Politick

Bill Gates 11 Rules for College Grads

When my son began his senior year, I compiled an up-to-date commencement speech to give him advice when he could really use it - as he began looking for jobs.  I borrowed a bit from a brilliant speech by Steve Jobs, and remember early humorous and poignant speeches by Guy Kawasaki and Kurt Vonnegut (which turned out out to be a hoax, but a good one).   If it had been done back then, I would have also borrowed from a Bill Cosby commencement address.  Now Bill Gates recently gave a speech about 11 things you did not and will not learn in school. He talks about how feel good, politically correct teachings created a generation of kids with no concept of reality and how this concept sets them up for failure in the real world weighs in.  Here is his advice:

China Changes Direction

John Mauldin puts out a very good newsletter/blog.  He occasionally guest blogs from other sources.  He recently passed on a China Visit Report from Simon Hunt.  Simon's observations are worth contemplating, as it means China is now in a five-year transition that is fraught with risk.  The Yelnick View has been that the 2008 Olympics are to China what Y2K was to the US - a defining event that the government will make work, whatever the cost.  Post the Olympics, all bets are off.  Will China make it that far?  Let's take a look at the China Report and its implications.

The Outlaw President & The Third Wave of Reform

The enduring (and endearing) Ur-Myth of the US is the Cowboy, exemplified in movies such as Shane or High Noon.  The paradigmatic Cowboy does his duty, solves the problem, and leaves.  He does not do it for money, or power, or even love; but because it is the right thing to do. 

Reagan embraced the Cowboy, and led the First Wave of Reform of the Great Unwinding of the Progressive Era.  Newt Gingrich led the Second Wave of Reform, when the Republicans captured Congress in 1994 under his Contract With America.   Bush was expected to lead the Third Wave of Reform, but instead of embracing the Cowboy, he became the Outlaw.  The consequences of this will be felt for decades.

The Great Unwinding

We have been following the humbling of GM and its pathetic slide towards bankruptcy.  GM today reneged on the social contract it made over 50 years ago with its employees: to take care of their retirement.  It is cutting or capping pension and health benefits to its workers.  A similar move has already been made by US airlines, United most notably; and yet US airline costs are still 2x higher than Asia and 50% higher than in Europe. The Europeans will not escape this fate, either.  Their per capita wealth is dropping relative to the US towards levels not seen since the '70s, and their societies are suffering riots of a sort not seen in 40 years.   What is going on is a global phenomenon, an unwinding of the economic and social assumption underlying the past 125 years: the Great Unwinding of the Progressive Era. 

View From Palo Alto of Global Warming

It was quite a gathering. Most of the Silicon Valley Billionaires were there: Larry and Sergey (Google); Eric (Schmidt) and his remarkable wife Wendy, who organized the event with another wonderful person Amy Rao; Jerry (Yang), although not Dave (Filo), the Larry and Sergey of 10 years ago (Yahoo); Steve Jobs, but not his Larry (Ellison); Vinod; John Chambers (Cisco); John Doerr (Kleiner); Chuck Geschke (Adobe); Gary Lauder; and many more. Some have become celebrities, and some are so well known as to become known by their one iconic name only, like Madonna or Prince; although none has yet become so famous as to be a letter (W comes to mind).

What brought them together was being involved with Global Warming, and seeing the Man Who Invented Their Internet, Al Gore, who has achieved iconic status as Algore, one word that sounds as if he were star in the firmament above the hole in the ozone layer, named by a long forgotten Arab astronomer. Al Gore put in quite a performance and made a convincing case for Global Warming, but the night truly belonged to Silicon Valley. Can the Ethic of Innovation and Faith in the Future prevent a catastrophe in the making by using Science and Technology to overcome the Tyranny of Inertia and the Arrogance of Power? Can the Crusade of the Valley Boys recapture the Holy City (Washington) from the Jihad of Big Oil? Read on ...

Advice to College Graduates Now, When They Need It

It is traditional to give graduates advice on careers and life when they graduate, but they need it more at the start of their senior year when they desperately hunt for jobs.  Seniors in college are like canaries in the mineshaft, or lemmings on the march - whatever is hot is in.  In 1999, they all wanted to become dot-com godzillionaires and retire when they are 30. Today they all want to run hedge funds and retire when they are 30.  What they need is some perspective on how careers unfold and why they went to a liberal arts college in the first place. 

European Disunity and the New World Order

A loyal Yelnick reader and occasional guestblogger asked what the take is on the rejection of the European constitution. Two issues: the currency union (Euro) and the political union (Constitution).

Demographic Destiny and the Global Scramble for Yield

We are entering a one time event in human history - population will peak and then drop in our lifetimes.  The demographics are clear - in developed nations, birthrates are below replacement, and in developing nations, they are plummeting towards below replacement.  The primary cause seems to be the education of woman, who then see much more to life then being barefoot & pregnant.  (Just in case anyone has any doubts, I find the liberation of women to be the a GOOD thing, the seminal achievement of this era.) 

