Growth and Efficiency Argument, Deconstructed.

I am suspicious of the word ‘efficiency’ when it comes to business – big business to be more specific. There’s a level of honesty in small business that is absent in most of the big business models. Where new restaurants pop left and right, elbowing each other to deliver good food at reasonable prices, I don’t see this kind of eagerness to please a customer from an electric or a cable company or big pharma. What is their interest in going an extra mile for me? And why would they do that? Pleasing a consumer is no longer a goal of a modern day big business. These days, when I hear the word ‘efficiency’, usually from consultants and business majors, I don’t expect to hear about how they are going to devise new ways to deliver cheap and useful goods to a consumer. I usually expect to hear about a strategy of maximizing shareholders value – somehow a more sacred endeavor than merely serving their customers. The consultants never disappoint. In fact, customers of a monopoly have become merely means to an end, a stepping stone to the real endgame – profit at all costs. Peter Thiel, the founder of PayPal, knows this when he constantly encourages businesses to strive to become a monopoly, rather than wither under constant competition. In his view competition is bad. Nonetheless, we get fed endless stories about heroic entrepreneurs who risk their capital to deliver the goods to consumers, leaving aside the fact that those who are really risking their capital are idealistic mom-and-pops who have internalized this beautiful but obsolete narrative. The real entrepreneurs, the financial innovators in C-suites don’t take risks, because they know 1001 ways of unlocking the already existing value.

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Profits vs. People

Eric Schneiderman, New York’s AG, is bringing a case against some retailers for their questionable employee-related practices. The power of businesses to cut their costs and their pursuit of efficiency has evolved into a grotesque practice of “on call shifts” where the employees don’t know whether or when they will be called to work, therefore making it impossible for them to make any plans or even to know whether or not they will be able to pay bills. I guess the cost-cutting business majors “geniuses” at those companies just made an assumption that if an employee is not called to come to work on Saturday at, say 2pm, he will then turn around and just find another hourly job that’s just sitting and waiting for him to turn to, at a moment’s notice. Or, that while tending a McDonald’s counter, he’s incessantly checking his Blackberry to see if the instructions came in to drop it and be at a Gap location in a half hour. I wonder how much more businesses can squeeze out of their employees, all in the name of efficiency? And when will we stop worship this kind of “entrepreneurship”? So, kudos to Schneiderman here.

I wanted to expand on this. The goal of businesses, which is profit, has reached such a revered and celebrated status, and we’re so captivated with this notion, that we’re unable to put things into perspective. What if a business can’t turn a profit without dehumanizing and shortchanging its workforce? What if it’s built in the very business model? Here we, as a society, tacitly acknowledge that profit is a more virtuous and legitimate pursuit than the welfare of employees and customers, or in other words, citizens. (Welfare in a sense of mutually beneficial outcome, not ‘government dependency’ as this word has evolved to represent over the years). So then what is the function of state in this case? To protect profits or to protect citizens? Let’s leave politics aside and look at it from a purely philosophical perspective. The existence of businesses is only as good as their contribution to the welfare of society, while also turning a profit. But profit should not be a sole defining and absolving factor of a business’ legitimacy: if it can’t turn a profit without shortchanging employees, without tricking its customers, without dumping shit on its neighbors, without undermining political processes then such a business’ moral dominance in the current zeitgeist (which is: businesses are more important than people because businesses give people jobs) should be questioned. “Don’t touch businesses” we’re told, “or they will take their toys and go home, leaving us all unemployed.” I say not necessarily. Because if a businessman’s choice is between earning a 6% margin by fucking his employees and earning 5% by giving them some breathing room, then he will take the latter option rather than closing up shop. (I mean, what he’s gonna do, put his money in a bank and sit on it? Haha!) And if his margins are so thin that giving his employees breathing room will put him in a negative territory then such business model is simply unsustainable and he has to find another line of business.

Unbelievable Blindness.

So extremists parties all over Europe are poised to win elections. It is making the Davos crowd nervous.

And what else did you expect? This year income inequality is all the rage and everyone is positioning themselves as defenders of the common folk. Ray Dalio of Bridgewater Associates, a $160bn hedge fund, bemoans the danger of extremists parties emerging and urges the moderate parties to “do something about it.”

