Sunday 30 December 2012

Twenty-Twelve: A Year of Wake-up Calls

Every year has its share of good and bad events in world affairs. But looking back on this year it seems to have been filled with a mixture of unfortunate events and near misses which remind us of the failings in our current ways of doing things. However, many of these events seem to have triggered a real reevaluation of our policies, our political systems, and our social aspirations. Among the gloom there may be cause for optimism yet.

Extreme weather, Climate Change, and the end of the world

A few years ago, news reports would shy away from suggesting a link between extreme weather in the present day and long-run climate change. Any mention of such a link would be filled with hesitation and caveats. A turning point seems to have been reached this year, with news reports making this connection regularly and unashamedly. Indeed, the frequency and extremity of storms, droughts and flooding has undeniably been rising over the last decade. This year has seen Hurricane Sandy cause massive destruction in New York and its surroundings. Meanwhile much of the central US was hit by drought. In the UK, the rain from April to June was the heaviest on record, with more floods this winter making it possibly the wettest year on record.

The supposed Mayan prophecy of the end of the world did not come to pass. But the threat that climate change poses is very real, and this year saw a change in the tone of the debate about its effects.

American Political Deadlock, US National Debt and the Fiscal Cliff

As I write this, negotiations about raising the US debt ceiling are ongoing, and it seems likely that automatic spending cuts and tax rises will kick in. This in itself is a worrying prospect. But the fundamental factors causing it are even more cause for concern. On the one hand the US has an immense level of national debt, as well as a gaping budget deficit, which will doubtless be a source of global instability in years to come. On the other hand, the American political system is so highly polarized into two ideologically opposed parties it seems that meaningful political progress on any issue is almost impossible. 

A pessimistic analysis would conclude that the institutions of US politics are fundamentally broken, that gridlock is the new norm, policy will drift and the economy will stagnate. An optimist might attribute the slow resolution of problems to the election, and point to Obama’s new democratic mandate as a catalyst of further progress. We shall learn which (if either) is right by seeing how things play out in 2013.

EU Bureaucracy, public sector finances and the Grexit

In 2012 it seems we came very close to seeing the break-up of the Eurozone. While disaster was, apparently, narrowly avoided, the budgetary problems of the periphery countries are far from resolved and the political union is more fragile than it has been in years. In the mean-time the degree of bureaucratic waste in the European political system has become ever more apparent. The backlash in the UK against surrendering power to Brussels has grown to record levels; so much that the anti-EU UK Independence Party is now the third most popular party, having overtaken the Liberal Democrats in the opinion polls.

An image has emerged of an EU parliament and commission disconnected from the people they represent. European bureaucrats are seen as a sinister elite, bound together by the sacred mission of European integration, a mission so important that trivialities such as democracy and national sovereignty can be ignored.

The chaos caused by public spending cuts in Greece has changed the people’s tolerance level for wasteful publicly funded institutions. After the failure of leaders to agree on the next EU budget in 2012, the stage is set for a showdown in 2013. This could well lead to turmoil, both in Brussels and further periphery countries, if it is not handled with finesse.

Some other alarm bells

  • The Arab Spring has stumbled. The jubilation at the toppling of several dictators is over, as the situation in Syria has crumbled to all-out civil war, and an Islamist-backed strongman has risen to the leadership of Egypt. The freedom and democracy that many in the region hoped for may yet be realized, but is proving more elusive than most hoped for.
  • The Sandy Hook shooting seems to have caused a change in the US debate on gun control. The stark contrast between the two attacks on primary schools that occurred on December 14th is especially poignant. In China, a man with a knife attacked 20 children, and none died; in the US, a man with a gun attacked 20 children all of whom died. It looks like in 2013 we may see new legislation curbing sale of the most powerful weapons to the public.
  • The Libor scandal has shaken up the banking sector and to skeptics is proof that the financial sector is rotten. When the metrics (i.e. interest rates) taken as the fundamental building blocks of the financial system are so easily corrupted, what does this say about the rest of the system?
  • The dispute between China and Japan over island territory has raised tension in East Asia, and contributed to the election of a hawkish leader in Japan’s election. The search for a diplomatic solution must be a top priority, as the crisis is already damaging the regional economy and threatens something much worse.
Have we woken up yet?

This remains to be seen. While I have noted a change in the tone of many important debates, this needs to be followed by action if real progress is to be made. I will be watching closely in 2013 to see if these seeds of change will flourish.

Sunday 23 September 2012

The Perils of Relying on GDP in the Information Age

“What gets measured gets managed” is one of the fundamental principles of management. What would a business do if they realised that their one critical measurement tool was broken? If their primary performance indicator was found to be unfit for purpose?

What about a country? When it comes to measuring the health of an economy, the received wisdom is that Gross Domestic Product is the best measure we’ve got. It’s widely acknowledged to be imperfect, but is measured anyway, and used as a yard-stick for government competence almost everywhere.

There are two flaws with GDP that are usually cited in economics textbooks.

Firstly, GDP leaves out certain things that have economic value. It leaves out value-creating work that is unpaid, such as volunteer work and domestic care that parents provide to children or relatives to relatives. It leaves out the value of leisure time spent doing nothing but relaxing.

Secondly, GDP includes certain things that have no economic value (or negative value). Products that are bought then never used are one example. ‘White Elephant’ vanity projects, like the ones described here by the BBC’s Paul Mason, fall into this category.

