SL500. Fun, yet so wrong for me.

Fast but heavy. Graceful but dated styling. Luxurious but showy. Surprisingly non-exclusive — once you drive one, you notice with embarrassment that so does every silver-haired gentleman in Newport Beach. With sport suspension turned on, there is too much body noise for a $100k car.

Mind-bogglingly complex — dozens of motors manage various tasks of dubious import. One example from many: raise the rear windows, and they move a quarter inch sideways for a better seal. Two motors just for that. This is a car that will not age well — who replaces 20 failing motors on a decade-old SL500?

My tastes run to simple quality: Toyota drivetrain, racing suspension, hand-cranked windows. Does this exist? As a matter of fact, it does:

Few but Mr. Bush’s dogged 29% now believe spreading democracy by force was a good stabilization strategy.

Can we find any useful insight at all, lost in the neoconservative disaster that is Iraq? Well… almost. OK, they were wrong about democracy, and wrong about using force, so their wrongness is at least 99.7% pure. But there is something rich countries can spread, by policy and by example, that automatically creates stability.

Trade and investment.

Why is this stabilizing? Because economic interdependency complicates projection of military power. Governments and citizens (particularly merchants) depend upon stability of input supplies and investments, and don’t want to rock the boat.

It’s no accident that the “axis of evil” happens to be a group of relative outcasts from the global trading system. In a confrontation between one of them and the U.S., both sides have less money to lose in a confrontation, and thus war becomes more likely.

Among the three, Iran is the most economically integrated, and thus least likely to be a threat. Look at Iran’s incentives. They are one of the more economically isolated countries in the world, and yet are absolutely dependent upon the price of oil. Could they use a proxy army (aka terrorist) to plant nukes in U.S. cities right now? Yes. Will they? No. Why? The price of oil would collapse, and with it their own economy. Even Iran’s hands are tied by its limited participation in the global trading system.

Viewed this way, it looks mistaken to economically isolate countries whose policies we don’t like. Yet this is consistently what we do. The right answer is the opposite: kill them with kindness, by throwing the trading and investment doors wide open.

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Is it time to read the fine print on that SIPC policy?

On August 20, the Federal Reserve tripled the amount Citibank, Bank of America and JPMorgan are permitted to lend to their brokerage subsidiaries, to a whopping 30% of bank assets. This is an unprecedented waiver of regulatory oversight, and calls the brokers’ liquidity into question.

Brokerage insolvency risk first emerged, quietly, with the Brookstreet Advisors insolvency in June. Brookstreet was buying (and advising its clients to buy) securities on margin, backed by mortgage-backed securities. When the subprime crisis hit, ensuing margin calls wiped out the firm and many of its clients.

Brookstreet’s failure, by itself, was just bad advice, not a systemic problem. The real concern was barely mentioned in the press: Brookstreet’s margin lender was a unit of Fidelity Investments. Fidelity, and presumably many other broker-dealers, have lent undisclosed sums of money against illiquid securities of dubious quality. They may repossess those securities in a margin call, but they cannot liquidate them at anything near face value.

It thus appears unlikely, but not impossible, that a major broker might fail.

Yes, investors’ assets are covered by the SIPC up to $500k, but they don’t say WHEN you get your money back. Individuals may not want to have all their eggs in one basket. Some alternatives that don’t require selling stocks:

• Move your “emergency” cash to interest-bearing checking (INGDirect pays 5% and claims no subprime exposure).
• Take physical delivery of stock certificates for long-term holdings, and put them in a safe deposit box.
• Move mutual fund shares to be administered by the mutual fund itself, not your broker.

This brings peace of mind with relatively little effort, and no taxes or trading costs.

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In the subprime meltdown, certain thought leaders are serving financial industry special interests while draping themselves in populist raiment.

Schumer and Dodd propose loosening regulation to let Fannie & Freddie buy subprime and jumbo loans. They claim to protect the working man. But who really benefits from a subprime rescue?

No benefit to subprime homeowners. They have little or no equity now — in many cases, they had none to begin with — and thus nothing to lose by defaulting.

No benefit to banks — they sold the bad loans long ago.

No, the beneficiaries of a bailout would be institutional investors holding bad mortgage-backed securities (MBS). Where are these unfortunates located? New York (investment banks and hedge funds) and Connecticut (insurance & pension funds).

Now let’s see, who are Schumer’s and Dodd’s constituencies? Why, New York and Connecticut. What a striking coincidence.

PIMCO chairman Bill Gross also appears possibly biased by self-interest. He recently suggested in his monthly letter that the federal government directly bail out defaulting homeowners. He then republished the proposal in the Washington Post.

