Markets want stability...and predictability

Ben Bernanke, President Bush's nominee to be chairman of the Federal Reserve, is an outspoken proponent for "inflation targeting (subscription required)." I'm no interest rate or monetary policy expert, but the basic tenants of the concept resonate with me.

Inflation targeting is essentially the concept that the Fed would publicly announce a monetary policy that targets a specific rate for inflation growth (most talked about is somewhere between 1 and 2%) or at least a range that they want it to fall in to. For the past eighteen years, under Alan Greenspan, the Fed has successfully fought inflation through the use of calculated rate increases and decreases, but has done so behind closed doors. "Fed watching," the process of guessing "what they'll do next" has become nothing less than a sport.

As mentioned in the article, the need for predictability has been known for a long time. "Economists came to realize in the 1970s that to contain inflation in the present, they needed to control the expectations of individuals and businesses about where inflation was going in the future."

The reason Inflation targeting is gaining so many proponents is that it provides much more predictability. Financial markets, while moved by hard numbers over the long term, are moved in the short-term with a heavy dose of psychology (Ben Graham's proverbial "Mr. Market"). Is it healthy for the market to change what it does in anticipation of a Fed move, and then immediately correct after new policy has been announced?

Markets crave stability. This is why in equity markets companies smooth their results by managing their earnings. Everyone knows that during the boom Cisco Systems was brining in cash hand over fist each quarter, but strangely, quarter after quarter their results would come in exactly .01 over the analyst expectations. Everyone is aware this earnings management is going on and no one cares because they know actual results are even better. It's seen as good financial management to chalk up nice predictable numbers like that.

This kind of predictability is why an inflation targeting Fed policy sits well with me. Steve Forbes has been arguing for years in his column Fact and Comment that the U.S. economy would be better served by tying monetary policy to a predictable underlying metric (in his argument, the price of Gold). While Mr. Greenspan has in many respects provided the stability the market needed by being himself, what the U.S. (and the world) needs going forward is a policy that provides the predictability and stability the market needs no matter who sits in that seat.

(Disclaimer: I've left out a discussion of the flexibility in time of crisis that the Fed would "give up" by following an inflation targeting policy. It is a valid issue/point of view. There's a good discussion of that in the article I've linked to in the WSJ at the top of this post.)

Peter Druker RIP

WSJ News flash - Peter Druker, 95 dies Full Story.

A loss, but what a fantastic contribution to the world.

Darth Venter – Competition focuses innovation

Out with friends last night I had a conversation with a friend of a friend that struck me as interesting in regard to the concept of competition in science and technology. This guy works on a genetics research project that is run by Harvard and MIT. Of course, I read just enough popular science books and articles to be dangerous, so I immediately asked him about Craig Venter. His reply was a bark of laughter and an acknowledgement, “yes, we call him Darth Venter!”

If you don’t know who J. Craig Venter is, he is one of the people who is at the forefront of mapping the Human Genome using “shotgun sequencing technology (on the right in the picture). His Wikipedia entry mentions that he became “infamous for running a Human genome Project for its own commercial purposes,” (GASP!) From various articles you read about him he sounds like a brilliant, egotistical, and incredibly arrogant person. That’s how he’s described, but bull-headedness is a prerequisite for innovation. In my mind he sounds like an incredibly interesting person.

So I thought it was funny to find out that his competition calls him “Darth,” and it occurred to me how incredibly healthy that is. At the same time he gave him all the attributes of Lord Vader, he also acknowledged that Venter has moved the entire industry forward. Competition is what drives many a new discovery. I just finish reading “The Double Helix” in which James Watson describes the competition to discover and fully explain DNA (incidentally, it’s also credited as one of the first real written works of “popular science”). The book is the description of the multiple teams who are all working on the project in competition (and “co-opetition”), and all of the science department and grant politics that go into controlling who can work on what.

Rich Karlgaard, the Publisher of Forbes (greatest magazine ever) also had a great column last week called, “Why We Need Goofy Contests.” From railroads to rocketry, many advances have come from crazy competitions. Karlgaard points to the success of Burt Rutan and the X-prize, and asks why NASA doesn’t raise it’s paltry $20 million in annual prize/reward money to something more like $2 Billion. It’s a great question. Competition clearly pushes innovation, and what are “token” or “paltry” sums to our government (and arguably wasted they way it’s spent today) could prove to be tremendous motivators for the scientists and engineers of tomorrow.

