33% of China's Carbon Footprint Blamed on Exports - abc News

Summary:
A Carnegie Mellon study finds that one third of China's carbon dioxide emissions are a direct result of the manufacture of goods destined primarily for developed countries. These "export goods emissions" account for 6% of the global emissions. International policy at the moment tends to penalise the country which produces goods rather than the one that consumes them. China has a point arguing that the US and Europe should bear the burden of responsibility for the emissions as they demand and consume the products. How to fairly apportion the liability for China's exported emissions is the million-dollar question. (Published: 29/07/08)

Notes:

• scale of China's emissions
  
• hot topic since it was forecast that they could surpass US emissions as the world's leader in 2007
• may have already happened

• Carnegie Mellon study:
  
• 2005: one-third of China's carbon dioxide emissions are pumped into the atmosphere in order to manufacture exported goods
• many of them "advanced" electronics goods destined for developed countries
• i.e. developed countries import many of the products that contribute to China's greenhouse gas emissions
• "export goods emissions" account for 1.7 billion tonnes of China's carbon dioxide
• represents 6% of total global emissions
  
• equivalent of Germany, France and the UK's combined emissions
• compare 1987: exports accounted for just 230 million tonnes
• 12% of China's total emissions
• China very aware that much of its carbon footprint is export emissions
• has used this as an argument against adopting Kyoto-Protocol-like emissions caps
• argues that other major emitters, including the US and Europe, should bear the burden of responsibility for the emissions as they demand and consume the products
• International policy at the moment tends to penalise the country which produces goods rather than the one that consumes them
• How to fairly apportion the liability for China's exported emissions "is the million-dollar question"
• Benito Müller of the Oxford Institute for Energy Studies, UK
• "It's just like narcotics," says Müller. "Who is responsible, the drug baron or the junkies?

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Quote of the Day

“When the facts change, I change my mind – what do you do, sir?” - John Maynard Keynes

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Word of the Day: The Paradox of Thrift

Posits that if we all individually cut our spending in an attempt to increase individual savings, then our collective savings will paradoxically fall because one person’s spending is another’s income – the fountain from which savings flow.

Notes:

But, as pointed out by Steve Waldman:

• often forgotten hidden assumption in the "paradox of thrift"
  
• true: one person's spending is another person's income
• but: does not follow that an increase in saving translates to a decrease in aggregate income
• two kinds of spending: consumption and investment
• e.g. buying Ferrari vs. laying a subway line
  
• nearly all savings are actually spent on investment goods
• no "paradox of thrift":
• what is "saved" is really spent on current production of future capacity
• plenty of paychecks to go around
• no "fallacy of composition": individually and in aggregate, today's thrift lays the groundwork for tomorrow's abundant consumption
• but: for this to work out, two things must be true:
  
1. today's savings must be invested in projects that will actually generate future wealth
2. savers must believe they will retain a stake in the increased wealth commensurate with the size and wisdom of their investments
• we have a financial system in order to make these facts true

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Quote of the Day

“God created the bulk but the Devil created the surface.” - Wolfgang Pauli

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Financial system failure and the paradox of thrift - Interfluidity

Summary:
Steve Waldman responds to yesterday's article by Paul McCully. Points out that under normal circumstances there is no paradox of thrift because savings is actually invested, i.e. spent on the current production of future capacity, and lays the groundwork for future consumption. Saving does not translate into a decrease of aggregate income. Issue only arises when the financial system breaks down: when investors lose faith in the quality of available investments or their ability to collect the proceeds (in real terms), they resort to precautionary storage (commodities, gold, art), i.e. saving of the wrong kind. Precautionary storage, not thrift itself, is the villain of the tale. Storage eats wealth. Encouraging consumption is not the solution. Feeds into a vibe that saving is so uncertain and money so volatile that one might as well spend. Much better to develop a financial system that actually performs, that identifies fruitful projects, puts current resources to work and allocates claims fairly. The financial system has failed because it erred grievously. Not a problem we can spend our way out of. To fix the financial system we have to change it, not rally to its support. (Published: 31/07/08)

Notes:

• paradox of thrift
• posits that if we all individually cut our spending in an attempt to increase individual savings, then our collective savings will paradoxically fall because one person’s spending is another’s income – the fountain from which savings flow
• often forgotten hidden assumption in the "paradox of thrift"
  
• true: one person's spending is another person's income
• but: does not follow that an increase in saving translates to a decrease in aggregate income
• two kinds of spending: consumption and investment
• e.g. buying Ferrari vs. laying a subway line
  
• nearly all savings are actually spent on investment goods
• no "paradox of thrift":
• what is "saved" is really spent on current production of future capacity
• plenty of paychecks to go around
• no "fallacy of composition": individually and in aggregate, today's thrift lays the groundwork for tomorrow's abundant consumption
• but: for this to work out, two things must be true:
  
1. today's savings must be invested in projects that will actually generate future wealth
2. savers must believe they will retain a stake in the increased wealth commensurate with the size and wisdom of their investments
• we have a financial system in order to make these facts true
• if the investment industry is capable of finding or initiating projects likely to satisfy future wants, and if financial claims are predictable and stable stores of value: no paradox of thrift
• issue only arises when the financial system breaks down
• when investors lose faith in the quality of available investments or their ability to collect the proceeds (in real terms), they pull out savers' Plan B: precautionary storage
• they buy gold, or oil, or art, or whatever, and they keep it, generating scarcity rents for those who can offer perceived value stores
• but very little in the way of general income and employment.
  
• precautionary storage, not thrift itself, is the villain of the tale
• when a dynamic of precautionary storage takes hold, vulgar Keynesian prescription is to encourage consumption
• in extremis that might be a good idea
• because if all everyone does is hoard, it's hard to figure what to invest in
• except maybe storage tanks
• but: it's much better to develop a financial system that actually performs, that identifies fruitful projects and allocates claims fairly
• storage eats wealth, while productive enterprise creates it
  
• people know this
• no one "invests" in gold or oil when a financial system is working
• they do so when it is broken: like now
• we're at a point where people are beginning to shift from investment to storage
  
• because of a well-deserved loss of confidence in the financial system
• but: not at a point where there's so little economic activity that we can't foresee future wants
• encouraging people to go shopping in order to help the economy?
  
• desperate last resort
• encouraging consumption now is nihilistic
• feeds into a vibe that saving is so uncertain and money so volatile that one might as well spend, 'cuz who knows what tomorrow might bring
• right way to sustain aggregate demand and maintain current income is to figure out what we should be investing in
  
• not: stocks, bonds, or CDOs
• but: factories, windmills, or schools
  
• and then to put current resources to work
• financial system is failing spectacularly
  
• because it erred grievously
• it built homes and roads and sewers that oughtn't have been built
• it "invested" in vacations and plasma televisions
• it paid itself handsomely for doing so
• not a problem we can spend our way out of
• to fix the financial system we have to change it
• not rally to its support
• we will know we've put things right when thrift is something we can celebrate
• when we save because we are excited about what we are creating rather than frightened by what we might lose

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The Paradox of Deleveraging - Pimco

Summary:
Paul McCully (M.D. of Pimco) defends Paulson's request to Congress for unlimited spending power on the grounds that the financial system is victim of the paradox of deleveraging: every levered financial institution is in the process of delevering their balance sheets, a wise thing to do on an individual level. Collectively, however, it is creating deflation in the assets from which leverage is being removed: not all levered lenders can shed assets and the associated debt at the same time without driving down asset prices. Solution similar as when the economy faces a paradox of thrift: in order to break the negative feedback loop, the Fed should borrow and spend. I.e. both a monetary and fiscal policy response are needed, not just a monetary one. But: levering Uncle Sam’s balance sheet to buy or guarantee assets to temper asset deflation does put the taxpayer at risk. Not popular, but ultimately in the taxpayer's best interest. (Published: 30/07/08)

Notes:

