Andy Kessler

WSJ: Raise Rates to Boost the Economy

The chairman of the Federal Reserve is stuck between a rock and a hard place—well, more like a house and a gas tank. How to escape? Mr. Bernanke, raise interest rates now.

In order to the save bank balance sheets that he never cleared of toxic mortgage assets, Ben Bernanke's near-zero interest rate policy and dollar- printing programs were an attempt to create a so-called wealth effect. "Lower mortgage rates will make housing more affordable and allow more homeowners to refinance," Mr. Bernanke wrote in a Washington Post op-ed last November. "Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending."

In other words, the Fed is manipulating the stock market. And it has been on a tear, up 19% since Mr. Bernanke's Jackson Hole speech last August outlining a second round of quantitative easing.

Unfortunately, when you print dollars, you debase the currency—and it shows up in higher oil prices, already rising well before the rebellions in Egypt and Libya. Copper and wheat and food are also seeing increases. For that matter, just about everything is rising except home prices. The Case-Shiller home price index dropped 2.4% in December.

What Mr. Bernanke's dollar printing has given to consumers in a supposed wealth effect, it has taken away in the cost of living.

WSJ: Dave Kansas review of Eat People

Early in "Eat People," a business-advice book for "game-changing entrepreneurs," former hedge-fund manager Andy Kessler casts his mind back to 10th-grade chemistry to muse on the "highly reactive" nature of atoms and molecules called free radicals. Because free radicals have an unpaired electron, he says, "they are always looking for something to do, hungry for some chemical reaction—like combustion."

Mr. Kessler's heroes, he says, are the free radicals of the business world, "someone who not only creates wealth . . . but at the very same time, improves the world, makes life better, and increases everyone else's standard of living." The roster ranges from modern free radicals like Steve Jobs and Sam Walton back to Andrew Carnegie and John D. Rockefeller, though the latter two gents "at some point" stopped being free radicals and "became monopolists." Rockefeller, Mr. Kessler says, was "more likely criminal." 

It's a typically cheeky aside from Mr. Kessler, who likes to incite and amuse while getting his unvarnished free-market views across to readers. After a long and varied career in finance—he was an analyst, banker and venture capitalist in addition to managing a hedge fund—he has become an author. Much of his early writing—"Wall Street Meat" (2004), "Running Money" (2005) and "How We Got Here" (2005)—was grounded in his first-hand experience.

Newsweek: Geopolitics à la Google - Lessons for the world from a “horizontal” company

Sometimes geopolitical lessons come from the strangest places. With Eric Schmidt stepping down as CEO of Google and replaced by founder Larry Page, I can’t help but wonder if world leaders are taking note. Google perfected the horizontal business model. To the delight of enthusiasts of David Ricardo, the comparative economist, the company does one thing really well—search—and has built an ecosystem for others to flourish using it as a platform.

Contrast this with IBM and AT&T, long past their expiration dates as successful vertical companies. It’s no coincidence that the Soviet Union and IBM, two raging, top-down, command-and-control systems, collapsed at about the same time. What do I mean by vertical? In its heyday, IBM did everything from soup to nuts. Designed chips, wrapped plastic around them, wrote operating systems and applications, and then sold and serviced mainframes. The giant captured half of computer-industry sales and 80 percent of profits until horizontal companies Intel and Microsoft knocked it out at its knees. AT&T owned phones and switches and long-distance lines until a very horizontal Internet and companies like Skype changed the economics of the phone call.

These same dynamics are now driving the world economy into a productive horizontal enterprise. And it’s about time.

Economies are about increasing the standard of living of their participants. If you don’t have an economic system to create productivity, you end up stealing it from your neighbors. Think Roman Empire. Or the British who colonized large parts of the world to lock up natural resources to plug into their manufactories. Both very vertical.

Hitler had a manufacturing engine, but felt Germans were above toiling in factories. So he chose to increase German living standards by the blitzkrieg process: take what you need by force. Grab territory. Steal their resources. Put them to work. Get rich. Vertical instead of horizontal.

