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Whither the Euro? The Liar’s Paradox

Whither the Euro? The Liar’s Paradox

In Dickens’ Hard Times the character Mr Gradgrind can’t help but speak about Facts to his pupils: ‘Now, what I want is, Facts. Teach these boys and girls nothing but Facts. Facts alone are wanted in life. Plant nothing else, and root out everything else’. As we listen to Mr Draghi, to Mr Carney and to Ms Yellen, as we read the Financial Times or listen to business channels, isn’t it all about the Facts and the numbers? Analyst’s commentary coupled with an over-reliance on Facts and numbers has thrown economic policy making into the lion’s den of semantic incoherence. We forget that the real economy is about losing a job, going bankrupt, losing your home, personal and household debt.

Facts and Numbers:  Relevance of Godel

Sadly, economic policy making has evolved into a game of natural numbers. In addition to semantic incoherence – ‘numbers on the upside’ or  ‘targets below forecasts’ – we would argue that Gödel’s first incompleteness theorem may have a direct relevance to policy makers, warning them of the incompleteness of an economic policy, reliant on numbers alone.  Each time a new policy statement – boosting credit in Southern Europe, changing interest rates or QE – is added as an axiom, there are other true statements that still cannot be proved, even with the new axiom. If an axiom is ever added that makes the system complete, it does so at the cost of making the system inconsistent. His argument shows that any consistent effective formal system that includes enough of the theory of the natural numbers is incomplete: there are true statements expressible in the language of economic theory that still remain unprovable within the EU system of policy signalling. For example, what would happen if QE were introduced by the ECB? Thus the policy problem for ECB and for the EU is that no formal system, reliant on numbers and number predictions, satisfying the hypotheses of the theorem, exists. Instead we have noise and signals.  

Godel’s sentence

Economic policy today is transmitted as number signals into the financial markets. Any decision to change interest rates, for example, will have already been discounted by hyperopic analysts. Mr Draghi like Mr Carney will push the forward guidance to ensure a target natural number is met – an inflation level or a growth rate target. On a quarter-to-quarter comparison, EU growth averages less than 0.5%. It is but a number. The Fed sets an unemployment target number of 7%, however measured, and only when unemployment converges to that number will the Fed signal an interest rate change. However, Godel’s incompleteness continues with the austerity mess, and the game of number predictions.

Waiting for Economics

What has happened to macroeconomics in the hands of bureaucrats and politicians? Once there was a policy mantra, P: ‘low (high) inflation explains currency appreciation (depreciation)’ and ‘low (high) interest rates explain currency depreciation (appreciation)’. The US Fed added QE which contributed to a devaluing US dollar. The ECB has been anxious about the strength of the Euro v US dollar, but the Euro has depreciated against Sterling. Is the interest-rate differential between the US and EU so much greater in natural number counting than that of the EU and UK to explain a depreciating-appreciation Euro. If policy prescriptions, P, each represent examples of the Gödel sentence that each time a new policy statement is added as an axiom, there are other true statements that still cannot be proved. We have the liar’s paradox embedded in economic policy decision making: Nominate a P. ‘P is false’. But it cannot be true for then, as stated, it is false – nor can it be false, for then, it is true.

Signals and Noise

Interest rates and inflation figures are Facts, they are numbers. Natural numbers that are allowed to guide policy – it is a mess. EU faces a deflation trap defined by a long period of low inflation, below a target rate of 2%.  The Economist in its May 24th 2014 edition referred to this period as one of ‘lowflation’. Mr Draghi had signalled in early June 2014 how he intended to tackle the imminent threat of deflation – lower interest rates and a European style QE boosting credit by providing funding to banks on the condition that they lend to business.  Now we await the ECB meeting this week (September 4th). He will be reminded that the economic fundamentals are just numbers. Interest rates, exchange rates and inflation are natural numbers. The EU target inflation is 2%, ECB interest rates are now at 0.15%, falling from 0.25% and the Euro/Sterling rate of exchange fluctuates around 0.7911 and 0.8123. Natural numbers but with a potent impact on policies that directly affect everyday life.

