Become aware of IPTV

Remember what television was like in the 1970s? There were no DVD players, not even VHS players yet -- you watched what was on when it was broadcast. If a movie came to television, it was over a broadcast network (no Netflix). For much of the 1970s, there wasn't even cable television, so you were stuck with a handful of VHF broadcast stations and (if you could dial them in) a few UHF stations where you might find reruns on tiny local stations for some "niche" content.

Television has changed dramatically since those days, but in a few years, the way television is today will seem as archaic as those memories of television back in the 1970s.

The reason is that the capabilities of your computer will be coming to your television, and the two will merge together. This may not seem too revolutionary, but it will be.

The capabilities of computers have been rushing ahead over the past dozen years, while the capabilities of your television have stayed roughly the same over the same time period (with some incremental increases, such as the replacement of VHS with DVDs, or the increase in visual quality ushered in by HD and the increase in size and display quality ushered in by LCD and plasma screens).

Think about some of the things that computers currently allow you to do that televisions do not, such as send content along to your friends and family through an email, or access the same content on any device you want to, from your desktop to your laptop to your handheld device (a Blackberry or an iPhone is really a small computer more than a telephone).

Those features are becoming available through IPTV, or the delivery of video content over networks that use internet protocols rather than the currently dominant methods (primarily cable). This change will be revolutionary not because of greater bandwidth (cable enables the delivery of tremendous bandwidth), but rather because of greater "interact-ability": with internet protocols (as we all know by now because of our use of IP with computers), you can have two-way communication, and you can have communities.

You can see an amazing documentary and email it to your friend. If it is something that would interest all the people from your college sorority, you can share it with all of them (or with any other groups that you join or maintain over computers).

Like other content that lives in the IP network (such as this blog, or your website), you will be able to access all of the video content that you watch on your television on any other device you choose to use, wherever you happen to be. You will be able to control that video with any other device that is on the network (you can use your iPhone as your living room remote, for example, or access your favorite sports team from your laptop while on a business trip).

Like other content that lives on the IP network, you will be able to create your own content. Your parents will be able to watch your HD broadcast of your child's soccer game live (or later on) in their living room in Des Moines (even if you live in Mountain View).

Like other content that lives on the IP network, you will be able to search for it using keywords. But, rather than just being an individualistic effort, your different social networks will also assist you in finding content, much as today (over the IP network) you may receive links to magazine articles or YouTube clips from your friends and family and colleagues.

Some of these capabilities are already available in the first-generation IPTV systems, and the rest and others will probably arrive faster than most people anticipate.

IPTV is going to be a major revolution, and it is just beginning. It is probably something that you should become aware of. It is also one of the heralds of the approach of the next paradigm shift that will be just as important and revolutionary as the paradigm shift created by the arrival of inexpensive computing power and its application to various aspects of life during the period from 1980 to 2000.

For later blog posts dealing with this same subject, see also:

• "Look for paradigm shifts" 01/03/2008
• "Must-read: 'Unleashing the Exaflood' by Brett Swanson and George Gilder" 02/22/2008
• "Yahoo, Microsoft, and Cloud Computing" 05/09/2008
• "Big changes coming" 05/28/2008
• "Big changes coming, part II" 07/08/2008
• "Exaflood update" 06/01/2010.

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Don't fear the current recession drumbeat

Recently, the "recession drumbeat" of those warning of the growing risk of a recession has been growing louder and louder.

Yesterday, for example, the stock market rallied strongly on negative comments from Fed Vice Chairman Donald Kohn, which market participants took as signaling a probable rate cut in the upcoming Fed meeting on December 11.

Today's front-page Wall Street Journal article discussing the rally featured a quotation from David Resler (Chief Economist of brokerage firm Nomura Securities International) declaring, "The risks that the weakness in this sector [housing] will pull the overall economy into a recession are rising by the hour." What exactly takes place in the housing sector on an hourly basis to threaten the economy with recession was not specified.

Bearish commentators, noting that the market recently (Monday) passed the official measure of a "correction" (a 10% from a previous high), made pronouncements that the upward moves of the last few days are just "dead cat bounces." Permabear Doug Kass published this article today on The Street.com entitled "This Dead Cat Won't Keep Bouncing."

While the market may indeed retrace upward moves that are predicated on a Fed cut (especially if the Fed deems that a rate cut is not needed), the increasing fear of a recession is overblown.

As we explained in this post, a large percentage of economists and journalists subscribe to the inaccurate "demand side" view of the economy, and this skews their vision and leads to questionable conclusions. Starting with "the consumer" as the fickle engine of the economy (fickle because they view the consumer as forever prone to becoming scared and not spending) the demand-side analyst is always afraid that the consumer will suddenly freeze up and usher in a recession. Current recession predictions generally blame "falling home prices" as the reason the consumer will go into hiding, as if most people buy their Christmas presents using home equity rather than money from their paychecks. The importance the demand side attaches to the "consumer confidence index" is another indicator of why they are always afraid that the moody consumer is always a bad mood away from going into hibernation and bringing on a recession.