But him and other Davos attendees – all billionaires and movers and shakers – don’t take it one step further. They don’t call on themselves to stop fucking with the politicians, stop lobbying, stop asking for favors. They refuse to admit that the current scheme works like this: business interests lobby the politicians –> politicians act on it –> common man gets squeezed (asked to work harder, study more, take more loans, take more pay cuts, etc.) –> economy dives –> businesses ask for more favors and loopholes –> common man gets fucked even more –> politicians bring on austerity –> common man gets fed up – >extremist parties win.

But Ray Dalio doesn’t see it that way. He think that he stands outside from all this mess and just does his business. He thinks he can just ask mainstream parties to get its shit together and when they will everything will be back to normal. But the cycle has to run through. So when the extremists win the Davos crowd will have no one to blame but themselves.

Fuck’em. Try to do business with Syriza and Sinn Fein and UKIP. See how that goes.

Our Obsession with Innovation Is Just a Marketing Trick.

This article eloquently puts to words an old pet peeve of mine.

Progress in communication is only good in a sense that we now communicate faster and more efficient. But this innovation did not change the content of those communications. We’re still saying the same old shit to each other, just faster. The quality of data, and by that I mean the content, the ideas, the thoughts, is not a subject to innovation. We’re not becoming better humans now that we possess an iPhone. So if you praise technology you have to praise only the delivery of content, not the content itself. And if so, then what’s the public good of such innovations? How did it make our lives better? Other than make us available 24/7 to our employer and everyone else? And gave us the tools for gratuitous displays of our daily routines? Is that progress? And what’s the social utility of this progress? The ability to send your boss a spreadsheet at 1am? Yeah, before you couldn’t do that and now you can. Now we can download the entire content of the Library of Congress to our devices, but what use is it if we have no time and desire to read it?

We adjust our lives to innovations, not innovations to our lives. You weren’t sitting in 1985, thinking: “Oh, man! Imagine how cool it would be if there were such a device that we could take pictures with and then to display them immediately in some kind of cyberspace that everyone had access to!” No one was thinking that. But such a device got invented by tampering, not by purpose and now we somehow consider it a great technological achievement.

The burden of proof falls on the revolutionaries, and their success in the marketplace is not sufficient proof. Presumptions of obsolescence, which are often nothing more than the marketing techniques of corporate behemoths, need to be scrupulously examined. By now we are familiar enough with the magnitude of the changes in all the spheres of our existence to move beyond the futuristic rhapsodies that characterize much of the literature on the subject. We can no longer roll over and celebrate and shop. Every phone in every pocket contains a “picture of ourselves,” and we must ascertain what that picture is and whether we should wish to resist it. Here is a humanist proposition for the age of Google: The processing of information is not the highest aim to which the human spirit can aspire, and neither is competitiveness in a global economy. The character of our society cannot be determined by engineers.

Let me put it in even simpler terms. The technological leap from a rotary phone to a cell phone was revolutionary. The change between iPhone5 and iPhone6 is just marketing. It’s big business selling us shit we don’t need.

And, yes, as the author suggests, it is the revolutionaries’ burden to prove that a life with an iPhone is better than a life with a Blackberry.

I Love My Blackberry But Free Market Says I Should Love IPhone.

I don’t have an iPhone because I don’t want it. I’m content with my Blackberry. I resent the idea and the subtle implication that I need things today that I didn’t need yesterday, like some fancy new app. The other day I received a phone call from my mobile company telling me that now that Blackberry is bankrupt I should switch to any other phone. What do you have? I inquired. Touchscreens, the young kid on the other side said. But what if I don’t want a touchscreen? He didn’t have an answer other than to subtly emphasize the point that I live in a stone age. That pisses me off. I think that’s the biggest folly of supply-side economics: they don’t give a fuck about what you like, they tell you what you should like. This is where the glorified free markets system break down. It shoves products on me that I don’t want, and denies me the products that I like. At some point in the business cycle companies won’t care to deliver a quality service to its customers. They will morph into a business model that functions by collecting more and more fees while providing less and more shittier service. Do you think the recent Comcast Time Warner merger will cut your customer service waiting time or your cable bill in some way? Please!

Still, even that business model is more benign than the business model of financial services companies. After all no one forces you to have a phone or a cable. But we are all joined at the hip and taken for a ride, whether we want it or not, when it comes to SIFIs (Systemically Important Financial Institutions). Lefties, in the form of Krugman and Simon Johnson and the assortment of occupiers, have been talking about it for years. But it seems that some conservatives, with a knack for facts and simple analysis, begin to be troubled by such an unrestrained capitalism. What if capitalism collapses under its own weight, they wonder. Does that mean that, gasp, Karl Marx was right?