Industrial activity that creates pollution and products that are harmful to health are often put in the second category: they add to GDP but have negative ‘externality’ effects for society. I would suggest treat these differently. They reveal another, deeper, flaw with GDP, which is that it ignores the ‘balance sheet’ effects of economic activity.  This is a major area of interest to environmental economists, but it has yet to make it into the mainstream of policy creation and debate.

Why do balance sheet effects matter? Because there are a range of economic activities that deplete our ‘stocks’ of natural capital (e.g. mining, oil extraction, fishing and some farming) and there are a range of activities that generate future economic liabilities (e.g. pollution, health deterioration). When economics was born hundreds of years ago, humanity’s impact on the environment was sufficiently small that balance sheet effects could be ignored. Now that the human race has grown to over 7 billion we are having a profound effect on our environment, and we can no longer ignore these effects. Just as it would be inconceivable to manage a business based solely on its profit and loss account, it is a fallacy for governments to concentrate so much on GDP, which measures only flows.

If this is not enough to convince you that GDP is a fatally flawed metric, consider another sort of good that it ignores: Free goods. GDP was developed in an age when most goods produced by businesses were products you could hold in your hand or services delivered face to face. Computing, software and the internet has changed all that. If I consider the most important services I use, most of them are information services, and most of them are provided to me for free by companies such as Google, Facebook and Skype, NFPs such as Wikipedia and the BBC, and individuals who share their thoughts through blogs. Advertising aside, none of this activity is captured by GDP, and yet lives all over the world have been made much richer by the easy availability of information and social contact for free.

GDP has been used consistently since WW2 because it has been a reasonable proxy for quality of life. But in the Information Age, the fundamental linkage between GDP and quality of life is broken (see also this HBR article). Infinitely scalable services with no marginal cost, given away for free, have changed the ball game and now we need a better stick with which to measure economic success.

Saturday 1 September 2012

Does this Apple look rotten to you? The World’s Largest Company and a $1bn Pyrrhic Victory

Apple, the world’s largest company by market capitalisation, reached two milestones last month. On 20th August, it became the most valuable company in history, in nominal terms, after surpassing the previous record set by Microsoft in 1999. And it was declared the victor in a long-running court case with Samsung over patent rights, in which it was awarded a cool $1 billion in damages.

Apple is a lot of people’s darling company. It has done incredible things: it has revolutionised many industries from computing to music through to mobile telecommunications. But its relentless pursuit of court cases based on intellectual property is a bad omen. It hints at a company that is paranoid, aggressive and insecure, not one that is cool, calm, and confident as Apple always used to seem.

Superficially the lawsuit is a rational manoeuvre: by disarming your competitors you can maintain your dominance in the market.

But that is precisely the problem. Not only does Apple come across as petty and bullying by pursuing its court cases, it appears to be aiming for a monopolistic position from which it can exploit its market power and dictate smartphone prices. This has been astutely ridiculed by Samsung which points out, “[it is] unfortunate that patent law can be manipulated to give one company a monopoly over rectangles with rounded corners.”

Courts around the world have refused to side with Apple. A judge in the UK dismissed Apple’s suit against Samsung, saying “[Samsung products] are not as cool. The overall impression produced is different.” In Germany, the Netherlands, Japan and Korea courts have found in Samsung’s favour. It is perhaps unsurprising that Apple’s only major victory was on its home turf in California – and the figure awarded in damages is absurd, like a number Dr Evil might pull out of the air.

What is also quite shocking is the fact that Samsung is one of Apple’s biggest suppliers. Plenty of management research shows that cooperative relationships across value chains contribute to long-run success – exemplified best by Toyota’s rise and longevity. Innovative technologies are shared, supply chain management can be optimised, best practices spread. Samsung is dangerously conflicted, acting as both supplier and competitor to Apple, and a long-running feud will do neither company any favours.

With regard to Apple’s new record market capitalisation this is only a nominal record. Accounting for inflation, Microsoft still holds the real record (peak valuation in $850bn 2012 dollars). Microsoft achieved that milestone in the late nineties, shortly before the tech bubble burst.  Apple is beginning to look like Microsoft in other respects. For starters it has transitioned from a rapid growth phase to the ‘mature company’ phase that stock analysts seem to dread (its first dividends, paid in July, are a key indicator of this). Microsoft adopted bullying tactics with its competitors (Netscape, BeInc…). And Microsoft did its utmost to maintain its monopolies over various software classes. It very quickly became an uncool company, its valuation flatlined, and right now it seems to be destined for decline.

Will Apple go the same way? It seems to be well on the way. Its products have been revolutionary – but its improvements with each new product generation are now more and more incremental. The release of a new iPhone (the 5th generation) will be a great test. The sales are likely to be strong, but sales numbers will be less important than the quality and originality of design when considering Apple’s long-run competitive advantage. Near field control, mobile wallet, or 4G technology cannot be considered revolutionary developments – they are already available so widely. On the other hand, soft-SIM technology, femtocells or something entirely novel could demonstrate that Apple still has what it takes to innovate.

Sunday 19 August 2012

The Good, The Bad, and The Ugly: Corporate Marketing during the London 2012 Olympics

Alongside the fantastic sport and athletics, I have been both impressed and irritated by the corporate marketing associated with the London 2012 Olympics. In the run up to the games the overall corporate involvement was excessive, in particular the corporate floats that preceded the torch procession all around the country. But at the venues themselves it was heartening that the presence of logos was limited and the focus was entirely on the athletes.