Just look at the Pentagon sponsored Robot Races in the desert, and the absolute drive and energy it has focused on the robotics industry. Congress has mandated that one third of all military ground vehicles be “unmanned” by the year 2015. One option would be for DARPA to contract a single defense contractor to build robotic vehicles (through a competitive RFP of course). But how much faster will they get there, and how much better will the final solution be because many teams scrapped through a contest that emulates the real-world problem? Faster, better, cheaper. Foster Competition, and you’ll foster innovation.

What did you expect France?

Supposedly the riots in France are beginning to "wind down." As they do, many people are starting to ask what started all this? Why are all these Arab Muslims so angry? It seems pretty clear to me that France has some of the same discrimination problems the United States had years ago (and probably still has in places).

Specifically, I'm reminded of an AP article I saved from Dec. 17, 2003. "Chirac to Seek Law Banning Head Scarves." I saved this article because at the time I remember being absolutely appalled. This was just two years after Sept.11th, 2001, but at the same time I could never imagine banning a certain form of religious dress in the U.S.A. It would be like making Hasidic Jews take off those hats!

In the article Chirac went on to say, "Secularism is one of the great successes of the Republic...It is a crucial element of social peace and national cohesion. We cannot let it weaken." This seems tremendously sad to me. I don't consider myself religious, but I do have faith. Totalitarian states based on a theocracy are one horrible extreme, but a total secular state seems to be the other.

"What chu talkin’ bout Willis?"

I’m a technology guy. That is, I’m not an engineer, but I truly believe in the promise of technology, and that it will continue to make the world better for millions of people. So Malaria vaccines aside, every so often I think of something that makes me think “hmmm, will we give up all of our privacy and freedom if such and such happens?”

Here’s an example. Starting today, 2005, for the rest of your life, you better watch out what you say near any type of recording device! That is, don’t ever say anything out loud that you don’t mind having anyone hear. This will apply whether you’re planning to run for office in twenty-five years or if you just want to talk about your boss behind his back. Don’t ever call into a radio show anonymously and make an off color remark, because there will be no such thing as anonymous.

And the reason for the peril described above? The answer, of course, is Google. Maybe not Google specifically, but the future combination of different technologies will “out” us all on our perceived privacies. It goes like this. One form of biometric, a voice print, plus digitally recorded and stored audio, plus search algorithms equals the ultimate audio look up tool.

That means you could have every intention of leading a quiet life, not bothering anyone, and one day get pushed into the public eye --- say you win the lottery. The next day, you’re a news story, and all anyone needs to do is type in your name, select audio (or video for that matter) and click search. Everything you ever said near any type of a recorder pops up, including the time you promised that if you ever won the lottery you promised to give it all $340 million away to save endangered snail darter.

Be careful what you say.

Dell's lost Mojo

I despise short-term thinking. I certainly can't say that I have never been guilty of it (who hasn't) but it doesn't stop me from calling it out in others....

An article appeared in Barron's this week entitled " Time to Admit It: Dell's Lost Its Mojo." (Sub required). A basic premise of the article is that Dell still rules the roost in U.S. PC sales, but that the Dell sell-direct model is not translating in overseas markets. "In the hottest markets, China and India, buyers prefer to play with a machine before buying. "

Well this seems perfectly logical. Haven't been to India; have not spent a lot of time in Beijing (zero), but I get the strong feeling that the PC market in these countries is very nascent. Furthermore, the article continues, ""The PC business is no longer a growth market, for Dell or for anyone else, and it never again will be," says John Enck of the Gartner Group. "There is no conceivable way that Dell can significantly outgrow the market as a whole "

This seems stunningly dumb to me. Sure, the PC business is not a growth market today. At the same time, can we all agree that the PC is a pretty neat invention? Can we all agree that the "sleeping Tigers" of Asia have huge pent-up market demand for PCs? Okay, so they're still in the tire-kicking stage of the PC market in China and feel the need to "get their hands on" the machines ahead of time. Once the masses understand the value of PCs, is there any reason to believe that Direct from Dell can't work there as well? What's more, could other PC companys like HP and Lenovo be so crazy as to be building reseller channels for PCs in these countries?

Doesn't make Dell a "buy" today, but also doesn't mean the PC market will "never again" be a growth market.

First Blood

Good Morning - nothing much to say at the moment, at least...not until I figure out how this tool works. Not exactly "first blood" I know, but we'll see what happens.