However, this worry is misplaced. Healthy economies do not just slip into a recession. Recessions are more often created by misplaced government intrusion than anything else. The current conditions include continuing positive business earnings, lower unemployment percentages than at any time during the entire decade of the 1990s, and generally benign taxation and interest-rate environments. Business growth will always accelerate and decelerate from quarter to quarter, rather than growing at a smooth pace, but the economists we have found reason to trust continue to predict positive economic growth at rates much higher than the general (demand-side biased) consensus.

In fact, there have only been two official recessions, defined as two consecutive quarters of negative GDP growth, in the past twenty years, one beginning in July of 1990 and one beginning in March of 2001.

Similarly, although there have been many market "corrections" in the same twenty-year period (drops of 10% from a previous high), there have been only two actual bear markets (generally defined as a 20% or greater correction), both of which corresponded to the two recessions (there was also a "near-20%" correction in 1998, corresponding to the "Asian Contagion" credit crisis).

These two 20% corrections are depicted in the chart above, which shows the Dow Jones Industrial Average over the past twenty years, with the two bear markets indicated by yellow brackets:

July 1990 - October 1990 (Dow went from 2999.75 to 2365.10 which is a drop of 21.2% and which lasted 87 days).

January 2000 - December 2002 (Dow went from 11,722.98 to 7286.27 which is a drop of 37.8% and which lasted 999 days, the longest since the Great Depression).

While it is important to have cash reserves for market corrections (to prevent your being forced to sell securities at low prices in the event you have a cash need) and it is important to be alert for indicators that threaten an actual recession (such as increased government interference with free trade, increased intrusion into and regulation of law-abiding businesses, increased taxation, or unnecessary over-constriction of the money supply), the current recession fears are largely unfounded demand-side anxiety.

for later blog posts dealing with this same subject, see also:

• "Don't fear the current recession drumbeat, revisited" 07/18/2008.
  

• "The long shadow of the Y2K bug" 08/22/2008.
  

• "Hurricane hits Wall Street firms" 09/15/2008.
  

• "Great Depression update: iPhones selling like hotcakes" 10/22/2008.
  

• "Thoughts on the NBER's identification of a current recession" 12/08/2008.
  

• "Taking stock of 2008" 12/31/2008.
  

• "It's a panic, not a Great Depression" 01/21/2009.
  

• "Managing Investments in the New Era" 02/18/2009.

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Would you prefer options linked to your company or to the S&P 500?

In December 2006, this article appeared in the San Francisco Chronicle Magazine typifying the kind of journalism that surrounds the "active versus passive" debate.

The article recounts the education of "hundreds of impetuous young multimillionaires" at Google who were given lectures on the superiority of index investing from Bill Sharpe, Burton Malkiel, and John Bogle prior to the IPO of GOOG in 2004. Entitled "The Best Investment Advice You'll Never Get," the author suggested that any form of active management amounts to "get-even-richer investment schemes" and that the main reason everyone in the country is not investing solely in index funds is that "putting investors into index funds is simply not in the interest of the industry that sells securities."

In fact, as we outline in The Emperor's New Index Fund, there is a steadily-growing portion of "the industry that sells securities" that is doing very well indeed "putting investors into index funds."

The real question that should be asked in that article is how those "hundreds of impetuous young multimillionaires" became multimillionaires in the first place. The answer is the exact same answer that we outline in this post entitled The Classic Growth Stock Investing Philosophy, and the same method that has made most of the big fortunes in this country not only in the 1980s, 1990s, and this decade, but for the past two hundred years: through ownership of shares in a growing company.

Do you think new employees at Google would prefer to receive employee stock options that are tied to actual Google stock, or to the S&P 500? If Google's management truly believes that buying indexes is actually better than owning shares of exceptional companies, then maybe they should incent employees using S&P options rather than Google options.

Trying to own good companies makes sense -- in spite of the fact that most of the press now takes it as an established fact that trying to buy companies that are better than the average is foolhardy or somehow unsavory. Don't be taken in so easily.

for later blog posts dealing with this same subject, see also:

• "The further you are from owning individual companies . . ." 12/10/2007
• "A twenty-year perspective for the recent market turbulence" 01/23/2008
• "The active vs. passive debate" 05/22/2008
• "The zero-sum connection" 06/02/2008
• "Invest like Mr. Howell" 05/18/2009.
• "If Rip Van Winkle took a one-year nap before September 15, 2008" 09/14/2009.
• "S&P takes aim at active management" 10/07/2009.
• "Composite performance through 12/31/2009" 01/11/2010.
• "Free markets, free enterprise, Friedrich Hayek, and active allocation of investment capital" 07/13/2010.
• "The growth theory of investment works" 01/14/2011.
• "Don't confuse free enterprise with a questionable theory about securities markets" 01/19/2011.