And they lost to a nation that went the horizontal route. America won WWII. Japan and Germany could have been American territories. But the horizontal model kept them independent as trading partners and we bought manufactured goods from partners around the world, especially Japan and Germany. It was better economics to let these countries run at their own pace, and own some horizontal layer (radios, clothes, cars). Today they trade cars and TVs for oil.

Imperialism and territorialism are increasingly obsolete. Why take over a country and deal with the headaches of a welfare system, and have to fix the plumbing in Uzbekistan, when you can buy its output on the cheap?

The vertical Soviet system lost precisely because it had no productivity. If you just steal resources, there is no incentive for others to create productive solutions.

And what about China? Well, it’s found its place in the horizontal stack. It leverages its cheap labor force and owns the logistic slice. It’s also locking up resources in Africa, trading instead of owning.

As of 1989, the United States of America became the world’s sole superpower. But what is America going to do with this status? Unlike past empires, there’s no incentive to take over the rest of the world. Imperialism is such a hassle. The world economy transitioned from loosely knit but mainly stand-alone industrialized countries through the 1970s to a tightly wound digital ecosystem today. Imperialism and territorialism are increasingly obsolete. Why take over a country and deal with the headaches of a welfare system, and have to fix the plumbing in Uzbekistan, when you can buy its output on the cheap, even ordering its goods over the Web? Despite all the protests, globalization instills peace. Trade now represents 26 percent of world GDP, up from 18 percent in 1990.

Globalization has linked the free world in a smart horizontal alliance. Computers, cell phones, and fiber optics are not made in any single country to be exported worldwide, but instead have components and labor from more than 30 inseparable countries, including China and Vietnam. Horizontal rules!

Without much forethought or planning or a dictator, benevolent or otherwise, the world has structured itself into a horizontal wealth-creating and peace-maintaining system—a productive system that actually increases the standard of living of all the participants, not just those in the United States. America still sits on top of the heap, sure, but wealth has increased for every country, company, and person that contributes. And they get rich not by stealing from the rest of the world, but by adding value to the food chain. Just ask Google.

http://www.newsweek.com/2011/01/30/geopolitics-la-google.html

WSJ: Time to Shut Down the FCC

It's time to close the Federal Communications Commission. This week, FCC Chairman Julius Genachowski gave a speech outlining his push for net neutrality, the absurd notion that the Internet should be "open and free" when in fact it's quite expensive to build. Net neutrality will straitjacket the U.S. economy's single most important driver of productivity and transformation.

 
Besides the obvious question of whether the FCC even has the authority to regulate the Web—in April, the U.S. Court of Appeals for the D.C. Circuit said it doesn't—the agency has a long history of restraining trade. Founded in 1934 partly to regulate radio spectrum (which in reality hasn't ever been scarce), the FCC delayed FM radio by favoring AM and television in spectrum allocation, mandated a TV network oligopoly by restricting station ownership, and kept long-distance rates too high for decades by forcing operators to subsidize local telephone costs. Now, because of bad bandwidth policy, it limits what smart phones can really do.

WSJ: What's Really Behind Bernanke's Easing?

http://online.wsj.com/article/SB10001424052748704648604575621093223928682.html

Federal Reserve Chairman Ben Bernanke's $600 billion quantitative easing program has been roundly criticized in this country and around the world. So why is he doing it? Does he know something the rest of us don't? Mr. Bernanke claimed earlier this month in a Washington Post op-ed that "higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending." But, as Mr. Bernanke must know, the Japanese have been trying to influence their stock market for 20 years, with little effect on their economy. It is also unlikely, as some claim, that the Fed chairman is whipping up a stealth stimulus or orchestrating a currency devaluation. He knows these have been tried and are more likely to destroy jobs than create them.

I have a different explanation for the Fed's latest easing program: Without another $600 billion floating through the economy, Mr. Bernanke must believe that real estate (residential and commercial) would quickly drop, endangering banks. The 2009 quantitative easing lowered mortgage rates and helped home prices rise for a while. But last month housing starts plunged almost 12%. And in September, according to Core-Logic, home prices dropped 2.8% from 2009. Commercial real estate values are driven by job-creation and vacancy rates, both of which are heading the wrong way. Because of unexpectedly bad construction loans, the staid Wilmington Trust was sold to M&T Bank earlier this month in a rare "takeunder"—what Wall Street calls a deal done below a company's stock value, in this case by 40%.