• paradox of thrift
• posits that if we all individually cut our spending in an attempt to increase individual savings, then our collective savings will paradoxically fall because one person’s spending is another’s income – the fountain from which savings flow
• part of a whole range of macroeconomic concepts under the label of the paradox of aggregation:
  
• what holds for the individual doesn’t necessarily hold for the community of individuals
• understanding this paradox is absolutely vital to understanding macroeconomics
  
• and even more so to understanding what is presently unfolding in global financial markets
• year ago: burst of double bubbles in housing valuation and housing debt
• every levered financial institution decided individually that it was time to delever their balance sheets
• at the individual level, that made perfect sense
• at the collective level, it has given us the paradox of deleveraging:
  
• when we all try to do it at the same time, we actually do less of it
• because we collectively create deflation in the assets from which leverage is being removed
• put differently, not all levered lenders can shed assets and the associated debt at the same time without driving down asset prices
• has the paradoxical impact of increasing leverage by driving down lenders’ net worth
• negative feedback loop!
• need both a monetary and fiscal policy response, not just a monetary one
• lower short-term interest rates via Fed easing are, to be sure, useful in mitigating deflating asset prices
• particularly if they serve to pull down long-term rates, which are the discount rates for valuing assets with long-dated cash flows.
• but monetary easing is of limited value in breaking the paradox of deleveraging if levered lenders are collectively destroying their collective net worth
• what is needed instead is for somebody to lever up and take on the assets being shed by those deleveraging
• that somebody is the same somebody that needs to step up spending to break the paradox of thrift: the federal government
• needs to lever up its balance sheet to absorb assets being shed through private sector delevering
• so as to avoid pernicious asset deflation
• i.e. should borrow and spend
  
• that’s a fiscal policy operation
• fiscal policy is not made by a few learned technocrats above the political fray of the democratic process, but is squarely in the hands of the legislative branch
• consisting of 535 politicians, with far more lawyers than economists among them
• levering up Uncle Sam’s balance sheet, to buy assets to break asset deflation resulting from the paradox of deleveraging
  
• still seems to be a foreign, if not a sinful proposition
• should not be
• hear endlessly that any levering up of Uncle Sam’s balance sheet to buy assets must be done in a way that “protects tax payers.”
• by definition, levering Uncle Sam’s balance sheet to buy or guarantee assets to temper asset deflation will put the taxpayer at risk
• but will do so for their own collective good!
• Fed and Bear Stearns
• put up $29 billion on nonrecourse terms to buy assets so as to facilitate the merger of Bear Stearns into JPMorgan
• was a fiscal policy operation, conducted by the Fed
• demonstrated by
  
• (1) the fact that the Fed sold a similar amount of Treasuries from its portfolio, increasing the supply of Treasuries in the market by the same amount
• (2) the fact that any losses the Fed experiences on that $29 billion will reduce dollar-for-dollar the amount of seigniorage profits that the Fed remits to the Treasury.
• $29 billion is actually a loan to a Limited Liability Corporation (LLC) set up to hold the Bear assets
• but the bottom line is that we the taxpayers bought $29 billion of Bear’s assets
  
• logically, it should have been conducted by the Treasury using appropriated spending power from Congress
• but: that “right” solution was not legally available to the Treasury, whereas the Fed did have the power to act
• Fed has power to lend to essentially anybody against any collateral, so long as it declares it is necessary to do so because of “unusual and exigent circumstances.”
• Paulson’s request to Congress to give him the power to spend unlimited amounts of taxpayers’ funds to buy the debt or equity of Fannie Mae and Freddie Mac
• Paulson is going to get most of what he wants
• if only because legislators are too fearful of the consequences if they stiff arm him
• But: between now and then, the Federal Reserve stands ready to lend to Fannie and Freddie
• unlike the case with the $29 billion spent for Bear’s assets, any Fed lending to Fannie and Freddie is explicitly being billed as a “bridge” to Treasury lending or investing in the agencies
• this is the way it should be: bailouts and backstops with taxpayer funds should be legislated by Congress and placed on the Treasury’s, not the Fed’s, balance sheet
• Treasury should also buy out the Fed’s $29 billion loan to the LLC holding Bear’s assets, putting it on the Treasury’s balance sheet, where it belongs
• currently, in the United States, asset price deflation is the menace at hand, not goods and services price deflation (cfr. Japan)
  
• asset price deflation can be every bit as nefarious as goods and services deflation
• Bernanke sees the role of the central bank as different in deflationary times than inflationary times:
  
• inflation
• often associated with excessive monetization of government debt
• virtue of an independent central bank is its ability to say “no” to the government
• deflation
• excessive money creation is unlikely to be the problem
• more cooperative stance on the part of the central bank may be called for
• not inconsistent with the independence of the central bank
  
• any more than cooperation between two independent nations in pursuit of a common objective is inconsistent with the principle of national sovereignty
• Japan faced both the paradox of thrift and the paradox of deleveraging
• screaming for the Bank of Japan to subordinate itself for some time to the fiscal authority
• US currently only experiencing the paradox of deleveraging, not the paradox of thrift
• though the latter malady is certainly a fat tail risk if the former malady is not ameliorated, notably in house prices
• conventional wisdom: when an economy faces a paradox of private thrift, it is appropriate for the sovereign to go the other way
• borrowing money to spend directly or to cut taxes, taking up the aggregate demand slack
• is precisely what Congress did earlier this year, sending out $100+ billion of rebate checks, funded with increased issuance of Treasury debt.
  
• Good ole fashioned Keynesian stuff!
• but: conventional wisdom is struggling mightily with the notion that when the financial system is suffering from a paradox of deleveraging, the sovereign should lever up to buy or backstop deflating assets
• analytically, there is no difference:
  
• both the paradox of thrift and the paradox of deleveraging can be broken only by the sovereign going the other way
• not a fun thing to do, but it is the right thing to do
  

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There is hope yet for science park toilers - FT.com

Summary:
Jonathan Guthrie sees evidence that the level of innovation in the UK appears to be declining. Not much coming out of universities anymore. We're living through a fallow period for innovation, fundamental innovation is slowing up after a remarkable 40 year boom. Internet investment bubble, Schumpeterian explanation: copycats to pile in on the upswing of an innovation wave. Was a fiasco for VC investment in UK. Returns negative for average fund set up after 1996 over 5 to 10 year periods. Confidence has weakened further with the credit crunch, which has closed the market for flotations. Less money was invested in European technology start-ups last quarter than at any time since 2001. Venture capital is more fragile this side of the Atlantic than in the US. Technology investment in UK will probably recover. VCs need to market themselves, focus on the lofty top decile, not the mediocre median. Early stage technology investment is attractive as a way to lay small bets on risky, glamorous propositions. Also need a handful of breakthroughs that are immensely remunerative. Biotech lost cost. Renewable energy and power savings big hope. (Published: 30/07/08)

Notes:

• little backing from City for fledgling tech companies on UK's science parks
• Jon Moulton, a private equity investor who backs technology start-ups as a hobby
• “In the UK the level of innovation appears to be declining. Universities are being picked over very hard for ideas, but not a lot is coming out of them.”
• likens UK early stage technology investors to ufologists
• instead of joining hands and imploring Martians to land, they hope, equally fruitlessly, for a worthwhile return on investment
• living through a fallow period for innovation
  
• Walter Herriot of the St John’s Innovation Centre
• “There is a slowing up in fundamental invention, though not in the creation of niche applications.”
• reflecting on the advent in the past 40 years of personal computers, the internet and mobile phones, he says: “I cannot see an equivalent explosion in the near term.”
• similar to Schumpeter's view
• proposed that innovation progresses in waves
• profitable breakthroughs occurrs in the troughs of economic cycles
• encourages copycats to pile in on the upswing, feeding economic instability
• cfr internet investment bubble
• now looks more like a belated dash into a maturing technology rather than the new era it was billed as at the time
• fiasco has constrained any advertising claims for venture capital based on recent performance
• funds set up after 1996 have typically lost 1.4 per cent a year over five years and 1.8 per cent over 10 years
• according to the British Private Equity and Venture Capital Association
• Confidence has weakened further with the credit crunch, which has closed the market for flotations
• less money was invested in European technology start-ups last quarter – €950m (£747m) – than at any time since 2001
• Apax, progenitor of European venture capital, launched a fund last spring with no venture capital component
• Braveheart is concentrating on follow-on financings;
  
