The Stimulus Backlash

It appears that one very significant problem that the Administration and the Federal Reserve created, a frightening spike in unemployment, is the result of a massive miscalculation about how the staggering borrowing by the government would play out.

The Fed endorsed a policy of record borrowing under the theory that we were at risk of a deflationary spiral and that before recovery could be achieved we needed to “reinflate” and not worry about inflation. So far so good. A consequence of the public debt and unrestrained printing of money would be a spike in inflation but that would be beyond the horizon and have a positive consequence of reducing foreign held government debt as a result of a surging dollar, which would crimp growth but also reduce some core inflation components like energy. So far so good, we reinflate the economy and inflation puts a crimp on Treasuries held offshore thereby normalizing the entire system.

It hasn’t worked out like that, instead what is happening is that a deficit of confidence in Congress and the Administration on economic matters is translating into massive uncertainty about the future. We have entered a strange new period where jobs data is shifting from being a traditionally lagging indicator to a leading one, in other words, because of future uncertainty employers are not expanding… it’s systemic bunker mentality. Weak jobs data is leading to more weak job creation activity and the consensus view is that the Administration doesn’t know what to do and Congress is distracted by the healthcare issue.

The unintended consequence of the above is that blowtorch under the chair has shifted from Wall Street to the Federal Reserve and Treasury Department. Bernanke is pretty well insulated, he’s not asbestos wrapped but he can handle some heat, while Geithner is less protected as he is a member of the Executive Branch and as such accountable to Congress whereas the Fed is, by design, independent and largely immune to congressional oversight reaches. That won’t stop Congress from considering changes that pull back the power of the Fed but one thing is cerrtain, Geithner is not going to have a pleasant holiday season.

On Friday, Paul leveraged public frustration at Washington’s management of an apparent “jobless recovery” – and the mounting pressure on Capitol Hill to do something – to push through a controversial amendment to rein in the Federal Reserve.

[From America the jobless: Ron Paul wins, Timothy Geithner loses? | csmonitor.com]

Get Ready for the Much Smaller AOL

AOL’s strategy, the latest new one, is to shift away from being an ISP to being a “next generation publishing” entity. Without parsing what it means to be “next generation” when you are doing what Yahoo has been doing for years, this sounds like a reasonable strategy but the anchor that weighs it down is that the bulk of AOL’s traffic comes from AOL’s ISP customers and there is no data that suggests a meaningful shift in where site traffic is coming from.

People login to AOL and follow links to AOL sites which generates the traffic that underpins the advertising revenue… facts are stubborn things.

CEO Armstrong says that the content portal traffic is not dependent on the ISP business but the data simply doesn’t support that contention, and the content sites that do stand up well on their own have a relatively small unique visitor and pageview count; while we could argue that these are increasingly outdated measures the fact remains that an advertising driven site is dependent on showing strength on exactly these 2 measures.

Today it was announced that AOL is going to shed 2,500 employees ahead of the planned spinoff from TimeWarner, reducing their operating expenses by approximately $300 million annually once the restructuring costs are accounted for. This move suggests that AOL understands that the move away from the ISP business will stunt their publishing aspirations.

Armstrong is giving up his generous bonus for 2009 but far from being the magnanimous gesture from Armstrong it is rooted in the reality that a full blown employee mutiny would have been certain were Armstrong to take his bonus while pink slipping 1/3 of the employees.

Armstrong’s (expensive) goodwill gesture: He is giving up his 2009 bonus, which was to be at least $1.5 million. His explanation to employees: “As a member of our team and the person who takes accountability for the results of the company, I am making the decision to forego my 2009 bonus. That decision is a personal one and is not a sign for the future payout of the overall bonus plan for employees.”

[From AOL: We Need to Fire 2,500 “Volunteers” | Peter Kafka | MediaMemo | AllThingsD]

AOL is the tech industry’s General Motors, it’s legacy for many will always be this and spinning it off and buffing up a new media strategy simply won’t be enough…

200911190852.jpg

More on this topic (What's this?) Read more on Aol Inc at Wikinvest

Reporting from the Echo Chamber

I read this short Reuters piece on President Obama’s Fox interview last night and simply thought “who are these people?”

Here’s my edited version of the full piece:

BEIJING, Nov 18 (Reuters) – President Barack Obama gave his sternest warning yet about the need to contain rising U.S. deficits, saying on Wednesday that if government debt were to pile up too much, it could lead to a double-dip recession. His crack team of economic advisors made the previously undiscovered link between deficit spending and negative economic consequences on Tuesday night and defended the $3 trillion in debt accumulated in 2009 as necessary spending to expand the role of government , denying that any link between massive public debt and economic conditions was evident before Tuesday.

With the U.S. unemployment rate at 10.2 percent, Obama told Fox News his administration faces a delicate balance of trying to boost the economy and spur job creation while putting the economy on a path toward long-term deficit reduction, saying “because let me be clear, we have to get ourselves re-elected next year!”

His administration was considering ways to accelerate economic growth, with tax measures among the options to give companies incentives to hire, Obama said in the interview with Fox conducted in Beijing during his nine-day trip to Asia. With his team of economic advisors behind him, shuffling their feet and looking downward, Obama admitted that “basically we have no idea how to create jobs because outside of government payrolls we’ve never done that, we’re pretty much guessing at this point and anyone with a good idea should send me a tweet.”