1944-2014: Breton Woods to Brisbane

Did Mr Draghi signal at the Jackson Hole meetings last month that the Eurozone needs a relaxed fiscal and monetary policy? Will we see a signal from the ECB this week towards a purchasing of securitised assets? According to European Commission figures last month (August 2014) Eurozone inflation was at 0.3%, well below the target of 2%. In the real economy, however, bad banks dominate the landscape, unemployment continues to rise and growth remains stagnant. Yet our policy makers remain persuaded by Facts and data and numbers.

A reliance on Facts and numbers will continue to stifle policy making; it will ensure that Europe is at least a decade away from any numbered gains in productivity, any increases in real wages or any increases in growth. There is always hope. But in the reliance on Facts and data there is a great danger for policy makers sailing between the Charybdis of raising interest rates too soon and the Scylla of raising rates too late.

Analysts could be predicting a weakening Euro, strengthening US$ and Sterling as we end 2014. FX analysts will try to predict likely movements in the currencies but currency misalignment still continues. Indeed, in a world of numbers we will continue to ask: whither the Euro and Eurozone economies in an era of stagnant growth? But unless ECB engages with QE, Europe will continue to drift into debt-deflation cycle. Maybe there is hope that at the G20 in Brisbane later this year our policy makers will consider an interim regime of managed exchange rates across the world #tuncnunc to facilitate a return to economics. Earlier discussion on managed exchange rates on http://www.patrickmcnutt.com/news/signalling-china-and-the-us/

NOTES:

Godel’s Theorem

Gödel’s theorem shows that, in theories that include a small portion of number theory a complete and consistent finite list of axioms can never be created, nor even an infinite list that can be enumerated by analyst’s computer programmes.

SIGNALS

 € Appreciates: Low inflation and High Interest Rates

If appreciates expect lower inflation, and high real interest rates

€ Devalues: High Inflation and Low Interest Rates

Low and negative rates of interest € devalues

 NOISE

 € Appreciates: Low inflation and High Interest Rates

If appreciates expect lower inflation, and high real interest rates

Higher unemployment and downward pressure on wages

Internal Member State devaluation

 

Activist shareholders, Tobin’s q = Marris v

Investors generally over-react to good and bad times. Equity values are now increasing at a decreasing rate across the indexes as investors anticipate corporate earnings and begin to read the signals; many investors extrapolate past share price performance, and using an moving average or charting the trends in the share price are de rigueur in the search for a Fibonacci pattern. Management are in a signalling game with shareholders, especially the activist shareholders who are demanding changes in the execution of strategy. From Pepsi to Apple from Hertz to Red Lobster, activist shareholders are trying to break up companies, demanding change from management. In http://www.mheducation.asia/html/9781259071065.html Chapter 4 of Decoding Strategy we define the activist shareholder as Bayesian – seeing what they want to see at a point in time. As Aristotle observed in Rhetoric it ‘is a matter of putting one’s hearers, who are to decide, into the right frame of mind’.  It becomes a constant exchange between activist shareholders and the management team of the targeted company. Most prominent today is Carl Icahn; he sees a pot of cash in Apple and is urging a share buy-back. The Apple C-suite management team are a player in a game of signalling and they should really engage in positive learning transfer [PLT], by signalling to shareholders how they intend to execute strategy, re-assuring them that further innovation will support a continued rise in the Apple share price.

All shareholders prefer high expected returns but they should also be concerned with the impact of signalling on share price performance.  Signals can be observed at any time: check the business feeds from CNN, cnbc or Bloomberg. Apple at US$554 January 24th 2014 9.37 ET is not the call – rather it is Apple at a sustainable US$800 by end of 2014. And that target price depends has a co-variance matrix that depends on (i) the outcome of market share zero-sum game with Samsung; (ii) Apple’s penetration in China with China Mobile and (iii) the launch of a nano-iPhone. The latter has been a theme of this Blog, notably in an open Memo to Ms Ahrendts: http://www.patrickmcnutt.com/news/memo-to-ms-ahrendts/. A nano-iPhone launch would signal innovation – the real challenge, however, is not just in the timing of a launch date but the price point. It should be competitively low priced with a volume throughput encroaching demand from low end smartphones across the world. We should be debating the sweet price for an advanced well specified nano-iPhone not the share price of Apple.