• 3i has pulled out of early stage investment altogether
• Venture capital is a more fragile flower on the eastern shores of the Atlantic than in the US
• Sir Ronald Cohen, founder of Apax,
• “The perception is that the early stage is tougher, you raise less money when you float, and there is less liquidity afterwards.”
• is technology investment is doomed to dwindle away to nothing in the UK?
• will probably recover
• dotbomb losses will drop out of short-term performance statistics during the next few years.
• returns need not then be spectacular – a long-term average is 4.5 per cent – to lure investors back
• trade bodies such as the BVCA, meanwhile, can do their bit by quoting returns exclusive of “exceptional losses” chalked up on internet plays
• marketing emphasis should be on the lofty top decile, not the mediocre median
• early stage technology investment is attractive as a way to lay small bets on risky, glamorous propositions
• absorbs just more than £1bn a year in the UK
• no backers stake money they cannot afford to lose
• in some respects it resembles alternative investments, such as art or wine, more than big buy-outs or quoted shares
• task that science park toilers face is to produce a handful of breakthroughs that are immensely remunerative
• little can be hoped for from biotech
• stricken by unprofitability as persistent as a hypochondriac’s bad back
• materials scientists have engineered a UK nanotechnology sector so tiny it is virtually invisible
• most to go for in renewable energy and power saving systems
• "scope for technological leaps equivalent to the shift from mainframes to PCs” (Sir Ronald Moulton)

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The Rogoff doctrine - Paul Krugman's blog

Summary:
Paul Krugman takes issue with Rogoff's call for "a couple of years of sub-trend growth to rebalance commodity supply and demand at trend price levels." The relative rise in price of oil and commodities is a result of their limited supply in the face of rapid global economic growth. It is the way the markets are supposed to work. Since when, Krugman asks, does economic analysis say that the way to deal with limited supplies of one resource is to reduce employment of other resources, so that the relative price of the limited resource returns to “trend”? (Published: 30/07/08)

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Quote of the Day

"It is much easier to be critical than to be correct." - Benjamin Franklin

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The world cannot grow its way out of this slowdown - FT.com

Summary:
Kenneth Rogoff says the global commodity price inflation is not surprising, given that we've experienced the most remarkable growth boom in modern history. Global economy is still growing too fast, and a global recession is necessary to rebalance commodity supply and demand at trend price levels. Efforts to maintain high growth through macroeconomic stimulus, will only result in even higher commodity prices and ultimately a bigger crash in the not-too-distant future. Bail-out activities in response to the ever-deepening financial crisis are compromising inflation stabilisation effort. Gains from this have to be weighed against the long-run cost of re-anchoring inflation expectations later on. Poorly run financial firms need to be allowed to go out of business, and the industry needs to shrink commensurate with the sharp fall in key lines of business related to mortgage securitisation and derivatives. Central banks need to raise interest to combat inflation, and Treasuries maintain fiscal discipline rather than giving in to the temptation of tax rebates and fuel subsidies. (Published: 29/07/08)

Notes:

• huge spike in global commodity price inflation is evidence that the global economy is still growing too fast
• not surprising: world has just experienced perhaps the most remarkable growth boom in modern history
• huge cumulative rise in global growth during the 2000s
  
• little wonder that commodity suppliers have found it increasingly difficult to keep up, even with sharply rising prices
• for many commodities, particularly energy and metals, new supply requires long lead times of five to 10 years
• although demand response is more nimble, it has been greatly dulled by a wide variety of subsidies and distortions in fast-growing emerging markets
• without significant global recession it will probably take a couple of years of sub-trend growth to rebalance commodity supply and demand at trend price levels
• if all regions attempt to maintain high growth through macroeconomic stimulus, main result is going to be higher commodity prices and ultimately a bigger crash in the not-too-distant future
• surprising how many leading policymakers and economic pundits believe that policy should aim to keep pushing demand up
• US: aggressive tax rebates, steep interest rate cuts and an ever-widening bail-out net for financial institutions
• China: briefly flirted with prioritising inflation, now resumed putting growth as the clear number one priority
• Dollar bloc countries: have slavishly mimicked expansionary US monetary policy
• rapid growth is putting huge upward pressure on inflation
• Europe: ECB coming under increasing domestic and international political pressure as Europe's growth decelerates
• if all regions try expanding demand, even the short-term benefit will be minimal
• commodity constraints will limit the real output response globally
• most of the excess demand will spill over into higher inflation
• central bankers mainly looking at wage growth
• argue that there is nothing to worry about as long as wage growth remains tame
• globalisation continues to shrink unskilled labour's share of global income.
• but: as goods prices rise, wage pressures will eventually follow
• ever deepening financial crisis as a rationale for expansionary global macroeconomic policy
• bail-out activities compromising inflation stabilisation effort
  
• may be convenient to have several years of elevated inflation to help bail out homeowners and financial institutions
• but: the gain has to be weighed against the long-run cost of re-anchoring inflation expectations later on
• also: not obvious that the taxpayer should absorb continually rising contingent liabilities
• financial firms need to be allowed to go out of business
• financial industry needs to shrink commensurate with the sharp fall in key lines of business related to mortgage securitisation and derivatives
• airline industry often goes through periods of excess capacity
• giant companies going out of business or merging
• we have grown accustomed to these traumas and learned to live with them, as in many other industries
• banking industry holding nations hostage each time they experience consolidation
• As major central banks extend their discount windows to complex investment banks whose business lines are evolving and churning constantly, "crises" of consolidation are surely going to become more frequent.
• financial market regulation is never going to be stringent enough in booms
• that is why it is important to be tougher in busts
• so that investors and company executives have cause to pay serious attention to risks
  
• "if poorly run financial institutions are not allowed to close their doors during recessions, when exactly are they going to be allowed to fail?"
• need to introduce more banking discipline
  
• policymakers must refrain from excessively expansionary macroeconomic policy at this juncture and accept the slowdown that must inevitably come at the end of such an incredible boom
• for most central banks, this means significantly raising interest rates to combat inflation
• for Treasuries, this means maintaining fiscal discipline rather than giving in to the temptation of tax rebates and fuel subsidies
• "In policymaker's zealous attempts to avoid a plain vanilla supply shock recession, they are taking excessive risks with inflation and budget discipline that may ultimately lead to a much greater and more protracted downturn."
  

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Word of the Day: Backshoring

Refers to manufacturing increasingly moving back to the West, or, rather, to where the markets are. This does not necessarily mean that all of it will return to the West, as emerging countries are also enormous markets (local production will serve local consumption there). But narrowly defined production costs will become less important in deciding where to locate manufacturing. See de Meyer and Holweg.