Some companies, both Olympic sponsors and non-sponsors, ran clever advertising campaigns based around the Games. For others, the campaigns were so bland, dull or ‘in-your-face’ that they served only to annoy. And worst of all some sponsors used the Olympics as a licensed monopoly for their products, which has backfired in ironic style for some! Here is a summary of the best and worst corporate Olympic associations, based on both my opinion of their adverts and on the newspaper and social media views on the campaigns.

Gold Medals (Sponsors)

British Airways

BA’s witty, self-deprecating tagline ‘Don’t Fly. Support Team GB’ is probably the most memorable piece of advertising I’ve seen associated with these Olympics. It shows a very British sense of humour, and resonates Virgin Atlantic’s famous ‘fly BA,’ campaign of 1986*. What’s more, BA's ads used the #homeadvantage hashtag, which perhaps helped psyche-out foreign athletes as they arrived. It was risky at the time, but has been vindicated by Team GB’s epic performance.


Not necessarily the most prominent of the sponsors, but Cadbury punched above its weight with its poster campaign on London buses and Tube stations, with some humorous comparisons between athletics and chocolate bars. I, for one, was amazed to learn that cycles in a slipstream are ‘only one Twirl bar apart.’ These ads raised a smile – and Cadbury seems to have avoided being tainted by the ‘junk food’ brush that harmed McDonalds and Coca Cola (see below)

Gold Medal (Non-sponsor)


Nike has had such a phenomenally successful campaign that more people think Nike is an Olympic sponsor than Adidas**. Nike’s campaign, based on the theme of ‘greatness’ and the places called London that aren’t London,UK, cleverly side-stepped the prohibition on mentioning London 2012 and the Olympics in ads, while capturing the spirit of globalism and inspiration The Games represent.

Silver and Bronze Medals (Sponsors)


Samsung’s campaign was solid, but not exceptional, and avoided leaving a bitter feeling in the mouth as some other sponsors did. It was certainly more prominent than Panasonic, the other electronics-supplying sponsor!


Lots of sponsors tried to associate themselves with Team GB’s athletes, but non more successfully than Adidas, which helped make several up-and-coming competitors household names before the Games even began.

Silver and Bronze Medals (Non-sponsors)

Jack Daniels

Mainly for its cheekiness, I really liked Jack Daniel’s adverts which focused on its history of winning Gold Medals at international spirits expositions. It included interesting trivia (JD has won seven golds, then stopped entering competitions as seven is its lucky number) and associated itself cleverly with The Games at relatively low cost.

Wooden Spoon (Sponsors)


Lots of things were wrong with Visa’s campaign, but above all its insistence that everything Olympic can only be paid for by Visa really took the biscuit. You knew it was going too far when it switched off regular cash machines from Olympic venues, and replaced them with just a handful of Visa-only cash machines. Hilariously, its payment systems actually broke down at Wembley stadium early on in the Games. It managed to get blamed in ‘empty-seatgate,’ its adverts were boring and in-your-face, and it is pretty-much lacking in consumer credibility anyway. We do not, in general, get to choose to have Visa or MasterCard, we just take whichever is issued by our bank!

McDonalds, Coca-Cola

These two companies were mentioned in the press a lot, but mostly as part of commentary / incredulity at how two of the unhealthiest foodstuffs around feature so prominently in a festival of sporting prowess. Their products taste nice – but are so calorific they are fuelling an epidemic of obesity, which is what sport and athletics should be trying to fight, not cosy up to. What’s more, McDonald’s insistence on a monopoly over serving chips in Olympic venues (with the notable exception of Fish’n’chips) seemed petty, and Coca-Cola unwittingly brought its ownership of Innocent Smoothies to greater attention by making Innocent ‘the official smoothie of London 2012-’ not so Innocent after all, eh?

Do you agree or disagree? Share your thoughts in the comments box below!


*Richard Branson describes the episode in his book Screw It Let’s Do It: “On 10 June 1986, BA ran a promotion to give away 5,200 seats for travel from New York to London. Immediately, we ran an advertisement that said, ‘It has always been Virgin’s policy to encourage you to fly to London for as little as possible. So on June 10 we encourage you to fly British Airways.’”

**Thanks to Ad Age Global / Toluna for the research, and thanks to Private Eye magazine where I first read about this amusing survey!

Thursday 19 July 2012

Oversupply, Collusion, or Petrodollars: What drives London's property market?

As a renter in London, I have a natural interest in the capital’s unusual property market. Rents in London seem decoupled from the rest of the country, 3 or 4 or 5 times as high, due to the demand created by London’s proximity to well-paid jobs. I don’t have much insight on which way the residential property market is going to go, but this fascinating article from Buttonwood at the Economist suggests UK house prices and rental rates are out of step and may be due for a correction.

One thing that has puzzled me is the resilient prices for commercial property. I haven’t found a good source of data on office rents but piecing together a few datapoints suggests rents have risen gradually and are apparently just 15% off their peak in 2008.

My insight on this comes from two simple observations. Firstly, there is a vast amount of vacant space in the City of London. Near my office in the Monument area there is a sparkling new development, The Walbrook Building, that has been vacant since it was completed in 2010. Streets near where I work and where I used to live in the East London area have a proliferation of empty space and ‘To Let’ signs.