In other words, real estate is at risk again.

Off the Phone Grid

I have officially cut the cord with AT&T. Landline anyway. For now, I'm stuck with AT&T Wireless for our iPhones, but like many others who have complained, they don't work at my house. This wasn't a landline for wireless move, or even a move to Vonage or MagicJack, this was dropping a $2000 a year AT&T for an almost-free roll-your-own internet phone set up. And it was pretty easy.

This photo shows the box on the side of my house (the important sounding Telephone Network Interface) with three telephone jacks disconnected, a sign of Victory!

I didn't do this on a whim. I worked at Bell Labs for five years and they sent me to grad school, so I have been a loyal customer, no MCI or Sprint for me. But even I got fed up. Every month its $16.45 per phone line plus $9.99 for CallerID for one line, plus $8.95 for a voicemail box plus $3.95 for International Savings Advantage Plan plus $13.20 for a Federal Subscriber Line Charge plus a 75 cent Rate Surcharge plus a 12 cent State Regulatory Fee plus $1.77 Federal Universal Service Fee plus $7.95 for a One Rate plan plus 14 cents a minute for calls in California plus 7 cents a minute for the rest of the country plus $2.86  for a Universal Connectivity Charge plus $2.39 for a Carrier cost recovery fee and finally $16.14 in a hodgepodge of Government Fees and Taxes. And without any of the even simplest features of Google Voice such as ringing calls on my landline and cellphone and letting me pick which one to answer or transcribed voicemails. It was time to drop AT&T like a bad habit.

I have three phone lines for six of us at home. One for our main number, one for a fax machine and one that rings on my home office desk. I now have three phone numbers with two different VOIP providers. The tricky part was keeping my main phone number that we've had for 18 years. I paid $10 extra for it, as it ends with 5377, which is KESS (pretty nice, eh?)

I currently pay Comcast a confiscatory $75.41 a month for internet access, call it IP dialtone if you will. $69.95 a month for Blast which claims 20 megabit per second service, which I've never seen, plus $5 to lease the cable modem plus 46 cents in State Sales Tax. Another ripoff, but we'll work on cutting that cord another time.

Dropping AT&T requires buying an Internet Phone Adapter. I've got an old Panasonic phone system that came with the house, plus a half dozen wireless phones, so I needed something that looked exactly like a real phone line, dialtone and rings and all. The one that is used widely is the Cisco/Linksys PAP2T. Think of it as one RJ-45 Ethernet jack in (from your router) and two RJ-11 phone jacks out. Exactly what you need and $45-50. The reason for going mainstream is that most VOIP serivces can tell you exactly how to configure the PAP2T. 

Next, you need a VOIP or Voice Over Internet Protocol service. I use two. The first one I signed up for, Sipgate, was free for the first line. They have local numbers in my area code and I spent probably an hour hitting refresh until i got a number that I liked. I probably shouldn't have bothered, as I use Google Voice to ring this number, but more on that later. I unplugged the telephone  jack on the outside of my house for the number that rings on my desk, plugged the phone line into the PAP2T picked up the phone and...nothing. OK, it's easy, but  not that easy.

Sipgate has a pretty good support section of their website that shows exactly how to configure the PAP2T. You hit "****" and then 110# and over the phone, the PAP2T tells you the IP address of the device. You plug that into your browser and get the configuration page for the PAP2T. My router is at 192.168.1.1 and my computers get assigned via DHCP IP addresses starting at 192.168.1.100 so I set the IP address for the PAP2T at 192.168.1.95.

Sipgate shows you what settings to change, mostly account number and password. Two numbers that are important are the SIP Port under the Line 1 tab in administrator view, which is probably 5060 and under the SIP tab, the RTP Port Min and RTP Port Max which is probably 5004 and 5020. These are the ports to control your device and to handle the actual phone calls. They are important because you will end up setting your router to forward those ports to your PAP2T.

I got a dial tone, made a few phone calls, and it all worked like a charm. You get 60 minutes of free calls, but I then entered my credit card and set Sipgate up to charge me $10 for credit every time my balance runs low. Domestic calls are 1.9 cents a minute, and so are calls to the U.K. or France (around 20 cents per minute to international cell phones). No need for One Rate or International Savings Plans.