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A silver lining to high oil prices - FT.com

Summary:
Arnoud de Meyer and Matthias Holweg anticipate a trend of "back-sourcing" due to rising energy and commodity costs: manufacturing will increasingly move to where the markets are, including back to the UK. Few companies that have gone global have so far achieved the full cost efficiencies they had envisaged, and this will get worse. Two common mistakes that companies make when deciding to source components from abroad are: they tend to only calculate the static costs of a supply chain, and they assume that costs will remain stable. Furthermore, global supply lines might be cost-competitive but they certainly are not carbon-competitive, which is gaining in importance. As a result, narrowly defined production costs will become less important in deciding where to locate manufacturing. This presents an opportunity for Western manufacturing, provided the skills and tacit knowledge that is needed for manufacturing are preserved. Companies may also have to learn how to efficiently operate smaller flexible units that produce the customised products for the local market. (Published: 30/07/08)

Notes:

• Increased transport costs resulting from higher energy prices and carbon taxes
  
• may create an opportunity for a revival in western manufacturing
• Most strategic decisions in companies are influenced by new "paradigms"
• path-breaking new concepts
• globalisation was certainly the paradigm of the past decade
• application of such paradigms tends to behave like a pendulum
• swinging towards one extreme, and eventually swinging back
• Is it possible that the pendulum may swing back for global manufacturing?
• premise of global sourcing and exploiting lower labour costs for manufacturing in eastern Europe and the Bric countries
  
• largely built on the cost of transport
• dropped by a third between 1960 and the turn of the millennium
• result of introduction of containers and the rise of third-party logistics providers
  
• shipping goods reliably from one end of the world to the other without owning any of the transport assets in between
• with further help from
• trade liberalisation and agreements
• stable currencies that reduced the risks in establishing global supply lines
• research shows that few companies that have gone global achieved the full cost efficiencies they had envisaged
• some even found that "offshoring" their operations was more expensive than sourcing or manufacturing locally
• subsequently returned to their home country
• cost of logistics may be a lot more important than originally estimated
• others found that product cost was indeed much lower, yet this cost reduction was traded off with much reduced quality
• e.g. recent highly publicised product recalls
• companies commit two common mistakes when deciding to source components from abroad
• tend to only calculate the "static" cost of a supply chain
• basically adds the unit cost ex-supplier factory and the transport cost together
• lower labour cost reduces the unit cost of the product
• generally offsets the higher transport cost of bringing it into the UK from China
• other costs are often not considered or underestimated
• e.g. the additional cost for buffer stocks
• supply chain becomes inherently less able to respond to swings in demand or changes in technology
• e.g. risk of obsolescence or running out of stock
  
• drastically increases, yet often is not factored into the calculation.
  
• e.g. cost of quality defects
  
• rises tremendously when a defect is discovered in a shipped batch arriving in Europe and costly air freight has to be used to refill the supply line
• e.g. co-ordination cost of working over long distances
  
• often taken for granted
• tend to assume that costs remain stable, not account for "dynamic" costs
• perception is that countries in eastern Europe, China and India have inexhaustible labour pools that one can tap into at low cost
• and that all these workers are trained to the needed level
• recent experiences
• Eastern Europe
  
• car manufacturers find that local labour pools of trained workers have been virtually exhausted
• inflation in the cost of trained labour is in double-digits as manufacturers are competing for labour
• India
• trained staff will change jobs several times per year if they see the prospect of higher salaries elsewhere
• annual turnover of 20 per cent being normal
  
• labour cost inflation rising to 25 per cent a year in some regions, such as Bangalore or Pune.
  
• China
• trained middle manager in the car sector, fluent in English and Mandarin, will earn more in Shanghai than in Wolfsburg or Birmingham
• carbon footprint gaining in importance
• global supply lines might be cost-competitive but they certainly are not carbon-competitive
• rising consumer conscience about the impact of patterns of consumption
• manufacturers with offshored operations will find it increasingly hard to justify sending products half-way around the globe if they can be made as easily close by
• recovery of competitiveness in the manufacturing sector
• long been dismissed as an obsolete part of a "service economy"
• "backshoring" trend
  
• manufacturing will increasingly come back to where the markets are
• does not mean that all of it will come back
• emerging countries are also enormous markets and local production will serve local consumption there
• but: companies will have to think increasingly in terms of networks or portfolios of plants
• narrowly defined production costs will become less important in deciding where to locate manufacturing
• developing the opportunity
• UK will need to preserve the skills and the tacit knowledge that is needed for manufacturing
• may have to learn how to efficiently operate smaller flexible units that produce the customised products for the local market
  

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Quote of the Day

"Spreadsheets are easy; science is hard." - Shaywitz and Taleb

Shaywitz and Taleb in answer to the question "Why do pharmaceutical companies, which spend billions of dollars each year trying to turn advances into treatments, have so little to show for their efforts?"

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Drug research needs serendipity - FT.com

Summary:
David Shaywitz and Nassim Taleb write that the pharma industry is suffering as a result from a mismeasure of uncertainty. Despite promise of molecular revolution and drugs by design, pipelines are dwindling. Pharma companies seek to identify the largest markets they can find, develop products for these customers and boost efficiency of development process. Wrong approach, for two reasons: drug sales notoriously hard to foresee (yields more false precision than true insight), and drug development process is also very difficult to predict. This strategy fails to reduce exposure to negative uncertainty (all the bad things that can happen during drug development), and eliminates much of the exposure to positive uncertainty (serendipity). Pharma's trend of outsourcing may open up possibility for innovators with a greater appreciation of the nuances of science to do a lot better. (Published: 30/07/08)

Notes:

• molecular revolution: was supposed to enable drug discovery to evolve from chance observation into rational design
• yet dwindling pipelines threaten the survival of the pharmaceutical industry
• what went wrong?
• answer: the mismeasure of uncertainty
• academic researchers underestimated the fragility of their scientific knowledge
• we still do not understand what causes most disease
• scarcity of good animal models for most human disease
• academic science tends to focus on the "bits and pieces" of life - DNA, proteins, cultured cells - rather than on the integrative analysis of entire organisms, which can be more difficult to study
• yet: real scientific progress has occurred
  
• pharmaceuticals executives overestimated their ability to domesticate scientific research: spreadsheets are easy; science is hard
• pharma companies seek to identify the largest markets they can find and develop products for these customers
• sensible in theory, but less so in practice, for two reasons:
  
1. drug sales are notoriously difficult to foresee
   
• even at the time the medicine hits the market
• i.e. predicting sales a decade or more ahead of registration, when the research and development process typically begins, is generally a fool's errand
• yields more false precision than true insight.
  
• yet: much of contemporary pharma R&D is driven by this sort of rigid planning.
2. drug development process is also very difficult to predict
• because of both our limited understanding of disease and our inevitably imperfect understanding of the effect any new compound will have on the body
• most modern medications were discovered in the old-fashioned way: by accident
• e.g. Viagra, originally developed as treatment for chest pain
  
• pharma companies have been trying to boost output by increasing efficiency
• narrowing focus to a handful of disease areas
• shelving safe but ineffective compounds without fully exploring their scientific potential
• trying to ensure that each project the company is working on is carried out with a clearly defined market segment in mind
• this strategy often fails significantly to reduce exposure to negative uncertainty - all the bad things that can happen during drug development - and eliminates much of the exposure to positive uncertainty (serendipity) that remains so vital
• managers so intent on maintaining focus that important opportunities for novel discovery are lost
• as is the intellectual space for tinkering and capitalising on the chance observations and unexpected directions so important in medical research
• pharma executives are creating an ever-more-rigid environment
  
• and then wondering why their productivity is going down
• and why they have such difficulty attracting and retaining talent

• diruptive innovation
  
• pharmaceutical industry is ripe for disruptive innovation
• but: the barriers to entry have been far too high for anyone new to break through
• however: pharma companies trying to cut costs by outsourcing large parts of their operations
• in response service providers have sprung up around the world to fulfil these functions
• if the trend to outsourcing continues and if the main competence of pharma companies becomes (as some have suggested) simply their ability to orchestrate the entire process, it is not difficult to imagine that an innovator - particularly an innovator with a greater appreciation of the nuances of science - might be able to do this a lot better
  

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Quote of the Day

"The problem is that we have socialism for the rich and rugged free enterprise capitalism for the poor." Martin Luther King

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Word of the Day: (Statistical) Arbitrage

Summary:
Arbitrage is the practice of taking advantage of a price differential between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. The transactions must occur simultaneously to avoid exposure to market risk, or the risk that prices may change on one market before both transactions are complete. In practical terms, this is generally only possible with securities and financial products which can be traded electronically.


Statistical arbitrage (as opposed to deterministic arbitrage) refers to highly technical short-term mean-reversion strategies involving large numbers of securities (hundreds to thousands, depending on the amount of risk capital), very short holding periods (measured in days to seconds), and substantial computational, trading, and IT infrastructure. It involves data mining and statistical methods, as well as automated trading systems. StatArb has become a major force at both hedge funds and investment banks.