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Happy Thanksgiving to all

As we head into Thanksgiving, many of the economic commentaries you hear on the radio or on the financial news media will be focusing on "Black Friday" (so named because retailers supposedly spend the entire year up to Thanksgiving "in the red," and then go "in the black" in a rush of post-Thanksgiving shopping).

Accompanying all this talk of Black Friday every year, and this year in particular, will be plenty of concern over the question of whether "the consumer" will be able to step up to the plate this year and at least get on base, or if he will strike out.

While the shopping appetite of "the consumer" is certainly important -- especially to retailers -- it is a mistake to believe that the consumer drives the economy. Yes, you've been conditioned to believe that the consumer drives the economy, and you've heard it endlessly repeated that 80% of the economy is driven by consumer spending, but it is actually not true that the consumer drives the economy. The consumer is able to spend (consume) because he has a job, and he has that job because of his part in the production side of the economy.

The reason most people believe that the consumer drives the economy is because most of the economists in the world are demand-side economists -- focused on consumption rather than production as the more important side of the supply-and-demand equation. The reason so many economists are demand-siders is not because demand-side economics leads to better conclusions (quite the opposite) but rather because the majority of economists are employed by the government and by academia, where demand-side thinking is entrenched, rather than in the sectors of the economy involved in actual production.

Economist and Professor Emeritus of Economics of Pepperdine University George Reisman outlines the vast philosophical divide between the demand-side approach to economics (which he calls "Consumptionism") and the opposite approach (which he calls "Productionism" but which is often called "supply-side" in the media and popular press) in an invaluable essay entitled "Production versus Consumption."

That essay, originally published in 1964, explains that the productionist sees "the fundamental problem of economic life as how to expand production" and takes for granted the desire to consume, focusing instead on "the ways and means by which production might be increased."

The positive aspects of the productionist approach are too numerous to detail in a blog post, but one very practical benefit is that the productionist approach is right much more often than the consumptionist approach. The last GDP figure was severely underestimated by the demand-side majority, while at least one "supply-side" economist, Brian Wesbury, nailed it within a tenth of a percentage point.

Another positive aspect of productionism (besides the fact that it is right and consumptionism is wrong) is that it sees that the integration of more people and more technology into the overall economy is beneficial and not harmful. Demand-side theory leads to the belief that if more people world-wide are working, they are taking jobs away from others. Thus it leads to a belief that foreigners, or people of other races, or women in the workforce, or people in other regions, or even robots, take away jobs and benefit one group at the expense of another. It is a "zero-sum" mentality -- a "fixed-pie" view of the world.

Production-side theory leads to the conclusion that the more people -- locally and worldwide -- who are able to join the economy, the better. It is not a zero-sum view of the world. As new value is added into the economy that wasn't there before (see this previous post discussing this subject), they will earn money (a place-holder for the value that they produce) and they will spend it, but the way they are enabled to spend is because they were first empowered to produce. In fact, their improved situation actually helps the entire system.

If robots working in Detroit enable more cars to be produced per worker, then there are now more cars per consumer than there were before. If workers in China are able to produce more goods more cheaply than were produced before, then there are now more goods per person available worldwide. More goods per person means that those goods become more affordable than before. If it used to take ten people to make one Corvette, and now it only takes one person to make one Corvette, then it stands to reason that you can now produce more Corvettes per person than you could before, and that more people can potentially acquire a Corvette. The pie has gotten bigger.

Regardless of whether you actually like Corvette cars (it was just a convenient mental example), this process is the story of the past century in the United States, and the reason behind the availability of a vastly greater supply of goods to a vastly greater percentage of society than were available in, say, November of 1907.

Something to be thankful for this year at Thanksgiving.

For later posts dealing with this same topic, see also:

• "Happy New Year!" 12/31/2007.
  

• "Economic ignorance hurts" 01/18/2008.
  

• "The production/consumption distinction with regard to stimulus plans" 01/15/2009.
• "The dark side of zero-sum thinking" 04/20/2009.

• "The Consumer" 10/19/2009.

• "Why can't we all just get along (on economic policy)?" 02/08/2010.

• "Happy Thanksgiving 2010" 11/24/2010.

• "Lawlessness in California" 12/16/2010.

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Malpass hits nail on head

In his most recent Forbes opinion, Bear Stearns Chief Economist David Malpass hits the nail on the head.

He points to "the uncertainty in U.S. tax rates and the scheduled tax rate increases" as underlying explanations of what ails U.S. markets here in the last months of 2007.

We agree, and point out that we sounded the same note last week in a blog post entitled "What's really troubling the market?"

While the media is full of pundits proclaiming that the "deepening credit problems" are the major issue of the moment, it is naive to think that the market has not been pricing in the current credit problems for many months.

Certainly the problem has been front-page news since the summer, and professional market participants have been making models incorporating the extent of these credit problems and write-downs for some time. It is very possible that there will be some "write-ups" later, when the damage turns out to be less severe than the more pessimistic models anticipated.

Rather, it is more likely that the forward-looking market is now looking ahead to 2008.

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