Has the Culture of Entrepreneurship Gone Too Far?

The culture of entrepreneurship and risk-taking has always been a central theme of the American history and character, but in the last few decades it morphed into a rather bizarre and unnatural form.

America today reminds me of a poker table where one player has sucked in all the other players’ chips and insists on keeping the game going, dismayed that the customers don’t have any money. “Come on, people, what’s the matter with you? Let’s play!” He laments. But he gets no action. It is at this moment that he has to decide whether it is all about the money or all about the game for him: what’s the point of having all those chips if you can’t use them? The chips only have value if you can use them to get even more chips. But what’s the point of being great at taking other people’s money when there are no customers around? What’s the point of having billions in cash if you have nowhere to invest it? You know you’re good at your game, but the more money you have the less opportunities you have to demonstrate it. It’s much easier to make 20% return on $10 million than on $10 billion. And the thought of shopping for yet another Lamborghini is depressing, because you already have several in your garage.

Game, action – is what you seek at that point. Perfecting your skills and promoting your gospel is the reason you wake up in the morning. That’s the main reason, perhaps, that many billionaires go into politics. With this mindset you invite, or rather, insist on others participating in your game. You view any human interaction as a business transaction, an opportunity for one-upmanship. To keep playing that game you have convince all the suckers out there that they too, if they work hard, can learn to play it. It is only when millions of others are striving to become like you, to play at your table, by your rules, you can have a lasting legacy. If they don’t then you’re just a lonely guy with mountains of chips at an empty table. And after you used all the leverage out there to improve your returns and received all the political favors, it all still comes down to having players at your table. At some point, when the flow of new customers slows over the normal course of business, you begin to devise plans to extract fees from the existing ones to keep with the original pace of growth. That’s how we got the new business models with various “financial innovations” schemes: private equity funds or activist investors extracting value from already existing caches, like pension funds or profitable companies; raiding others for value rather than building it.

With such a mindset one becomes blind to the idea that, perhaps, making a few hires, parting with a few chips, would jump start the game. But lack of introspection is the name of the game. The ideology of competition has penetrated our political quarters and our national discourse so deep that we glorify the gamblers and pity or tolerate the salaried workers. Such over-the-top encouragement of risk-taking produced many bad players. Extracting value from companies through M&A, rent seeking, and trading synthetic indices is not entrepreneurship in its distilled form, because there’s no risk involved or no product being made. These bad players have entered the game over the last few decades and in order to win they began to manipulate the odds for all other players. They situated themselves permanently on the button (the best position in poker) by making deals with dealers and the floor managers. But of course, they don’t attribute their success to such a privileged position – they attribute it to their skills. They look at 9-to-5 cubicle workers as cost centers, because those schmucks don’t engage in a game. And yet they would like for them to join the table. We rarely hear stories of a businessman turning into an office worker, because that is viewed as a failure. College students are encouraged to scrape around or borrow money and start their own businesses. We expect, nay, demand, that everyone becomes a small entrepreneur. Good luck with that, kid. Except you won’t be doing M&A, or charging others 2/20, or collecting insurance premiums from dumb customers with money, the businesses with essentially zero risk – the kind of businesses only “serious people in suits” and incidentally the biggest advocates of risk-taking are engaged in. You’ll be spending that last $50K to open a cup cake shop or a restaurant that has an 80% chance of closing in a few years. Giving such an advice to someone right out of college is bad faith. Strangely, the loudest advocates of risk-taking are the ones who deal with no risk at all. But then what’s wrong if one simply wants a quiet life, a stable paycheck, some financial security? He’s seen the statistics – the majority of small businesses fail, so perhaps he decided that such gamble would be imprudent given their circumstances. And why should such a decision be derided by the gambling worshipers on top of the hierarchy? Those workers simply assessed the situation and decided, correctly, that it would be a bad investment. If anything they should be commended for it, not ridiculed and called names, like “moochers” or “takers”. Since when simply working for a paycheck became a point of derision?

Poker players in the casino have a choice not to play, they can stand up and leave the table if they don’t like the game. Average citizens do not have that luxury. If the business community still insists on fleecing those unfortunates who scrape by paycheck to paycheck the least they can do is stop calling them names.

Rupert Murdoch makes a weak case for the morality of markets.