After a while, I would notice that one side or the other of the phone call would drop. I couldn't hear the caller or they couldn't hear me. A common problem it turns out. SIP, or Session Initiation Protocol is one of those that doesn't work well with most routers that are set up for web surfing, specificially NAT or Network Address Translation. Read this for an explanation. No matter. Inside your router, probably under security, is a page that let's you forward ports or a range of ports. I forward 5060-5064 to 192.168.1.94 (I'll explain the range in a moment). I also forward those RPT ports, 5004-5020 to the PAP2T as well.

No more dropped voices. In fact, it works great. Or did.

Confident in my new abilities to drop AT&T, I immediately cut the cord on the fax line and plugged it into the second line of the PAP2T. A second line costs $2.90 per month and the same 1.9 cents per minute. Well worth it. You could try to create a second free account with a different email address, but why bother? You can pay another $1.90 per month for emergency 911, "required" by law for primary lines, but I didn't need it on what are basically secondary lines.

I set the SIP port for Line 2 to 5061 vs. 5060 on Line 1. All of a sudden, both line screwed up. Intermittent dial tones, sometimes dropped calls, wouldn't dial out, would dial out, etc. Lots of back and forth with support via email for 48 hours until we figured out I should set the SIP port on Line 2 to 5062, and keep the SIP port for Line 1 at 5060. Works great. That's why I forward the range of SIP ports. The RTP min and max ports where already forwarded.

Again, confident, I decided it was time to port our main phone line. Getting a new number was a non-starter. So I called AT&T and asked how much it would cost to forward our existing number to a new number. Well, I never did get a real answer. It might be $16.45 a month, which is the cost of the line today, or it could be $23.44 which is the cost of the line plus call forwarding. Does CallerID still work? Does it just pass it through? Well, it might be another $9.99 a month for that. Forget it.

Fortunately, there is something called LNP or Local Number Portability. Phone companies have to let you keep your number and just port it to another phone service on request. Unfortunately, Sipgate doesn't do LNP. I turns out LNP (probably designed by phone companies) is a very paperwork intensive process. Very little is automated. It's why Google Voice doesn't let you use your existing phone number. Google hates human intervention and paperwork.

So I did some digging around and found a service Voipvoip.com. $6.99 per month including e911. Calls are 1.5 cents domestic and 1.9 cents per minute to London. And they do Local Number Portability. It takes about three weeks. You need your old phone bill which has your complete account number. You digitally sign some paperwork and they do the rest. Three or so weeks later I got an email that said my number is ported. Voipvoip charges me $7 per month.

I had bought a second PAP2T. Setting it up different from the other one was a little tricky, because Voipvoip and Sipgate do things a little differently and you need to forward different ports to different PAP2Ts. I set up the second at 192.168.1.94. I used port 5160 instead of 5060, as recommended by Sipgate if you use more than one PAP2T. Voipvoip never really said what to use.

Voipvoip does have a automatic configuring system. You plug in an address under the Provisioning tab under Profile Rule and your PAP2T is set up by Voipvoip. You still have to go in and find the SIP Port and RTP min and max so you can have your router forward them. In my case, they are 5466 and 16384 and 16482. I still had issues until I plugged in Voipvoip STUN server address, stun.voipvoip.com, under the SIP tab. STUN is Simple Traversal of User Datagram Protocol (UDP) Through Network Address Translators (NATs). Another way to fix the incompatiblity of SIP and NAT. This sounds like a pain, but it really isn't. My three VOIP lines now work like a charm.

Each of the VOIP services have voicemail and CallerID and call forwarding built into the basic plan. But you also get total control. Forward to another number after a period of time, block certain numbers and more. But I happen to like the Google Voice voicemail transcription, so I set up our main number to forward after 15 seconds to Google Voice which pretty quickly emails me a transcription of the message. That costs nothing.

And I haven't even started on customizing my lines. There are tons of settings at both VOIP services, plus lots of things you can change inside the PAP2Ts to change ringtones and the like.