Mant of these issues are accommodated within the Marris methodology; for example, failure to re-invest the cash or any signals of lagged innovation can damage the long term value of the company. Bayesian shareholders are attracted to companies like Apple and Red Lobster’s parent company Darden Restaurants. They are unlikely to praise management. But as shareholders they are frustrated. In game theory language, they believe that management are bounded rational or limited in their decision making. A nano-iPhone signal to the market would be a better play for Apple executives now than a share buy-back. New product launch is a classic PLT signal, re-assuring investors that Apple executives are playing to win the game, not playing to lose. In addition, it could relax the constraint imposed by activist shareholders.

And the Marris v – probably better known as Tobin’s q – is a reliable metric in our game theory tool-kit where rational investors are also concerned with how their share portfolio co-varies with the signals in a signalling game. It is the ratio of market value and book value or the replacement cost of the firms’ assets. Combined with other metrics, the Marris v offers a guide to investors: if v > 1 consider a sell and if v < 1 consider a buy. Who didn’t buy ARM at 95p in early 2009? Taking a moving average of v, defined as v if v > v consider a sell and if v < v consider a buy.

Compare Intel v ARM share prices over the past 5 years. The relative high performance of ARM’s share price from less than £1 in early 2009 to £9.80 at 10.44 GMT January 24 2014 reflects management PLT, their innovation and their attack on Intel’s dominance in the chip market and Intel’s lagged response to getting its chips into smartphones and tablets. Intel management were bounded rational. They tried to acquire ARM but antitrust law prohibited the acquisition. Tobin’s q is interchangeable with Marris v. Both rely on market valuations; the Marris v, however, should be understood in terms of PLT. Management’s type, that is, their ability to define the game dimension and their ability to win the game represent an intangible asset in the Marris v. The Marris v by relying on market valuation avoids many of the descriptors of accounting profits wherein high profits often equate with a monopoly position. But it could also be the case that companies with high market shares earn profits not attributable to concentration in the market – they are more efficient and more innovative than their competitors. Observe the share price and the investment commentary but when v < 1 or v < v step back, read the signals, make a judgement call and consider a buy as a long term investment – do not look back and do not regret the decision once made.

Who Owns our Personal Data?

 Who Owns our Personal Data?

Personal information and data stored in the cloud have an inherent high ‘tradable’ value – they facilitate the discovery of patterns.  We trust the providers and processors and distributors of the data, they retrieve our personal data and they can and do use it. Our data is now a tradable asset. But who owns the information? In Chapter 12 of our 2010 book Political Economy of Law http://www.elgaronline.com/view/9781848445215.xml we had discussed property rights and consumer e-needs in an Internet era arguing for the integration of the economics of information into legal reasoning. There is a new challenge for the law, relying on ‘material facts at time period t when technology has already taken the market to time period t+T (pp306)’. Google believes that the information it is harvesting is its own by virtue of the harvesting. But you and I, as e-consumers, have claim rights to our personal data. Data exchange has become a transaction and we need to ask: who benefits from the trade in our personal data?

At the recent Midland’s Think Tank http://midastechnologies.ie/agenda/ in Mullingar, Ireland, I raised this issue in the context of how we could use this market exchange to our advantage in Ireland? A cloud services free trade zone [FTZ] in personal data and data patterns was presented as worthy of consideration.