Secondly, there is huge amount of new office space coming on to the market based on new completions. The Heron Tower in Bishopsgate, and St Botolph’s in Aldgate are ‘prime’ examples. The Shard, which opened this month in an impressive ceremony is the epitomy of this, with some reports suggesting barely any space in it is let. The Cheesegrater, the Pinnacle and the Walkie Talkie are all still under construction.

Sooner or later economics ought to catch up with this glut of new capacity and cause a crash in the commercial property market. One apt question, then, is why have prices remained resilient so far?

With respect to rents, I think this may be a case of weak competition. Most of the properties are owned and/or managed by a handful of developers (Land Securities, Canary Wharf Group, British Land) and property brokers (Knight Frank, CBRE, Cushman Wakefield, JLL, DJD). They each have such a large exposure to rental rates overall that they would rather let properties go vacant than let them at lower rates (the natural course of events in a competitive market).

With respect to capital prices, it is no secret that London property has become a magnet for foreign cash. Two of the highest profile developments (The Shard, Battersea Power Station) have backers from Qatar and Malaysia respectively (indeed, Qatar has also recently bought the Olympic Village, Credit Suisse HQ and Harrods.) These buyers are able make high bids for these assets because they have petrodollars which they need to recycle, on which they are willing to accept lower rates of return than other investors. It’s an interesting reversal of 20th century neocolonialism. While all this investment is superficially good for the UK economy, it has the effect of inflating property prices when arguably the economy would benefit from a correction. It also leaves prices vulnerable to capital flight, with the possibility of a full on crash (akin to the 1997 Asian Financial Crisis).

Having made all these bold predictions I shall eagerly wait and see how things play out. In the meantime, I shall not be investing in commercial property in London any time soon!

Wednesday 20 June 2012

When Genius Failed: LTCM and the Flawed Assumptions of Modern Finance

The story of Long Term Capital Management, a hedge fund that collapsed dramatically in 1998, is instructive to anyone with an interest in modern finance. Roger Lowenstein gives the definitive account of the rise and fall of LTCM in his book ‘When Genius Failed’, now part of the business-lit canon.

When it was founded in 1994 LTCM was notable for the outstanding pedigree of its partners, a mixture of experienced traders and renowned academics, including Myron Scholes and Robert Merton, two professors who helped invent option pricing theory and would later share a Nobel Prize. The premise was simple: they would identify small anomalies in bond prices, then make massively leveraged bets that the anomalies would disappear. Relying on economic theory and past data on market movements they could identify theoretical mis-pricing in the market and profit from the correction in market prices.

The fund initially made terrific returns, peaking in April 1998 with a 300% profit, a sum of over $4bn. Between that point and September 1998, the fund managed to lose a spectacular $4.5bn, reaching the point where its imminent bankruptcy threatened the whole financial system. How did such smart people lose so much money? Leverage and bad luck both played a part. But fundamentally the fund based its trades on the same assumptions that underlie much modern financial theory, assumptions that have repeatedly proved to be untrue. Here are three:

  1. Governments debt is ‘risk-free’
    Until recently it was expected that powerful governments would never default on their debt. This belief was eroded by various crises, and in the mid-nineties the conventional wisdom was only that nuclear powers would never default. LTCM expected this to hold and was seriously caught out when Russia stopped paying its creditors in 1998. Nowadays it is accepted that even developed nations may default (they have simply accumulated so much debt), but nevertheless the US Government is still considered a ‘risk-free’ borrower. The concept of the ‘risk-free rate
    indeed lies at the heart of the equations used for investment decisions – so accepting that there is no such thing would require a new ‘relativistic’ framework at the heart of finance. With the US deficit out of control and its politics in paralysis, maybe the invention/adoption of a new framework is overdue.
  2. Markets are efficient, or tend towards being efficient*

    While it is generally accepted that markets stray from being efficient in the short run, many economists still believe that in the long run prices always converge with intrinsic values. Many investors, including LTCM, base their investment decisions on this assumption. In LTCM’s case, it served them well for several years – but backfired massively in 1998 when prices became more volatile than any of the ‘fundamentals’ would suggest they should have. Instead of cutting their losses when markets moved against them, the managers of LTCM were so confident that they increased their positions. The ‘Efficient Long-Run’ is a dangerous myth, and while many academics recognise this (and are working out why prices move irrationally) it is a myth that endures.
  3. Your trades do not move the market

    Finance theory is based on the perspective of a small investor whose individual actions do not affect market behaviour. One corollary of this is that there will always be a buyer for one’s assets, at the market price. LTCM was a long way from this theoretical ideal. With over $100bn in assets placed on a fairly small number of trades, it was like a whale in a swimming pool: the slightest move could make waves in the markets. It entered into trades so large that it could not exit them without prices in the market dropping. When liquidity in its markets (mostly exotic derivatives) dried up, it was left with no means of ‘cutting its losses’ on losing trades.

Perhaps astoundingly, these assumptions are still widely believed and still guide much of the financial industry and government policy. The implosion of LTCM should have been a wake-up call, but instead it was patched up and things returned to business-as-usual, sowing the seeds for the 2008-09 financial crisis. Many prominent investors and academics have been openly questioning these assumptions for decades (Soros, Buffett, Stiglitz and Shiller to name a few) but as yet the core of the finance establishment is yet to change. Perhaps the absence of a convincing and functional alternative theory is holding back change? Perhaps, herein lies an opportunity to come up with something new?