Longtime readers of Bill Gross will remember his April 2003 issue, in which he details some of PIMCO’s income strategies. These included:

• Buying mortgages while shorting an appropriate index
• Selling out-of-the-money put and call options on Treasury bond rate swaps and futures.

The first strategy would tend to be killed by a wave of mortgage defaults (and rescued by a federal bailout). The second strategy would tend to be killed by a sudden spike in volatility of Treasury bond rates, as might occur in a monetary policy rescue — leaving a fiscal rescue as the only way to preserve the second strategy.

Again, what a coincidence that Mr. Gross appears to propose exactly the solution that would appear to most benefit himself.

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Market power (scale, network effects, or other) allows an operationally inferior firm to sustain a position. To see see how powerful this effect is, consider that people are actually still using Hotmail.

Since April, everything I send to Hotmail is classified as spam. Everything. Even mail to myself. Hotmail then deletes all spam after only 5 days.

So, when I email any client at Hotmail, it goes to spam, 100%, even if we’ve corresponded for months. If he doesn’t check within 5 days, Hotmail deletes, and I can never prove delivery. This renders Hotmail unusable for business.

This problem occurs only at Hotmail. My domains and IPs are not blacklisted. I have never sent bulk mail. I send fewer than 20 messages per month to Hotmail, all to clients who have paid me in advance to deliver to them.

Is this really a problem with Microsoft? Consider what happens when you try to fix the problem.

First, set up Sender Policy Framework. This is good practice — I should have done so long ago. However, at Microsoft, due to the principal-agent problem in the marketing department, SPF is called “Sender ID.” It has no discernible difference from SPF other than the name.

Once Sender ID is configured, postmaster.msn.com instructs you to notify senderid@microsoft.com. Oops:

senderid@microsoft.com:
Remote host said: 550 5.1.1 User unknown

So they’ve shut down the Sender ID cache update address, and failed to document it on their own instructions page. Ominous.

Undaunted, I found the next noodle in this strategic spaghetti: MSN Smart Network Data Services. To proceed requires signing up for Windows Live (formerly MSN), which yields this:

From the user’s point of view, it looks like Windows Live is offline in the middle of a weekday. Actually, it’s yet another case of silent failure on incompatible browsers, a widespread Microsoft problem mentioned in previous posts.

No problem. Changed browsers. Got a Windows Live account. Went back to Smart Network Data Services, and was greeted with this:

So Microsoft’s email security site has a bad SSL certificate. It’s a security site. With a bad security certificate. Ah, what they hey, I’ll risk it. Set up SNDS, and all was done.

After all that, everything sent to Hotmail is still classified as spam. No change.

Just one option left, according to the MSN postmaster: “Sender Score Certified,” formerly “Bonded Sender,” formerly “Return Path.” Under this scheme, you can rent the right to send anything to Hotmail, for a fee of US$1,400. To send 10 messages a month. Right.

Fortunately, there is a much cheaper and simpler solution, for some reason not mentioned at the Hotmail support site: I can refuse to support Hotmail, and persuade clients to use a different email provider. This has been effective.

The Orphans of the Sky scenario at Microsoft is not limited to the engineering department. With no overarching plan to guide them, various hives of Microsoft product marketers buzz with pointless activity, endlessly renaming myriad half-finished products and services.

Sample paragraph from a recent .NET propaganda piece:

“At MIX07 in Las Vegas, Microsoft detailed planned .NET programming support for Silverlight, formerly known as Windows Presentation Foundation/Everywhere … also disclosed was the Dynamic Languages Platform, itself based on the Dynamic Language Runtime.”

In 2 sentences, two “initiatives” are renamed for no discernible reason.

Another good example is “Sender Score Certified,” the new name for “Bonded Sender,” which was itself the new name for “Return Path.” (This service lets spammers tunnel into Hotmail, with MSFT approval, for a fee of $1400).

What does this marketing sound and fury imply? High turnover. How’s that? Well, it works like this.

You’ve just graduated from a major business school. You want to get into tech, but have no experience. No problem: Microsoft will take you, based on your pedigree. But the only position open to you is entry-level product marketing.

You feel this job is beneath you. You are an ambitious Harvard MBA. You want out, as fast as possible. But how best to do it? Answer: put easy-to-identify accomplishments on your resume, purpose-designed talking points for a job interview.

Just one problem: you inherited “Windows Presentation Foundation/Anywhere,” a 3-year-old project, as your first gig. How can you turn this into a bullet point? Simply rename it. Suddenly your resume says “Founding project manager, Silverlight.” Fantastic! Call the recruiters! You land a COO position at a VC-backed startup, and you’re off to the races.

In business school, we call this the principal-agent problem.