So I am out $6.99 per month for Voipvoip plus $2.90 a month for Sipgate. If I talk for 500 minutes a month, way more than I do on my cellphone, I'm out another $10 per month. So maybe $15-20 per month instead of my $125-175 per month to AT&T local and long distance. Almost a factor of ten savings!

A few issues. CallerID is just a number, not a name, which is annoying. Also, on all VOIP calls, you get some tiny slight delays and the full duplex/half duplex thing can be an issue. You start talking and the other person doesn't hear you to stop talking. It is a little different that AT&T landline. But certainly not 10 times worse. And way better than cell phone calls.

Finally, I've read a few descriptions of using Google Voice to dial out and save the 1.5 cents a minute per call. I wouldn't recommend it. I find that Google Voice calls have even more delays. It is hard to have a long conversation with Google Voice because of the delays and duplex issues. Plus, on my line anyway, a voice occaisionally interrupts saying "this call is being recorded", a bug that others are having. Or maybe Eric Schmidt is listening in. Either way, embarrassing to have to explain. A stupid bug. So stick with your VOIP provider for now, who my guess will improve quality in order to keep or attract customers.

But in the mean time, no more AT&T landline! (An important tip: You're AT&T local cancels automatically when your number gets ported away from them, but you have to cancel AT&T long distance yourself at 1-800-288-2747). I'll work on ditching AT&T Wireless when an alternative is ubiquitous, and then I'll work on Comcast and DirecTV. Five more years? Maybe so.

 

Simple Traversal of User Datagram Protocol (UDP) Through Network Address Translators (NATs)

WSJ: What's The Matter With Wall Street?

 

What's wrong with Wall Street? I don't mean the painfully slow and dreadful new Oliver Stone movie. I mean the real Wall Street. The stock market has been on a tear this month and is up a few percentage points for the year. But the stocks of most Wall Street firms are actually down close to 15% for the year.

It wasn't supposed to be this way. The Federal Reserve's near-zero interest rate policy makes it almost impossible for Wall Street not to make money by borrowing at next to nothing and buying anything, especially Treasury bonds. This gives banks easy profits and the wiggle room to write off the toxic mortgage assets that never got cleared out.

While most firms won't release earnings for another three or four weeks, Jefferies investment bank set off air raid sirens last week by announcing disappointing earnings, which CEO Richard Handler blamed on "painfully slow trading." And there's more trouble down the road.

WSJ: We Should Have Eaten Those Toxic Assets

TARP and the Continuing Problem of Toxic Assets

It was a bold bet that the Treasury and Fed could engineer an economic recovery without allowing the repricing of U.S. housing stock.

We should have eaten those toxic assets instead of sweeping them under the carpet.

The Troubled Asset Relief Program (TARP) was a foolish bait and switch. To prevent the 2008 financial crisis from worsening, TARP was originally designed to buy toxic mortgage derivatives weighing down banks and Wall Street, but no one could decide what price to pay for them. Too high and TARP would look like a government handout. But if the Treasury paid what they were worth, which was not much, financial firms would have to take huge write-offs, forcing many of them into insolvency and even nationalization.

So Treasury Secretary Hank Paulson switched plans, investing TARP funds directly into banks for a piece of equity. The idea was that banks would "earn out" their toxic portfolio—i.e., slowly write them off against the profits gained by the Federal Reserve's zero interest rate policy. It was a bold bet that the Treasury and Fed could engineer an economic recovery without allowing the bottoming action of a sharp but swift repricing of the U.S. housing stock. It turns out they only bought time, not a recovery, and now we are paying for that mistake.

Interviews with Andrew Keen and Techcrunch

Here are parts 2-5:

Part Two: Kessler on The World Economy

Part Three: Kessler on Productivity

Part Four: Kessler on The Next Big Thing

Part Five: Kessler on Where To Invest

DB: Greece is Bear Stearns, (fill in the blank) is Goldman Sachs

http://www.thedailybeast.com/blogs-and-stories/2010-06-19/andy-kessler-on-greece-germany-and-the-euro-crisis/p/

Even a win in the World Cup soccer tournament won’t save Europe. Nor will the G-20 meeting in Toronto this week. With Grecian urns, Irish eyes, Spanish flies, and Portuguese waterdogs all up to their eyeballs in debt, it’s only a matter of time before the whole venture implodes. Even after an almost trillion dollar bailout across Europe, Moody's Investors Service last week downgraded Greece's debt from A3 to Ba1--junk bonds.