*'Market Efficiency' is the idea that prices of assets reflect all available information about the current and future value of the asset and as a result all assets are properly priced (i.e. price = intrinsic value)

Wednesday 23 May 2012

Learning from our mistakes: a review of Jared Diamond’s book Collapse

I am getting towards the end of a fantastic book: ‘Collapse,’ by Jared Diamond (who is also the author of one of my all-time favourite books, ‘Guns, Germs and Steel.’) 

Collapse is both a historical discussion of past societies that have collapsed due to the environmental damage they caused, and a forward-looking discussion of how to utilise what we know about the past to prevent similar things happening in the future. Like ‘Guns, Germs’, Collapse draws upon Diamond’s wealth of knowledge across a wide range of disciplines as diverse as ornithology, anthropology, social psychology and marine biology. It is written with the wise perspective of someone who ‘sits outside of time’ and is able to place today’s problems in the context of what has happened in the past and may happen in the long-term future.

Collapse is primarily concerned with environmental problems. It recounts how the once thriving population of remote Easter Island continued to fell their trees until there were none left. The knock-on effects were devastating for their society, as agriculture failed and the population shrank to a fraction of its former size through starvation and violence. The Anasazi Indians and Greenland Norse perished in a similar way because they failed to anticipate the effects of their mining and farming on the environment. But it is not all bleak tales of failure. Diamond describes several positive stories of proactive response. For example, the Tokugawa shoguns of Japan realised that land was being used unsustainably and instituted wide-ranging laws which successfully reversed the damage.

Diamond analyses the reasons why some societies failed and others survived, and how the decision-making apparatus of various societies proved disastrous or essential for their prosperity. He goes on to relate this analysis to environmental problems today, in a discussion that every government today should make note of.

His writing reminded me of the disastrous way we as a society seem to fail to learn from our mistakes, not just ecological ones but in many walks of life. This year is the hundredth anniversary of the sinking of the Titanic – and yet we still manage to have an unthinkable maritime tragedy, the sinking of the Costa Concordia, caused by navigational error combined with failure to evacuate a ship safely. 2008 saw the collapse of Lehman Brothers, which was directly related to the use of ‘off-balance sheet’ finance mechanisms that should have been prevented following the failure of Enron (for structurally similar reasons) in 2001.

A failure to learn from the past seems to be an all-too-common feature of both historic and modern societies, but in Jared Diamond’s book we have an excellent tool to help us adopt thought-processes and decision-making processes that are more robust and less prone to failure. If every decision-maker was as keen to learn from historical mistakes as Diamond is, the world would be considerably better off.

Tuesday 8 May 2012

How Long Before we see the World’s First Trillionaire?

In the news in the UK last week was the latest Sunday Times Rich List, which highlighted the widening gap between the super-rich and the average person. Amongst the one thousand wealthiest British citizens, wealth, on average, rose by 5%. Meanwhile, average incomes are falling. A similar pattern is seen in the US. The growth of wealth among the super-rich is a global phenomenon. And the extremes of wealth are extraordinary: the 5 wealthiest people in the world collectively own $252 billion, equivalent to 10% of the UK’s GDP.

An interesting question, I thought, is how long before we see the first trillionaire? So with a bit of help from Forbes and Wikipedia, I’ve done some research and very simple modelling on the subject.

The first dollar-billionaire was apparently John D. Rockefeller, who made a fortune in the oil industry, surpassing the billion dollar mark in 1916. As of 2012, there are 1,226 billionaires with a collective wealth of over $4.6 trillion. Having examined historical data, the evidence points to an exponential trend in the wealth of the very rich, which shouldn’t surprise us as compound interest and GDP are both (exponential) driving factors.

How might we forecast the year in which the first trillionaire will appear? I’ve taken three simple approaches. The first involves just two data points: Rockefeller’s first billion, occurring in 1916, and the record for individual wealth, set in 1999 by Bill Gates at $101 billion. In 83 years, ‘Max Wealth’ went up two orders of magnitude. To reach a trillion, it only needs to go up one more, so let’s say this takes 41 years from Gates’ 1999 record and we’re left with 2040, i.e. as soon as 28 years’ time.

My second approach is to use compound annual growth on today’s ‘Max Wealth’, which is $69bn belonging to Carlos Slim. Historical rates of growth of the wealth of the billionaires are highly variable, but smoothed ten-year CAGRs range from c.3% to c.9%. Taking the midpoint of 6% as my compound growth rate suggests a trillionaire will appear in c.2058, though of course volatility means it is more likely to happen before this.

Thirdly, I have run a simple exponential curve-fitting analysis on the data published by Forbes for the world’s richest person over the last 25 years (shown above). Extrapolating the trend this produces into the future suggests the first trillionaire can be expected in 2052, though again volatility will likely bring this forward (and I haven’t tried to model volatility here).

This is just theoretical number-crunching, so can we validate or sense-check these numbers? How about thinking about sources of wealth. Some of the most frequent sources of wealth are natural resource stakes, software and ecommerce, fund management and telecoms. Something these all have in common is ‘scalability’ as I explained in an earlier blogpost. Importantly, most billionaires gained their wealth through the growth and flotation of a large business. 