Notes:

• arbitrage on Wikipedia
  
• statistical arbitrage on Wikipedia
  

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Despite economic slowdown VC returns remain positive in Q1 2008 - NVCA

Summary:
Venture capital returns, as measured by the private equity performance index (PEPI), have been falling across all investment horizons ending Q1 2008, but still compare favourably to stock indices like the NASDAQ and S&P500 according to NVCA. The economy’s biggest effect on the venture market has been indirect — the IPO and mergers/acquisitions markets are hurting, which means VCs have to pump more money into later-stage companies. Causes lower returns. According to Mark Heesen, returns will fall even further if the exit market doesn’t improve. (Published: 29/07/08)

Notes:

• one-year private equity performance index (PEPI) showed the greatest change from
  Q4 2007
• 7.6 point decrease to 13.3% in Q1 2008.
• historically, short-term horizons show significant fluctuations quarter over quarter based on large exits impacting the return
• next largest consecutive quarterly change occurred in the ten-year time horizon
  
• PEPI decreased by 1.1 points quarter-over-quarter
• three year performance also posted a modest decline from the previous quarter
• decreasing .2 percentage points from 9.7% in Q4 2007 to 9.5% in Q1 2008
• five-year and twenty-year performance figures showed modest quarter-over quarter increases
  
• to 9.1% and 16.8%, respectively

• Venture returns across all horizons, except the five-year horizon, outperformed public
  market indices, NASDAQ and the S&P 500, through 3/31/2008

• Mark Heesen:
• "The IPO market has now been essentially shut down for venture-backed companies for over seven months. Combined with a skittish M&A market, shorter term performance returns are and will continue to be impacted."
• "Our asset class continues to out perform many other investment alternatives
  including the public markets over the long term. But we will need to see the exit markets improve dramatically to maintain that position in the coming year."
  

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Quote of the Day

“If I had asked my customers what they wanted, they would have said a faster horse.” - Henry Ford

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America’s Addiction and the New Economics of Strategy - HarvardBusiness.org

Summary:
Umair Haque we're not just addicted to oil, but to everything. We're not entering Peak Oil, but Peak Consumption. Current financial system is a house a cards that's in the process of collapsing. Consumption in developed world has been subsidised by developing countries: goods at low prices, and reinvestment of their revenues into our government and mortgage debt. Ignored costs like pollution, community fragmentation, and abusive labour standards. Our economy is built on firms whose very purpose is to sell, to relentlessly push people into endlessly consuming, without ever considering the long-run consequences. But we're entering a world where consumption must slow. Haque proposes that being able to break yesterday’s maladaptive consumption addiction is at the heart of next-generation advantage. Next global financial system will be powered by firms that can shift past nihilistic, meaningless industrial-era corporate purpose, beyond acting as mere pushers of an addiction. (Published: 29/07/08)

Notes:

• house of cards that is the global financial system
• emerging markets seek export-led growth
• they undervalue their currencies, so their exports are more competitive purely in terms of price
• amounts to essentially a subsidy to consumers on the other side of the table – those in the developed world
• emerging markets accumulate surpluses, and recycle them:
  
• lend them back to the US and UK in the form of government and mortgage debt, stabilizing their economies
• amplifies the existing consumption subsidy in developed countries through leverage
• artificial cheapness further amplified by simple fact the true costs of production haven't been factored in - until now
• very real costs like pollution, community fragmentation, and abusive labour standards
• we’ve been able to consume mercilessly and remorselessly – with no regard for the human, social, or environmental consequences, to us or to others
• not just cheap oil we’re addicted to: it’s cheap everything
• world we’re entering isn’t really of Peak Oil as it is one of Peak Consumption
• tentative economic history of the 21st century:
  
• Emerging markets – and the people that broke their backs in them – lent the developed world tremendous amounts. What did the developed world do with it? Instead of investing it in tomorrow, they spent it on McMansions, Hummers, and strip malls.
• could have chosen, instead, to invest
• anything would have been a more sensible choice than naïve consumption
• education, energy, healthcare, transportation, even a more sensible and rational kind of finance
• problem with strategy
• our economy is built on firms whose very purpose is to sell
  
• to relentlessly push people into endlessly consuming, without ever considering the long-run consequences
• tough choices for boardroom
• entering a world where consumption must slow
• Does it continue to hawk stuff that “satisfies” largely artificial needs?
  
• Or does it choose to do something authentic, meaningful, and purposive – something that makes us all radically better off than we were before?
• new strategy
  
• At the heart of next-generation advantage is, paradoxically, being able to break yesterday’s maladaptive consumption addiction – not fuel it
• It is firms who can shift past nihilistic, meaningless industrial-era corporate purpose – beyond acting as mere pushers of an addiction – who will power the next global financial system.

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Treasury's mortgage rescue plan - Peston's Picks

Summary:
Robert Peston on Sir James Crosby's assessment of the outlook for mortgage finance. Darling worried by risk that the chronic shortage of mortgage finance could lead house prices to fall much further and faster than would be warranted on the basis of notional economic fundamentals. Discusses the importance of MBS to mortgage lending and the UK economy. Consequences of the credit crunch: demand for MBS dried up; no cash for mortgage lending; only five or six banks still able to lend; lending more expensive; lending only to the most reliable borrowers; rising number of defaults; exacerbating house price fall and weakening consumer demand. Crosby's likely to recommend action. Either Bank of England becomes the market-maker of last resort for mortgage-backed bonds; or government guarantees, on commercial terms, billions of pounds of better quality tranches of new mortgage-backed securities (i.e. taxpayers underwriting a huge slug of the mortgage market). Significant risks to the health of the economy from doing nothing. (Published: 29/07/08)

Notes:

• Sir James Crosby, FSA
• assessment of the outlook for mortgage finance
• forecasting that a chronic shortage of mortgage finance for homebuyers and homeowners will continue throughout this year, 2009 and 2010
• importance of mortgage-backed securities (MBS)
  
• finance from the sale of MBS was equal to two-thirds of all net new mortgage lending in the UK by 2006
• total stock of UK MBS was a staggering £257bn out of total residential mortgages of £1200bn by end 2007
• equivalent to around a fifth of the value of the British economy
• consequences of the credit crunch (almost exactly one year ago)
• demand for MBS completely dried up
• still almost impossible for any bank to issue mortgage-backed securities
• no cash to meet even the current reduced demand for mortgages from homeowners who need to refinance their debts and from prospective homebuyers
• leading banks are expecting the net increase in mortgage lending to fall to £60bn in 2008, from £110bn last year and a similar amount in 2006
• drop of 45%
• shrinkage that reflects a collapse in mortgage approvals for house purchase
• banks also struggling both to raise other forms of wholesale funding and to extend the maturity of their existing debts
• squeeze on the money they have available for new mortgages is exacerbated by their obligation to repay around half of their existing mortgage-backed borrowings over the coming three years
• likely to be a rise in the number of mortgage holders who can't pay their debts
• mortgage finance is now only available to those with utterly reliable earnings and deposits equivalent to at least 25% of the value of what they want to borrow
• what little lending there is is now dominated by the UK's biggest five or six banks
• small banks and building societies making almost no new loans
• many mortgage intermediaries expected to disappear
• shortage of mortgage finance likely to exacerbate the fall in house prices and the weakness of consumer spending
• recommendations
• government needs to attempt to re-open the market for mortgage-backed securities
• to prevent the banks becoming so strapped for cash that the housing market would go from decline to meltdown
• two possibilities
• Bank of England becomes the market-maker of last resort for mortgage-backed bonds
• Bank agrees to lend to almost any financial or investment institution against the security of mortgage-backed bonds bought by the relevant institution
• Bank would be guaranteeing that if the market for such bonds were shut, it would make sure that the bonds did not become totally illiquid
• government guarantees, on commercial terms, billions of pounds of better quality tranches of new mortgage-backed securities
• i.e. taxpayer would be providing a promise that it would pick up the tab in the event that the value of of those securities was impaired by a huge rise in repayment difficulties or defaults by mortgage borrowers
• i.e. taxpayers underwriting a huge slug of the mortgage market
• other possibility: government should not intervene, on the basis that such intervention may create more difficulties than it would solve
• but: would be significant risks to the health of the economy from doing nothing
• Darling deeply troubled by the risk that the chronic shortage of mortgage finance could lead house prices to fall much further and faster than would be warranted on the basis of notional economic fundamentals
• wants to prevent house prices overshooting on the way down, just as they overshot on the way up, and thereby wreaking massive damage to the economy