Rupert Murdoch, chairman and CEO of News Corporation, addressed the morality of free markets in his recent editorial. The essence of Mr. Murdoch’s argument is that free market is inherently moral and that greed is not the driving force of success.

“The market succeeds because it gives people incentives to put their own wants and needs aside to address the wants and needs of others. To succeed, you have to produce something that other people are willing to pay for.” Mr. Murdoch writes.

Let’s dwell on this for a moment. Benevolence is not why people start a business. Businesses are profit driven. Some enterprises can begin as an experiment and be iconoclastic and pioneering in nature, like Apple; the rest are founded with the sole purpose of making a profit. If someone wants to put his own wants and needs aside to address the wants and needs of others he volunteers or starts a non-profit.

One can’t mindlessly marvel at the virtue of the free markets without considering the following: people are not always rational; markets do not always self-correct; there are informational asymmetries between transaction parties; there’s an agency problem (that is when a hired representative, in business or in public life, represents his own interests rather than the client’s). If we lived in an idealistic world of artisanal mom and pop shops, Mr. Murdoch would have a case for the morality of market participants. But when those small shops run out of natural customers the troubles begin. Embarking on the quest of permanent growth, those businesses tend to enter the realm of creative finance, consolidation, dubious products and political favors. Business models for many big firms have long ceased to resemble the innocuous model that some laissez faire idealists subscribe to. We’re not living in the world of mom and pop cupcake stores and community banks anymore. Consumers’ interests and corresponding profits are not aligned anymore: customers and their interests are secondary to the interests of shareholders and investors. Because everything is put at the altar of “growth” there’s a point where a business begins to invent useless or harmful products (addictive prescription drugs, subprime mortgages, leveraged buyouts, entertainment disguised as “news”).

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Inflation of Labor

Republicans now are rediscovering the “middle class”. Rubio made sure to make “middle class” the focus of his SOTU reply. It’s a welcome about face in a party that just a few months ago was celebrating business owners (as opposed to people who work for them) on Labor Day. It wasn’t surprising: the current Republican dogma coalesced around the idea that only business owners work hard; everyone else is either lazy or not entrepreneurial enough. In Republican mind, whoever didn’t become business owner or “made payroll” is implicitly a lesser member of society, a leech and a moocher.

Republicans love to keep their focus on inflation: there was no shortage of dire warnings coming from the right quarters about inflation that was just around the corner. The inflation that they had in mind never materialized, but in the meantime the other type of inflation – labor inflation has been devastating the communities for decades but received little attention of the doomsayers.

Back in the day, the time that many conservatives are nostalgic about, the 1950-60s, it was possible for a man with a high-school diploma to work at a factory and get paid enough to provide a middle-class lifestyle for his entire family. For a man with a college degree the career paths were wide-open and his chances of successful employment were even more robust. To achieve and maintain a middle-class lifestyle one didn’t need a double-income family and didn’t need to leave home and 6am and get home at 12am and be available on weekends. Since then “success” has been redefined. To be considered successful these days you have to negate your own self and turn into a machine.

Toiling away from paycheck to paycheck and working harder and longer hours is required nowadays just to keep one’s head above water. The world where business owners work 24/7/365 and everyone else works from 9 to 5 with an hour break for lunch is a fantasy. Let’s examine a minimum wage worker working shifts at Walmart. If he or she works 8 hours a day they would make roughly $15K a year. I would argue that if this person is presented with an opportunity to work longer hours or find another part-time job, say, at nearby Taco Bell, he would take it. Many do. We’ve all heard stories about people working 2-3 jobs. Or let’s even take an average Wall Street employee: no matter how entrepreneurial they might feel about themselves – they are still just glorified salary workers (with bonus). They are expected to be on-call 24/7 checking their blackberries at night and on weekends and they have acquiesced to this way of life as a default and some, in some masochistic way, even consider it a badge of honor. Working hard and especially reveling in your hard work is as American as apple pie. Our entire way of life now is treating the best-case scenario as a base-case scenario. In other words, there were times when working 8-hour days meant to be average and working 12-hour days and weekends meant to be successful. Now, for many, to work 12-hour days plus weekends is a given, a base-case scenario.