The largest listed companies are now worth several hundred billion and their founders tend to be multi-billionaires, so before we see a trillionaire we will first likely have to see a company with a multi-trillion-dollar valuation, with an individual still owning a substantial stake in it. This is would be eminently possible if the Saudi Arabian National Oil Company ARAMCO ever decided to list. Alternatively, a trillion-dollar company might be the result of pushing a new technological frontier. When this occurs, a company can grow so fast that competition law can’t keep up, and hence it can build a de facto monopoly as Microsoft and Facebook have each done in turn. Each tech boom is generating new companies with higher flotation values, so the first multi-trillion dollar IPO could occur within the next 2 or 3 tech cycles.

Can we conclude anything useful from all this hypothesizing and number-crunching? I have five key observations. The first is that the super-wealthy are likely to get richer faster than the average person, unless something fundamental changes in the way our economies or taxation systems are organised, or a systemic financial disaster/ bout of deflation effectively ‘resets’ the world economy. Second: the world might produce a trillionaire sooner than most people would probably guess, inside of 2 to 3 decades. Third, that traditional macroeconomics does not include the super-rich as a variable, even though the wealth of a few individuals is now comparable to the size of entire economies. Fourth, that the ever swelling wealth of the ‘top 1%’ will structurally change how of the top end of most consumer industries run, as huge buying power is concentrated in a few hands (think luxury apartments, hotels, flights, education). Fifth, that the ‘bottom 99%’ will become increasingly dismayed at the rising disparities – and the sentiment of the Occupy movement will reach the political mainstream across the world.

If you liked this post please leave comments below 

You can follow me on twitter: @david_clough1

Thursday 26 April 2012

Three simple policies to nudge the UK economy back to growth

Yesterday the news broke that the UK’s GDP shrank in Q1 2012, meaning the country is back in recession. Given the scale of public sector spending cuts a double dip recession was rather predictable. Put in perspective, the 0.2% decrease in GDP represents stagnation more than serious decline, but it is worrying nonetheless. However the negative growth was so small that even some relatively small policy changes might be able to reverse it. 

While I often write about quite abstract ideas, in this post I will put forward three concrete, low-cost, easy-to-implement policy proposals which would help to improve the economy. 

1.) Regulate the Scrap Metal Industry 

To me, this one seems like a ‘no-brainer.’ When a scrap metal thief steals electrical cable from a railway to sell for £60 to a scrap metal merchant, he causes thousands of commuters hours of delays. The economic value of that lost time is tens of thousands of pounds, plus thousands more for repairs. These thefts happen all over the country on a daily basis, costing the economy tens of millions every year in lost productivity. Furthermore, scrap metal thieves desecrate our monuments, our churches, our public artwork, destroying our cultural heritage as well as costing large sums of money. Some thieves stoop so low as to rip cables from a generator at a hospital, thereby endangering lives. 

Much of this damage could be swiftly curtailed if we required scrap metal merchants to keep records of the origin of all the material they buy and who they buy it from. Stolen goods could be traced to their seller, and strict enforcement would, I believe, deter many would-be metal thieves. Any metal thieves who persist should be subject to severe legal penalties. 

The increased burden of this system would fall largely on scrap metal dealers, and given the trouble that this industry causes for the rest of society, I would see it as completely justified. 

2.) Accelerate the issuance of licences for 4G mobile spectrum*

Why is the UK set to be one of the last countries in Europe to get 4G mobile? Why are we so far behind the USA and Japan? Norway and Sweden have had LTE since 2009. Up to the end of 2011 there were over 40 deployments of LTE worldwide, in 24 countries, including Uzbekistan, Belarus and the Philippines. In the UK, the auction of 4G spectrum has not even occurred yet, after repeated delays. The valuable spectrum which is being freed up by the switch-off of analogue TV will be sitting mostly idle for at least a year. 

 Issuing licences would have multiple economic benefits. First of all, it would trigger a wave of private sector investment in telecoms infrastructure (and Vodafone’s purchase of Cable & Wireless will start to look pretty smart). Second it would increase the productivity of people (such as myself) who use mobile broadband as their main internet connection. Third it would position the country for the next generation of mobile handsets and tablets, which will be powered by 4G technology and be capable of things that will make the iPhone4 look like a 1980s ‘brick.’ Fourth, it would position the country for an explosion in Machine-to-Machine (M2M) communications which could revolutionise our power grids, our roads, our medical devices and much else (much of which has yet to be invented). 

The next generation of smartphones will make the iPhone4 look like this

3.) Deregulate Sunday trading hours for shops 

This may be the most controversial of my three suggestions, but I believe a review of our archaic laws on Sunday Trading Hours is long overdue. For any readers from overseas, I should mention that British stores larger than a local corner shop are currently allowed to open for no more than 8 hours on a Sunday. 

At one level, my views on this are guided by personal frustration at going out to shop on a Sunday and having to head home at 6pm when I’m only half done because everything has closed. But I doubt if I am alone in my frustration. There are plenty of people who Monday to Friday at their desks, for whom Saturday and Sunday are the only opportunities for ‘shopping as leisure,’ who would welcome longer hours. I believe that if stores opened longer, people would buy more, and stores would make more income.