“It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession,” he said. With consumer confidence at record low levels, many argue that it’s hard to imagine that confidence in the economy could be any lower but the President needs Americans to keep buying Made in China to ensure the flow of recycled dollars into U.S. debt purchases.

Fox News, which released a transcript of the interview, showed that comment by Obama on Wednesday morning and said the full discussion would be broadcast later in the day. (Reporting by Caren Bohan; Editing by John O’Callaghan)

[From Obama: Too much debt could fuel double-dip recession | Markets | Markets News | Reuters]


Blazing Saddles Scene

Nick | MySpace Video

Three Card Monty at GM

I read this and shook my head in amazement at the limited financial acumen of reporters covering business.

General Motors, encouraged by its improving financial situation, could repay all of its $6.7 billion in loans from U.S. taxpayers by the end of next June, the company’s top executive said Monday.

[From With $42B, GM moves ahead | freep.com | Detroit Free Press]

Let’s recap what is going on at GM. The Federal government – aka “us taxpayers” – gave GM $57.6 billion in exchange for equity in the company and a debt instrument for $6.7 billion, which is referenced in the above pull quote.

One of the favorable consequences of reorganizing GM in the bankruptcy court is that the company was relieved of servicing the $50+ billion in corporate debt that they had accumulated and suspended payments to their employee pension fund. What all this means is that $GM’s fixed burn rate went way down… way way down.

So fast forward to today and we learn that GM posted a loss but increased it’s operating cash by $3.3 billion. The increase in operating cash is what is really important, not the accounting loss… but it’s no surprise that they increased their cash considering that they didn’t have all that debt to pay interest on and then there is that $25 billion owed to the VEBA trust (another employee benefit expense) that payments were suspended on until December.

GM has the chutzpah to hold up high their plan to pay back taxpayers with the same money that the taxpayers originally gave them and claims that their increasing cash position as a consequence of not having to pay the VEBA Trust and the now extinguished bondholders is a win… really.

Let’s talk in January after they pay $10 billion to the VEBA Trust, $8.1 billion to the US Treasury and Canada, $2.8 billion for the fiasco at Delphi, and another $900 million for Canadian worker benefits.

My Droid Review

My wife came home with a Droid yesterday, which on one hand was pretty cool while on the other very disturbing as she is by no means a geek and not once did she ask for my opinion on this device. I suspect that some kind of counseling may be necessary.

Having had the opportunity to play around with the device I think I’m going to hold on to my iPhone for the time being. The Droid is really nice but it’s simply not appreciably better than the iPhone therefore it’s hard to justify switching.

My first concern, having seen the Droid only in press photos, was that the build quality was suspect but I’m happy to report that those fears are unfounded. The Droid is solid and conveys a sense of quality when held in your hands. The slider is smooth and the touch screen is crisp.

The camera is one area where the Droid excels compared to the iPhone. While it does have some latency that could disrupt your ability to get a shot “in the moment”, the quality of the images more than makes up for this negative. The flash and picture controls, white balance and color effect, are nowhere to be found on the iPhone.

I am not so enthusiastic about the keyboard, for several reasons. First of all, I’m not a big fan of the iPhone virtual keyboard but I do appreciate how it can be reconfigured for the app, such as offering a different layout when in the email address field as opposed to the body text, and when spun in landscape mode the virtual keys are plenty big enough even for folks with big fingers like me. You really do get used to it.

The Droid keyboard will no doubt please many and also be subject to the “you’ll get used to it” clause, but there are several design elements I just don’t like. The keys are flat, reminiscent of the laser etched keys on the old Razr handset, and while they do offer some tactile feedback (and in all fairness the iPhone keyboard offers no tactile feedback) it still isn’t enough to comfortably type without looking at where your fingers are going. The spacebar key is too small, which makes no sense because there are two unused key positions on the lower right and lower left of the keyboard; certainly they could have made that space bar larger by moving the ALT key left and right (there are 2 ALT keys, one on each side).

I found the keyboard keys to be really small for my fingers, and ironically I discovered that my typing speed and accuracy were greatly improved using the Droid virtual keyboard. This may be a simple transition issue for me, coming off an iPhone, that my wife who uses a Blackberry and never got used to the iPhone keyboard doesn’t experience.

The Google App Market needs some work, and this is probably the single dominant reason why I would not switch off the iPhone just yet. My favorite apps (e.g. Evernote and Tweetie) were not available and while promised I have long ago learned to judge application offerings on what is available rather than what is promised to be delivered.

I also found it interesting that many of the featured apps in the Market were priced in € and UK£. This is probably not a big deal from the standpoint on handling the transaction but is it really too much to ask that the storefront merchandizes every app in USD$ for customers who are clearly entering it through a U.S. carrier?

Aside from a couple of annoying usability issues (I still can’t figure out how to wake the device without opening the slider) the Droid is nicely designed and well appointed. The build quality is impressive and it feels substantial, and perhaps most importantly my first impression of it as an actual phone are pretty good although I would have to use it for a couple of weeks to really get the gist of integration of phone features in the apps (e.g. click on a phone number in an email to make a call).

In the final equation, the Droid is impressive for a v1 handset but it’s not enough to make me switch… yet. The openness of the Android platform is a big strategic advantage for Google and handset partners, providing they don’t allow the carriers to dictate what the handset can and can’t do from an app standpoint, but if allowed to develop momentum I could see this putting real pressure on Apple even among the hardcore user base.