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America must not act rashly over inflation - FT.com

Summary:
Mark Gertler warns against Fed targeting of headline inflation. Points out that core inflation has remained steady and low. Rapid increases in the relative prices of energy and food cannot go on indefinitely. Once this process dies down, as long as core inflation remains anchored, headline inflation must converge to it. Fed has adjusted monetary policy to sustain the core measure at a steady, low rate, and headline inflation is still well below that of stagflationary 70s. Impact of increasing inflation expectations, despite moving upwards, has yet to show up in the behaviour of core prices and wages. There are signs that forces that have pushed headline above core inflation are beginning to reverse due to laws of supply and demand. Funneling core inflation through a tight oscillating path even over the medium term is beyond a central bank's capability and may wreak havoc on the real economy. Monetary tightening is needed, however, in many emerging economies. A policy response from the Fed is needed that recognises the complexities of the inflationary process. Learn lesson from Japan. (Published: 28/07/08)

Notes:

• startling jump in US consumer price inflation over past several months
• entering inflationary spiral like in 70s?
• careful inspection of underlying mechanics shows that
• almost all the increase in headline CPI inflation is due to rocketing energy and food prices
• inflation excluding energy and food is significantly lower
• core CPI was just 2.4% over past year
• just over Fed's comfort zone of 1-2%
• uptick last month due to feeding through of food and energy costs to core prices
• but: over coming year, below-capacity output growth and softening oil and commodity prices are likely to push core inflation back towards comfort zone
  

• distinction between headline and core inflation important
• sustained move of headline inflation to levels of 70s is unlikely without an accompanying increase in core component
• reason: although they can be highly persistent, rapid increases in the relative prices of energy and food cannot go on indefinitely
• once this process dies down, as long as core inflation remains anchored, headline inflation must converge to it
• e.g. late 1960s to late 1970s
• Fed lost control over core inflation
• increased nearly in lock-step with overall inflation
  
• this decade
• Fed has adjusted monetary policy to sustain the core measure at a steady, low rate
• despite prolonged periods of departure of headline inflation from core
• but gaps typically under 100 basis points annually
• headline inflation indeed uncomfortably in 3-4% range recently
• but: is well below that of the stagflationary 70s

• signs that forces that have pushed headline above core inflation are beginning to reverse
• oil prices declined >10% over past several weeks
• commodity prices have softened also
• laws of supply and demand suggest this may not be a transitory phenomenon
• root cause of increase in energy and food prices was most probably rising global demand
• global economic activity expected to slow down considerably
• demand for oil and commodities is likely to weaken along with it
• will place downward pressure on relative prices of these goods

• targeting headline inflation directly will not help
  
• in environment of gyrating energy and food prices inflation, targeting headline inflation requires the central bank to engineer offsetting changes in the path of core inflation
• but: prices of most core items adjust only sluggishly
• funneling core inflation through a tight oscillating path even over the medium term beyond a central bank's capability
• simply too much uncertainty over both the timing and the overall impact of its interest rates moves on core inflation to believe that a central bank could smoothly accomplish this task
• sharp interest rate adjustments likely to accompany this attempted fine-tuning exercise could wreak havoc on the real economy

• is high headline inflation unmooring inflation expectations?
• would lead us back to the 70s
• some measures of inflation expectations are edging upwards
• needs to be taken seriously
• but: impact of increasing inflation expectations has yet to show up in the behaviour of core prices and wages
• core inflation has remained stable
• growth in nominal unit labour costs also remains benign
• is what most pricing of core items is based on
• Fed's reputation for keeping core inflation stable may have kept the expectation relevant for price- and wage-setting in line
• also: to date, wage-setters appear to understand that, however unfortunate, the relative increase in energy and food prices is something beyond the central bank's control
• something they must live with

• many emerging countries: picture different
  
• above-capacity output growth has pushed core inflation up along with headline
• also: high output growth among these economies has been an important factor in the global commodity price boom
• here monetary policy needs tightening

• inflation is a real concern
• but: policy response is needed that recognises the complexities of the inflationary process
• including its global nature
• not simple knee-jerk reaction!
• lesson from Japan
• a fractured credit system can induce prolonged stagnation, even in an advanced economy
• given uncertain conditions of the US financial and real sectors, goal should be to achieve price stability in a way that continues to keep low the possibility that this economy could suffer a similar fate
  

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Summary only...

When to start - Seth Godin

"The best time to start was last year. The second best time to start is right now." - Seth Godin

Notes:

When to start

• The best time to start is when you've got enough money in the bank to support all contingencies.
• The best time to start is when the competition is far behind in technology, sophistication and market acceptance.
• The best time to start is when the competition isn't too far behind, because then you'll spend too long educating the market.
• The best time to start is when everything at home is stable and you can really focus.
• The best time to start is when you're out of debt.
• The best time to start is when no one is already working on your idea.
• The best time to start is when your patent comes through.
• The best time to start is after you've got all your VC funding.
• The best time to start is when the political environment is more friendly than it is now.
• The best time to start is after you've got your degree.
• The best time to start is after you've worked all the kinks out of your plan.
• The best time to start is when you're sure it's going to work.
• The best time to start is after you've hired the key marketing person for the new division.
• The best time to start was last year. The best opportunities are already gone.
• The best time to start is before some pundit declares your segment passe. Too late.
• The best time to start is when the new generation of processors is shipping.
• The best time to start is when the geopolitical environment settles down.

Actually, as you've probably guessed, the best time to start was last year. The second best time to start is right now.

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Quote of the Day

"It's probably true that hard work never killed anyone, but why take the chance?" - Ronald Reagan

Notes:

• Buffett on how the management of large organizations is extremely hard work, which is why he has taken the "easy route": just sitting back and working through great managers who run their own shows. "My only task is to cheer them on, sculpt and harden our corporate culture, and make major capital-allocation decisions."

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Quote of the Day

"We shape our buildings, and afterwards our buildings shape us." - Churchill

Notes:

• Buffet uses this quote in reference to organizations apparently becoming slow-thinking, resistant to change, and smug as they grow bigger
  

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China's currency needs to rise further - FT.com

Summary:
Three years after lifting the renminbi's dollar peg, and an appreciation of 20% against the dollar, the currency remains substantially undervalued, and undervaluation has in fact increased. The nominal exchange rate appreciation has not kept up with that of the equilibrium value of the currency, i.e. the value consistent with economic fundamentals. China has remained heavily dependent on investment and growing trade surpluses to sustain its double-digit growth rate. A change to more consumption-driven growth is required, but will be difficult as long as household income continues to decline as a share of GDP. The main source of the problem is a serious misalignments in the real exchange rate and the real interest rate. Unless China narrows gap between the real and equilibrium exchange rate of the renminbi, it will find it ever harder to prevent speculative capital inflows from undermining its pursuit of independent monetary policy. (Published: 22/07/08)

Notes:

• 3 years since lifting of renminbi's dollar peg
• currency has become more flexible and appreciated about 20% against the dollar
• yet: under-valuation of the renminbi has increased
  
• real trade-weighted exchange-rate has appreciated only 15%
• only about a third of what's needed
• equilibrium value of the currency has risen faster than real trade-weighted exchange rate
  
• i.e. the value consistent with economic fundamentals
• external surplus has mushroomed
• current account surplus has soared
• from 3.6% of GDP in 2004 to 11.3% last year
  
• official reserves grew by massive $280b in H1 2008
• rapid productivity growth in export industries has enhanced China's competitiveness
• also:
  