Humans have a great adaptive mechanism – we can get used to many things and we can accomplish remarkable feats especially if we’re in a survival mode. But we can only stretch our productivity so much, and after a certain point more workload becomes detrimental to an individual, counterproductive for companies, and eventually damaging to society. We physically can’t work more than 24 hours, we can’t be at 2 places at the same time, we can’t win on every trade. At some point there will be no room left to push harder. The benefits of longer hours and constant availability are becoming marginal. To take success onto the next level from what is considered successful career today is to become superhuman, develop magical powers or to rig the game. And if you have no way of doing it – you’re just an average, talentless, lazy schmuck. But don’t dare to complain about it – to complain is un-American.

There’s clearly an inflation of labor for those holding a wage job. Over the years the normalcy of 8-hour work days turned into 10-hour work days and then into 12-hour work days, but the benefits are failing to keep up with the contributing effort. The jobs for which a high-school diploma was sufficient, now require a college degree; and where before a college degree would provide job security for life, a graduate degree is required and yet it is no longer a guarantee of lifelong employment. It’s hard to say which came first: inflation of college degrees or inflation of labor. Surely, today this labor inflation can be attributed to high unemployment rate, but this phenomenon was prevalent even during the roaring years prior to the 2008 collapse.

The “moochers” that Republicans keep talking about are stretched too thin. They are one accident, one blown tire, one missed paycheck away from not being able to keep afloat. It is only in the imaginary world of self-declared “makers” everyone else lives off of the fruits of their labor. In the real world, “makers” expect everyone to be on call at all times for pennies and then have the chutzpah to accuse them of being lazy. Well, at least some in the GOP, who actually have to win elections rather than exercise their wits at the expense of an average Joe, are rediscovering that such attitude is damaging the brand. I’m following their transformation with great interest.

Happy New Year!

I want to wish everyone who reads this blog a very Happy New Year!

Also, I’d like to speculate about what the new year might bring in areas that I follow closely: politics and economics.

If the fiscal deal is not reached tonight (and it increasingly looks like it won’t be), we will begin the 2013 with Democrats in congress and Obama pushing for the middle-class tax cut. Republicans will grudgingly, and after some mandatory posturing and howling, accept it. The bigger wave on the horizon is the impending debt ceiling which will have to be raised somewhere in February. Unless debt ceiling is somehow dealt with during the tax cuts negotiations that will happen in January, we can have a repeat of August 2011 debacle. And Republicans will have the upper hand again, because as they have demonstrated earlier, nothing indicates their love of the country better than the willingness to hold it hostage to placate the far-right constituents in their home districts. If I were Obama I would deal with it now, while I have a better hand and can force some consessions. But there’s a silver lining here too – those who are looking to buy some stocks will be well advised to wait till Feb or March when the markets will dip during the certain debt ceiling debacle.

Here, I must say that I have been 70-80% long stocks for the last 3 years. It’s been a rollercoaster, but I held on during the 2010 flash crash and 2011 debt ceiling sell-off, notwithstanding several other, smaller dips. My strategy is not fancy, but rather straightforward,  and it worked for me during the past years and it will work for me again in 2013. In a nutshell, the reason why I’m long stocks is because of the deleveraging (a process where everyone pays off their debts and stores cash on their balance sheets) and low yields in pretty much all asset classes out there. In plain English that means financial institutions are sitting on  hundreds of billions of cash and have nowhere to put it. Bonds across the board (corporate, mortgage, Treasuries) have rallied so much that they earn zilch now. So stocks look more and more attractive to invest in. It’s riskier than bonds, but at some point (especially when the market dips again during the inevitable debt ceiling clusterfuck) many fund managers, pressed by their clients to deliver yield, will be forced to buy equities. Another powerful force that is behind my back on this strategy is Ben Bernanke who will stay as Fed Chairman through 2014 and will keep the rates low as he has been doing for years. Low rates are bullish for stocks.

I hope Wall Street will stop fighting the Obama administration and will come to terms with the new normal. The business model and the payoffs of the 2003-2007 era was an aberration and Wall Street handicappers, if they are as smart as they claim, should come to this realization.  

And as always, I wish Obama and the Democrats would learn to play the hand they’ve been dealt forcefully. Here’s a great poker parallel about the way Obama plays his hand now: “The negotiating style Obama has displayed in these instances is what poker players call “tight-weak.” A tight-strong player avoids throwing in his chips, saving them for a big hand, which he plays aggressively in hopes of a huge win. A loose-weak player plays lots of hands, bluffing frequently. Tight-weak is the worst of all worlds — when you have a weak hand, you lose, and when you have a strong hand, you fail to maximize your position.

Happy New Year!