The major resistance to longer trading comes from shop workers themselves. The unions believe Sunday evenings should be ‘family time’ and resistance to changing the rules is so strong that even a temporary waiver during the Olympics caused an outcry

But retail workers who oppose change are being short-sighted. The retail industry is in crisis. High streets up and down the country are becoming increasingly deserted as retailers go bankrupt. Tellingly, new shops are not taking their place. It’s important to remember that by freeing up the rules the government would not be forcing any shops to open longer than they currently do, just giving them the choice whether or not to. And business flexibility is something retailers need more of if they are to increase their contribution to the economy instead of continue in their decline.

A lot of options for stimulating the economy are bigger, bolder and more expensive than the ones I’ve outlined. But the strength of these three is that they require little cost to implement: they simply unlock the potential of the economy that was there all along. 

*I realise that accelerating the auctions at this stage may be impossible, in which case the key point is that the auctions must not be delayed again, as they have been many times in the past 

Wednesday 11 April 2012

The Infrastructure Dilemma: How a shock for visitors to London hints at greater changes to come

The hot weather in London the weekend before last got me thinking about how unpleasant the London Underground can be at the height of summer, and what a surprise this might be to visitors coming to London for the first time to attend the 2012 Olympics. The London Underground is one of the oldest subsurface railways in the world, with deep and narrow tunnels that are impossible, as yet, to keep cool. The carriages are not equipped with air-conditioning and even if they could be, the existing tunnels don’t allow sufficient ventilation to dissipate the heat to the surface.

In contrast, many ‘developing’ countries have modern metros with fully functioning air-conditioning. They also have wider tunnels and wider trains, which do not require that tall passengers stoop to fit in. Unlike the London underground, many of these metros also support underground mobile phone reception. Visitors from Beijing, Bangkok, Kuala Lumpur and Shanghai may get a shock to find themselves disconnected and in sweltering conditions as they travel on the Central and Bakerloo Lines this summer.

This particular example seems to me to be part of a broader problem facing the ‘developed’ world. Countries in Western Europe and North America were comparatively early in building a lot of the core infrastructure that supports our daily lives. Roads, railways, water networks, sewerage networks, and electricity grids were installed decades or centuries before the rest of the world. This is a big part of the reason ‘developed’ countries got a headstart on the rest of the world in developing industrialised economies. Economic growth theory suggests that a country’s asset base is a key determinant of its labour productivity, so a large asset base (of both physical assets and knowledge) has a positive feedback effect. A classic example is factory tools: investment of capital can improve the tools, which makes the factory more productive and so increases the capital available for further investment.

For most kinds of physical and knowledge-based capital, this dynamic allows whichever country is in the lead to stay at the forefront. However with infrastructure things are different. Unlike other kinds of assets, such as factory tools, computers or science textbooks, infrastructure cannot simply be ripped out and replaced when a new, better version becomes available. Our roads, railways and water networks are in constant use, and in the case of water pipes and the London Underground are buried beneath our streets so that they are costly or impossible to access. For this reason, countries which put in place infrastructure later will have a distinct advantage: they will be able to build better networks than we have. As a result they will gain greater productivity advantages from it – and since they can also upgrade non-infrastructure assets, the ‘emerging’ countries which are currently underdogs could end up leapfrogging the West. They may end up with higher productivity, higher GDP per capita and higher standards of living than what we currently call the ‘developed’ countries.

This process has already begun. Already, Singapore has among the highest GDP per capita in the world. And already, the high costs of maintaining and upgrading hundred-year-old infrastructure are weighing heavily on the city of London. As I’ve previously argued, developed countries need to come up with innovative solutions to their infrastructure dilemma. Furthermore, government planners and civil engineers in less developed nations must learn from what is happening in the West, and design their infrastructure with future change in mind. 

Thursday 29 March 2012

Are the Youth of Today the ‘Betrayed Generation?’

‘Years of struggle for a jinxed generation’ was the headline on the front page of last weekend’s Financial Times. The necessity of  ‘averting a lost generation’ was talked about at Davos this year. It is important that attention is being given to the massive intergenerational wealth transfer created by the Western world’s past borrowings. However I’m not sure the terminology is quite right – a point I will return to in a bit. 

 The article in the Financial Times explains, ‘for the first time in half a century, young Britons embarking on their careers cannot expect to be any better off than their parents.’ The FT’s analysis shows that disposable incomes of young people have stagnated for years. What’s more, for our parents, many things that we have to pay for came for free. The biggest item may be University education; now young people will have to take on massive debts before their mid-twenties to get an education. These are debts which (as I discussed back in 2010) few of them will ever pay off. What’s more, until this month nearly all the burden of austerity in the UK was felt by the young and working age people and almost none by retired or nearly-retired people. 

It is pleasing to see that the government is finally starting to address this. Some newspapers jumped on the removal of the Age Related Allowance as a ‘granny tax,’ exaggerating the impact the changes will have in a transparent attempt to sell more copies by inducing outrage in the public. But George Osborne’s move was long over-due. The Age Related Allowance is an unfair distortion of the tax system – and because income tax allowances are going up anyway its gradual removal for new pensioners will only have a small effect on a small number of people. Further distortions that favour older people need to be looked at. Also, more generally, increasingly progressive taxation will help young people in low-paid jobs. 

Many older people in the UK don’t seem to realise how angry the younger generation really is. The London riots of 2011 were not just mindless criminality, as many seem to think. They were an outburst of the tension that is simmering, mostly under the surface. The same anger led to the trashing of the Conservative party headquarters. The same anger led to the occupation of St Pauls. Much of the press expressed puzzlement at these events (and misrepresented the Occupy movement by calling it ‘Anticapitalist’). But while I find the first two of these examples of expressions of anger deplorable and regrettable respectively, I can at least partially understand why they occurred. 