• central bank has strengthened controls on capital inflows
• consumer price inflation has risen to 8%
• China's new exchange rate policy has not been helpful
• in "rebalancing" economic growth towards consumption and away from investment and net exports
• nor in alleviating the repression in the banking system
• both of which are strongly in China's own interest
• China has remained heavily dependent on investment and growing trade surpluses to sustain its double-digit growth rate
• investment exceeded two-fifths of GDP last year for the fifth consecutive year
• main cause: low interest rates (now negative in real terms)
  
• in part because the authorities are reluctant to adjust upward for fear of attracting even more speculative capital inflows
• low lending rates
  
• contribute to an excess demand for loans and thus the high share of investment in GDP
• low deposit rates
  
• have depressed the growth of household income far below the levels that would have been achieved with less financial repression
  
• contribution of consumption to GDP growth remains depressed
• last year the government slightly increased its own outlays on health, education and other social programmes as a share of GDP
• first time in more than five years
• but: was not enough to offset the multi-year decline in household consumption, which slumped to a new low of only 35 per cent of GDP
• China will find it hard to change to more consumption-driven growth as long as household income continues to decline as a share of GDP
• rebalancing the sources of growth will require more rapid appreciation of the renminbi as well as other policy adjustments
• bank profitability has suffered as authorities engage in massive sterilisation
  
• to prevent increases in inter-national reserves from spilling over into an undesirably rapid increase in bank lending
• central bank has raised the level of required reserves 19 times since mid-2005
• note: reserves pay a negative real return
• authorities have also "sold" banks huge volumes of sterilisation bonds that bear negative real yields
• have more than offset these implicit taxes on banks by maintaining a large spread between lending and deposit interest rates
• but: this spread will erode as further domestic financial reform and globalisation expand the alternatives available to Chinese savers and borrowers
  

• progress on China's currency regime should not be evaluated by focusing exclusively on movements in the renminbi/dollar exchange rate
• China is still suffering from serious misalignments in two crucial relative prices:
  
• the real exchange rate and the real interest rate
• unless China narrows gap between the real and equilibrium exchange rate of the renminbi, it will find it ever harder to prevent speculative capital inflows from undermining its pursuit of independent monetary policy
  
• needs to reduce the scale of intervention and sterilisation
• needs to increase interest rates significantly
  
• or it will continue to face strong headwinds in rebalancing the sources of its economic growth
  
• needs sharply accelerate the pace of renminbi appreciation
• step revaluation of the renminbi would be helpful
  

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How to fix a broken venture capital model - EETimes

Summary:
Interview with Matthew Nordan about why the current VC model is broken, especially in the case of materials, energy and environment sector investing. The linear path from angel to VC to IPO no longer works due to greater costs, longer gestation times, greater technological uncertainty and ill-defined problems. This is a time of great experimentation and visible discomfort. New type of VC machine needed. Smartest venture firms cultivate relationships with the buyers of technologies. Nordan also has four rules for venture companies: Make non-obvious matches of technologies and solutions; be suspicious of exponential growth; maximize options to avoid surprises from left field; and avoid focusing on an ideal technology to such an extent that you fail to see a "good enough" technology in its wake. (Published: 22/07/08)

Notes:

• Matthew Nordan, Lux Research, President
• ideas on how to make startup financing work again
  
• old machine
• linear path
• angel funding -> VC financing -> (some cases growth equity/PE) -> public markets
• works really well for IT
• don't need tremendous amount of money; pretty capital efficient investments
  
• also for life sciences
• because there's a rule book that you can follow by using the FDA and EMEA approval cycles as a way of determining how far the company is
• none of those rules exist in the materials, energy and environment world
• and you need more money over longer periods of time (gestation times in excess of a decade)
  
• frequently break 10 year close-ended fund cycles that VCs as a rule have
• with greater levels of technology risks further down the cycle, down into the land where you have 10s of millions of dollars of investment being made by PE and growth equity funds
• machine doesn't work; need a new machine
• new machine
• some innovations promising; but you don't know what works till folks have seen a 25% IRR on doing it in a new way
• interesting: fund that raises small amounts of money to be able to go out and seed companies to get them to a stage that they are ready for a venture fund
• cut of that first part of the technology development cycle and get it to fit into a 10-year close-ended structure
• interesting: project financiers beginning to construct joint venture vehicles where there may be a carve-out slice of equity for the venture financiers that may get them some returns (some meat to take home to the cave for the LPs) before the company is able to achieve the liquidity of it
  
• particularly for water and waste technologies
• venture funds have responded by specializing
• Rockport and Kleiner Perkins Caufield & Byers
  
• invest in early-stage technology
• Riverstone and FourWinds
  
• invest in deployment of semi-mature technologies
• only a few funds like Vantage Point try to span the gamut of development and deployment
• new model of "clear-cutting" VCs
• exemplified by Khosla Ventures
• represent funders of last resort
• ultimately this a time of great experimentation and visible discomfort
• will be 5 to 10 years before we know which of any of those ingredients are going to work out
• bringing in the growth equity partner between VC and IPO
• growth equity is coming back
• VCs are not prepared to extend funding into the hundreds of millions of dollars
• smartest venture firms cultivate relationships with the buyers of technologies
• smart venture firms talk to the customers of potential startups to say what problems do you need solved five years down the line?
• ranging from OEMs in the semiconductor field to utility companies in the energy field
• then build a startup based on the wish-lists of those customers
• business plans get ripped apart five times over before the company ultimately decides what it is that it's supposed to be doing
• difference from an energy environment perspective is that the problems are generally less well defined; lack of definition
  
• as opposed to software: explicit problem that they're trying to solve upfront
• e.g. Green Fuel Technologies Corp., algae company
  
• intended to use algae to process wastes from natural gas plants and ferment biomass fuels
• turns out that you can get a lot more revenue from the same unit of algae, not by fermenting it to make biofuels, but by selling it as fish feed, or as an additive
  
• the desiccated algae itself are more valuable than the biofuels that you can make from them
• at least in the current state; may change over time

• four rules for venture companies
1. make non-obvious matches of technologies and solutions;
   
2. be suspicious of exponential growth;
   
3. maximize options to avoid surprises from left field and to be aware of unexpected breakthroughs;
   
• e.g. emerging "solar antenna" that can tune in to 800-900 nm waves, thus obsoleting several small-scale solar technologies
• also involves carefully quantifying all externalities
• e.g. the water-use requirements for ethanol and biodiesel make so-called clean energies look dirty when total inputs are taken into account.
4. avoid focusing on an ideal technology to such an extent that you fail to see a "good enough" technology in its wake

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Utilities say grid can handle rechargeable cars - MSN Money

Summary:
Energy industry officials believe they will be able to cope with the increased electric demand when rechargeable cars become a reality. Industry has already dealt with increased electric demand from millions of plasma TVs (cars consume 4x more electricity). Changeover from ICE to electric is likely to be gradual (still lot of issues with batteries to be solved). Will thus be able to handle it in same way as they handled plasma TVs. Most electric cars will likely be charged during off-peak electric use times, utilities should have no problem generating enough electricity. Potentials problems: rise in oil price causes transition to be very rapid; stress on distribution system in certain areas; electric vehicles getting larger and requiring far more electricity for recharging; and demands from people that their vehicles be recharged quickly, drawing more electricity during peak times. (Published: 23/07/08)

Notes:

• cars vs. plasma TVS
  
• rechargeable cars consume about four times the electricity as plasma TVs
• but: industry already has dealt with increased electric demand from the millions of plasma TVs sold in recent years
• experience will help them deal with the vehicle fleet changeover
• Mark Duvall, program manager for electric transportation, power delivery and distribution for the Electric Power Research Institute
• Plug-In 2008 conference
• "So as long as the changeover from internal combustion engines to electric vehicles is somewhat gradual, they should be able to handle it in the same way"
• "We've already added to the grid the equivalent of several years' production of plug-in hybrids."
• "The utilities, they stuck with it. They said, 'All right, that's what's happening. This is where the loads are going, and we're going to do this.'"
• Automakers are planning to bring rechargeable vehicles to the market as early as 2010
• but will take much longer for them to arrive in mass numbers, due in part to a current lack of large-battery manufacturing capacity
• auto and battery companies still are working on the lithium-ion battery technology needed for the cars, and on how to link the battery packs to the vehicles
• Efrain Ornelas, environmental technical supervisor with Pacific Gas and Electric Co. in San Francisco
• "We see the vehicle penetration levels coming at a rate that's manageable. It's not like tomorrow the flood gates are going to open and 100,000 vehicles are going to come into San Francisco or something like that."
• PG&E will be able to track their charging patterns and plan accordingly for the future
• current demand
• utility officials say they already are coping with increased demand
• especially during peak-use periods in the afternoon and early evening
• rest of the day, most utilities have excess generating capacity that could be used to recharge cars
• most electric cars will likely be charged during off-peak electric use times, utilities should have no problem generating enough electricity
• the preparation doesn't mean electric vehicles will be accommodated without problems and good planning
• since people with the means to buy electric cars likely will live in the same areas, utilities worry about stress on their distribution systems
• if high gasoline prices could push sales of rechargeable electric vehicles well into the millions by 2020, that could stress the system
• other possible problems include
  
• electric vehicles getting larger and requiring far more electricity for recharging
• demands from people that their vehicles be recharged quickly, drawing more electricity during peak times
• choice for consumers
• consumers will face a lot of choices about when and where they charge up their cars and how much they want to pay for the electricity
• utilities likely will raise rates to charge cars during peak use times, generally from around noon to 8 p.m., and lower them for charging during low-use hours
• e.g. PG&E charges 30 cents per kilowatt hour to charge an electric vehicle during peak hours, he said, but charges only 5 cents from midnight to 7 p.m
• talk of the cars storing electricity and sending it back to the power companies during peak times
• officials say that's a long way off

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Nano-machine captures zinc in protein-like jaws - R&D Magazine

Summary:
A team from Berkely Lab generates a protein-like function from a synthetic polymer: two helical peptoids with functional groups at the end, linked together using an unstructured segment. The two-helix bundle can fold in half and bind a zinc ion. Perhaps anitial step toward developing nanostructures that combine the precision of proteins with the ruggedness of non-natural materials. Such foldable polymer bundles could lead to highly accurate sensors capable of operating in harsh environments, or disease-targeting pharmaceuticals that last much longer than today's therapies. (Published: 22/07/08)

Notes:

• proteins
• unmatched molecular recognition and catalysis capabilities
• have the ability to selectively bind with one—and only one—type of molecule
• also initiate incredibly precise chemical transformations
• e.g. cutting a DNA strand in just the right place
• hitch: lack ruggedness and stability
• limited to narrow temperature and acidity ranges
• require a watery solution
• degrade over time
• drawbacks limit their utility
• proteins to target pathologies at the molecular scale degrade over time, curbing their effectiveness
• protein-based sensor would be unsurpassed at sniffing out harmful contaminants, but it wouldn't be able to operate in hot, cold, or dry conditions
• Ron Zuckermann
• Facility Director of the Biological Nanostructures Facility in Berkeley Lab's Molecular Foundry
• goal: take proteins' catalysis and molecular-recognition capabilities, and add them to a material that is more rugged and less prone to degradation
• peptoids
  
• proteins are precisely folded linear polymer chains of amino acids
• made similar polymer chain by linking together non-natural amino acids
• peptoid: synthetic structures that mimic peptides
• use peptoids to build synthetic structures that behave like proteins
• binding zinc
• zinc: drives many fundamental biological processes
• e.g. DNA recognition
• developed helical peptoids with zinc-binding residues positioned at both ends
• also added fluorescent tags at both end: allowed measuring when the bundles fold in half, trapping zinc in place

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World must look to Europe as capitalisms clash - FT.com

Summary:
John Thornhill argues that if the world does not become more like Europe then Europe will be in trouble. But if the world does become more like Europe, the world can only gain. We seem to be entering a more adversarial world, where a global scramble for resources is permanently changing the balance between supply and demand. Europe in danger of being the only vegetarian economic power in a world of carnivores. The Anglo-Saxon model of capitalism is in decline. Many different forms of a capitalism have evolved. May result in clash of capitalisms. Europe's model most vulnerable: configured for economic peace. Biggest challenge will be maintaining its welfare state (built to neutralise the social tensions that fuelled aggressive nationalism). But it's model of "permanent negotiation" could be an advantage. Needs to marshal its forces more effectively. (Published: 24/07/08)

Notes:

• if regions resembled stock market investments over the past few years:
• US is a racy (leveraged) technology play
• Asia is an explosive growth story
• Europe is a defensive utility stock happy to bumble along and throw off big social dividends
• appear to have reached that point in the stock rotation cycle when dull is good
• may explain strength of the euro and the fact that Warren Buffett, the legendary US investor, has recently been sniffing around Europe for value investments
• but: this may not be a standard economic cycle
• frightening about the current situation is that commodity prices have been surging while demand in the US and Europe has been slowing
• global scramble for resources is permanently changing the balance between supply and demand?
  
• entering a more adversarial world?
  
• Europe in danger of being the only vegetarian economic power in a world of carnivores?
• France's Cercle des économistes
• argue that the apparent ascendancy of Anglo-American capitalism has been an illusion
• i.e. philosophy of a small state, minimal regulation and capital market finance
• proven by the US-originated credit crisis that has been distributed to the rest of the world
• global financial markets may have encouraged many companies into mimicking Anglo-American behaviour in emphasising shareholder value
• but: striking how resilient other forms of capitalism are and how potent some of the new mutations are becoming
• different forms of state capitalism evolving in China, Russia, the Middle East and South America
  
• vibrancy of family capitalism and private equity
• fear that globalisation will bring about a clash of capitalisms
  
• cfr fuss over sovereign wealth funds
• each capitalism is desperate to assert its own superiority in a process akin to economic natural selection
• clear that new rules of the game need to be established if there is to be efficient and equitable use of resources, fair competition and an adequate response to global challenges such as climate change
• worry is that there are few supranational bodies capable of enforcing reciprocity
• most of the multilateral organisations are viewed as occidental clubs that have limited legitimacy in the developing world
• will Europe be vulnerable in a more conflictual world?
• European Union is configured for economic peace
• has abandoned the arms of war
• naive in running liberal trade, competition and exchange rate policies
• Europe is in danger of becoming the "idiot in the global village"
• according to Hubert Védrine, France's former foreign minister.
  
• but: Europe could itself play a big role in shaping the new economic order if it could only marshal its forces effectively
• 27-member EU is now the world's biggest economy thanks to enlargement and the euro's strength
• also the world's biggest single trading bloc setting many of the world's de facto regulatory standards
• McKinsey Global Institute: Europe's capital markets have probably now outgrown in size those in the US - if you throw in non-EU countries such as Switzerland, Russia and Norway
• corporate Europe
• in many areas European companies may be doing a better job of moving up the value chain than their rivals in the US or Japan
• European companies have maintained their share of the aggregate market capitalisation in the FT500 ranking of global companies over the past decade
• US companies' share has dropped from 57 per cent to 38 per cent
• Europe's companies have held steady at 32 per cent.
• Europe's biggest challenge
  
• whether it can afford to maintain its welfare states in a hyper-competitive world
• only sure answer to that question is: we had better hope so
• welfare state was built to neutralise the social tensions that fuelled aggressive nationalism
• European model is an arbitrage between capitalism's winners and losers
• as a result, Europe has been light on the accelerator but heavy on the brakes
• considerable handicap when careering along the straight
  
• but has its advantages when steering round bends
• Europe's example may be of particular use in a world currently experiencing such a scary ride
• EU's model of "permanent negotiation" has been remarkably successful in establishing common economic rules between once-warring nations
• if the world does not become more like Europe then Europe will surely lose. But if the world does become more like Europe, the world can only gain
  

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