We’ve seen this movie before—in 2008, when it was banks, not countries, reeling out of economic control. Once you recognize this pattern—desperate nations behaving just as the desperate banks did—the next 12 months of news will all make sense. Here is a handy guide.

Greece is clearly Bear Stearns. They’ve taken on too much debt, used derivatives created by Goldman Sachs to put off payment well into the future, and aren’t generating enough tax revenue to pay for their bloated expenses. The cost of Greece’s debt financing is skyrocketing, now 8 percent higher than the benchmark German bund. Either Athens defaults, causing more firebombs to be tossed and even larger riots in the streets, or the European Union arranges a takeover by deep-pocketed Germany.

Germany is the JP Morgan of this story. It will provide a lowball 200 billion Euros to Greece and then end up paying 1000 billion, reminiscent of JP Morgan offering $2 and then paying $10 for Bear Stearns. Now wait a second, I can hear you complain, countries can’t merge like companies.

Of course they can, it happens all the time—though usually when tanks roll. Ask Poland. Or Hungary. In this case, Germany won’t legally own Greece, but in reality, it will absolutely be in charge of fixing Greece’s mess. My sense is the Germans will be quite good at tax collection and not so strong at dismantling the welfare state. But Greek debt will be resolved and maybe the Euro will even rally.

But it won’t be over quite yet. That’s because sadly, Spain is Lehman Brothers. With 22 percent unemployment, and loaded with debt and deteriorating real estate prices, who is going to save it? Tongues will wag that defaulting on debts will teach a lesson to countries that live beyond their means. As a huge exporter, the carcass of a bankrupt Spain will be attractive to some country, probably in the Middle East, given Spain’s multicultural history. This country will be to Spain what Barclays was to Lehman, buying the parts of Spain it wants—say Barcelona—and dumping the wine business on France.

France, by the way, is Morgan Stanley; they have so many of their own problems that they can’t truly be part of any solution. Like Morgan Stanley, France will probably take some money from a large Japanese bank and then ignore them.

Italy, which always seems to drag down the rest of Europe, is, of course, Merill Lynch. It is not really good at anything in particular, though it has retail offices in the form of restaurants and pizzerias across the globe. Still, Italy is a net destroyer, not a creator, of wealth. Not wanting to return to the days when it cost 5,000 Italian lira to pay for a cup of espresso, Italy will (again) fall under the ownership and control of the German state, bringing flair and design to Germanic rigidness. A nice match. The Greeks only have islands.

The Euro, by the way, is Fannie Mae and Freddie Mac bonds. Banks around the world owned it because it could never fail. Oops—until it does.

Okay. I can’t believe I’ve gone this far without answering the real burning question: Who is Goldman Sachs? The United Kingdom, of course. Aloof and not really part of all that mess on the continent, the U.K. will probably make money shorting the rest of Europe and then become nervous that Greece and Spain will drag them down as the mess spreads. The U.K. will eventually come around and do what it can to help calm the markets. But it won’t matter. Everyone will still accuse the U.K. of being a giant squid or leech or mosquito, sucking the blood out of Euro-weenies until they cry uncle. Later, when things are more stable, the U.K. will be accused of fraud and benefiting from Europe problems. The U.K. won’t care because its citizens are all paid so well.

I’d like to say that Warren Buffet is Switzerland, but I think I’ve stretched this analogy much too far.

Just be warned. You can bail out Wall Street banks and recapitalize their balance sheets and someday they can start lending again (we’re still waiting). On the other hand, you can’t really bail out a country without massive structural changes, cuts in entitlements, huge reduction in government as a percent of GDP, and a rewriting of the social contract between government and workers. Often, bankruptcy or the threat of it is the only way these nasty tectonic-shifting changes can be pushed through.

Andy Kessler is a hedge fund manager and author, most recently of Grumby. He has written for the Wall Street Journal, Forbes, Technology Review, The New York Times and elsewhere and has appeared on CNBC, CNN, Fox, NPR and Dateline NBC. He lives in Northern California with his wife and four sons.