One consequence is a radical change in investment.  We all tend to believe in regression-to-the-mean, so if rates are low, they will rise; or if bonds are high, they will fall.  The demographic trend may lead to a one-time direction that should last 40 - 50 years, and the fact it doesn't change will catch everyone by surprise. 

Another consequence is grave risk of the Japanization of developed countries - decades of slow growth or modest decline.  One massive driver of growth are the Tweeners - twenty-somethings who enter the workforce and buy their first car, house, appliances, etc.  Subsequent purchases tend to be trading up or trading in.  Without the Tweeners, economies grow much slower.   (Hence the wisdom of consumer credit - fuels the Tweeners, is paid back when they begin saving in their 40s and 50s.)   The Birth Dearth means the Tweener growth engine sputters. 

(As a policy implication, it may be time for the US to open the immigration spigot, particularly for the best & brightest Tweeners from around the world.)

Economists at CSFB have assessed the inevitable demographic trends and made five predictions.

Fighting Terrorism by Empowering Woman

Aristophanes in Lysistrata wrote a wonderful satire with a gem of truth: to prevent war, the women withhold sex. George Gilder, before he wrote the Bible of the Reagan Revolution: Wealth and Poverty, wrote a screed against feminism called Social Suicide which, although much vilified and satirized, also contains a germ of truth: through marriage, young and restless men are made to provide for the future. But what about the woman?

At a Commonwealth Club session at Stanford, an off-handed suggestion was made by one of a group of panelists while discussing the role of the UN in the war on terrorism, that may contain an amazing insight into winning the hearts and minds of the people trapped in the broken nations that spawn terrorism: empower the woman to break the back of support for terrorism. Despite what Gilder argued, it appears worldwide that the empowerment of woman - education, employment, enfranchisement and entrepreneurialism - is a major force for lifting broken nations out of a cycle of poverty and hate. The Grameen Bank in India, and others like it, have found that giving microcredit to the poor, especially to woman, has a remarkable impact.

Can the Fed Stop Deflation?

Prechter's EWI site has posted their primary deflation analysis. Worth studying.

Prechter defines deflation as follows: "Just as inflation is an expansion in the supply of money and credit, deflation is a contraction in the supply of money and credit. Deflation is not falling prices. Falling prices are a consequence of deflation. It is dangerous to confuse the two ideas because prices can fall without deflation." PC prices are an obvious example of this.

Is deflation impossible because the Federal Reserve Bank can just print money? Prechter says no, since the Fed primarily 'prints' money by fostering the expansion of credit. Banks create money by lending. The volume of bank money dwarfs the volume that the Fed could sensibly create on its own. Hence the Fed has to weave its magic by trying to manage credit markets.

Currently credit markets for business ("Main Street") are not working well - another way of saying that it is hard to get venture capital, or go public, or get commercial loans at reasonable rates and terms. It is virtually impossible in certain segments, such as dot-coms, or new telecom companies.  During the Great Depression, banks simply stopped lending, and the levers he Fed used to change behavior did not work. This was called the liquidity trap' since the Fed made credit available to banks but the banks did not make it available to borrowers. The psychology had to be broken before banks lent. Speeches about fear, big government deficits, government job programs, Fed pump priming, cheapening the currency, failed to do so then, just as they have failed for Japan more recently. It took WWII to break the psychology.

(A fascinating validation of Prechter's point of view can be seen in WWII movies. Some of the most commended early movies about WWII are actually about the Depression; watch From Here to Eternity or In Harm's Way. These movies start with people being bored, and when the war comes, it is welcomed, as a way to escape the psychology of the Depression. More recent WWII movies, such as Saving Private Ryan or Pearl Harbor, completely miss this context, as they were made during the social mood of the '90s.)

Three credit markets have been working in lieu of Main Street: Muni's, Mortgages and Margin, although the window on two of them appears to be closing. Given the sorry state of California, muni borrowing is approaching its limit. Given the recent jump in mortgage rates, after a final rush to borrow, the real estate boom is likely to end. That leaves the stock market. As Yelnick has reported, it appears the Fed has used any significant event (9/11, Iraq War, blackout) to pump credit into equity markets and keep the stock markets afloat without creating a dysfunctional reaction from naked credit pumping.

Greenspan's strategy is use credit in these ancillary markets to keep the economy afloat long enough for Main Street to return to normal. This means the Fed is primarily trying to manage social mood and psychology, not more mechanistic targets such as money supply growth.

Prechter's point is that the Fed is running out of arrows in its quiver to affect credit market psychology, and when there is no more it can do, the negative social mood may overwhelm all that it has tried to do, and send us into a deflationary spiral and subsequent depression. The marker for when the 'herd' recognizes this point of no return is a severe stock drop, or even crash. If it happens, it will be said after that the crash caused the subsequent depression, or 'discounted' it, when in fact, the crash only reflects a collective "Oh, $#!@" reaction as investors head for the exit, not knowing what may follow.