When newspapers and politicians use words like ‘jinxed’ or ‘lost’ to describe my generation they seem to imply no one is to blame (much like Nick Frost’s use of the word ‘Accident’ in Hot Fuzz). In reality, it is the financial mismanagement of previous governments for several decades that has resulted in the current situation. Perhaps the next time the Financial Times prints and article on the plight of young people today, we would be more accurately referred to as the ‘betrayed generation.’ 

Tuesday 13 March 2012

Will the Circular Economy be dominated by entrepreneurs or big business?

Two of the big environmental problems that exist today – the high amount of waste we produce, and the vast amount of raw materials we consume – would appear to have a fairly straightforward, complementary solution. We need to re-use more stuff.

While this is easy to say, it is not so easy to do. Our products were not designed with re-use in mind. With a few exceptions, it is normally more profitable to let people throw away the old so they can purchase something new. Dismantling an old product to re-use the materials is often more costly than getting fresh raw materials for your manufacturing process.

Having said this, recycling of raw materials has become ever more prevalent due to a mixture of legislation and rising commodity prices. But environmentalists have long argued that we need to take matters to another level: instead of decomposing waste into raw materials that resemble our current commodity feedstock, why not design products in such a way that at the end of their lives they can be dismantled and the components re-used without extensive materials processing.

For example, you might want to dispose of a bicycle once the seat and gear mechanisms are worn out. On the one hand, you might take it to the tip, where the steel frame would be used as scrap to help manufacture fresh steel, and the rest would end up in landfill. On the other hand you might give it to a small business which would overhaul the bike, fitting a new seat, a new gear mechanism, giving it a new lick of paint, and then selling it on. In a world where raw materials and landfill space are increasingly scarce, it makes send to do the latter – and this is what the hypothetical ‘Circular Economy’ is all about.

Last week’s New Scientist contained a small but notable article highlighting the publishing of two high profile reports into the potential of the Circular Economy. The reports are well worth a read in their own right, but the most important message is that the idea of the Circular Economy is gaining traction.

Over the next few decades, the Circular Economy has clear potential to be a disruptive force in almost every manufacturing industry. Big companies need to ask themselves where they will fit in the circular value chains of the future. If they don’t take a lead in the move towards ‘remanufacturing’, they risk allowing a new generation of industrial entrepreneurs get a head start. Economies of scale should give established businesses a clear advantage in moving towards a new economic paradigm. But organisational inertia – the natural preference for maintaining the status quo – could hold back companies even when some of their managers understand the need for change. It has happened many times before and it could happen again. For entrepreneurs there are valuable opportunities for building businesses with the circular economy in mind.

It will be fascinating to watch the transition to a more circular economy. I expect it to occur gradually, and it may not even be complete in my lifetime, but the next 10 to 20 years should begin to reveal who will be the winners and who will be the losers.

Wednesday 29 February 2012

Why I no longer question the portion of my taxes that supports the military

It’s a while since I last posted, not because of a lack of stimulating books, articles and conversations but more down to a lack of hours in the day. But a book I have just finished reading, Paul Collier’s The Bottom Billion, made me revise the way I think about military spending. It made me question one of my long-held beliefs: that to make the world more peaceful Western nations should reduce what we spend on the military. This, I thought, is worth sharing.

Paul Collier is an economist who is tackling one of the world’s toughest problems: how can economic development get started in the poorest nations on Earth where growth has been absent for decades. He identifies four poverty ‘traps:’ conflict, natural resource dependency, being landlocked and bad governance, and explains why these lead to self-perpetuating poverty. He takes a pragmatic view in admitting that the scope for Western assistance is limited and much of the impetus for change in these countries has to come from within. But he also identifies four instruments the West has at its disposal that can make a difference: aid, international laws, trade policy and military intervention.

This last one got my attention. Having observed the war in Iraq, I and many of my generation would associate intervention with resource imperialism. But Collier makes a case for intervention based on the consequences of a lack of it. He explains how the US entered Somalia in 1993, but withdrew after 18 American casualties caused a wave of bad publicity. In Somalia, he points out,

‘by 1995 around 300,000 people had died… but the biggest killer consequent upon the withdrawal was not what happened in Somalia but the lesson that was learned: never intervene. It took only months to prove how disastrously wrong this lesson was. Remember that 1994 was the year of Rwanda. We didn’t want another Somalia, with another eighteen American soldiers killed, so we got Rwanda, in which half a million people were butchered, entirely avoidably, because international intervention was inadequate.’

Collier explains how the British operation in Sierra Leone in 2000 dispersed a rebel army with a few hundred men, very likely averting a civil war. He articulates very clear circumstances when military intervention is warranted, and warns us from being put off the idea by the calamity that occurred in Iraq – or else we may have another Rwanda on our hands.

For one thing, the historical perspective on military interventions is crucial when considering the events in Libya last year and the ongoing conflict in Syria. For another I no longer question the value of the proportion of my taxes that go towards paying for the UK military. The important thing is to be vocal about how the military is used. Very few situations warrant the violence of a military incursion, but when they do we should not be afraid to use force.

If this topic interests you, this TED Talk gives some further (more rhetoric-driven) arguments for the importance of Western countries’ armies.