At the Think Tank a range of interesting presentations were outlined and provided a great platform to showcase the greatest technology advance since the 1980s digital revolution – the Internet and all its applications.  The Internet is part of our daily lives. Not only is it the screen in front of us but also the back infrastructure of wires and machines.  We were told that there is an exponential growth in data and a reliance on data. Individuals are outsourcing memory to smart devices such as smartphones and tablets; we are reliant on pre-authorised smartcards, buying tools and Apps to support basic queries and purchases. SEPA when rolled out will smooth electronic transactions. Companies are migrating from in-house IT to outsourcing data storage.

We have become datified…..

In the June 2013 edition of Foreign Affairs the authors Cukier and Mayer-Schoenberger argued that we have become datified – Google’s augmented-reality glasses datify our gaze, Twitter datifies our thoughts and LinkedIN and Facebook datify our professional and personal networks. Datification, we contend, is a pre-requisite for third parties as they begin to extract an inherent ‘tradable’ value in our data patterns. But who owns the information? Do Google and Facebook, for example, own our data?  The EU Commission in their definition of ‘personal data’ in the Internet era are debating the traditional rules of data protection viz 2014 General Data Protection Regulation. Commissioner for Justice, Viviane Reding, commented recently in Global Insight that ‘personal data is the currency of the digital economy’ and that by 2020 it will account for 8% of EU-27 GDP.

Our data is at least worth the equivalent of 8% of EU-27 GDP before exchange and trading. Tradable personal data is a good example of the frozen market concept introduced in Political Economy of Law. Frozen markets uniquely evolve from ‘a latent underbelly of technology struggling to meet new challenges and set new standards in a modern economy (pp312)’. We should recognise the frozen market and persuade governments to transfer the trade in personal data to a cloud services free trade zone in personal data and data patterns.  With so many start-ups and legacy IT companies in Ireland, there may be an opportunity to bring them all together under one umbrella – a cloud services free trade zone, providing storage solutions, security and surveillance capabilities. The cloud zone could be designed as a ‘special services’ zone similar to the Shannon FTZ.  All IT companies registered would enjoy a 3 -5 year sunset clause of special tax incentives for employing IT staff. Information would be stored and processed into data patterns in the cloud zone. It is only when the data is traded does it become subject to Irish value-added tax or custom duties.

Free Trade Zone in Personal Data…

Mixing a tablespoon of skilled labour with a dose of FTZ is a recipe for baking the projected 8% of EU-27 GDP into an employment cake of highly productive Stakhanovite workers in the age of automation, technology and innovation.

One way to integrate the complexity and potential of the cloud is the organisation of a cloud free trade zone, subject to legal, regulatory and environmental issues. It could be established under an Irish or pan-European variant of the US inspired 2009 Alternative Site Framework [ASF] initiative, by re-organising the Shannon FTZ into an alternative site framework in cloud services spread across ‘magnet sites’ from Mullingar to the Inishowen Peninsula in Donegal. In this the 50th anniversary year of the Shannon FTZ it could be part of planning for the next fifty years of economic growth in Ireland reliant in part on personal data as a tradable asset.  Data security is paramount and our reliance on the data-keepers is dependent on trust and on transparency in their use of our personal data. A cloud services FTZ in personal data could provide both trust and transparency. Questions may arise – do we really own our personal data patterns? Who benefits from any trade in our personal data? Answers should be diverted into exploring options that will create new job opportunities in an Internet age characterised by a shrinking role for human labour.

Memo to Ms Ahrendts

MEMO

Re: Apple Inc: Play not to lose: Minimax strategy

Dear Ms Ahrendts

Congratulations on your recent appointment. We have been commenting on Apple for a number of years in this Blog, and from the perspective of game theory. You should challenge everything about the data – market share figures, consumer loyalty and the source of the competitive threat. Apple does need to refocus, to reshape its strategy in order to compete in an evolving game that exhibits both convergent technologies and rapidly changing set of consumer preferences. Are you a brand? Are you a design company or an innovator? Analysts look at Apple in terms of profit margins and a company trading on earnings estimates and revision of the estimates. With new product launches across the i-suite of products, coupled with an underlying iOS ecosystem, they look forward to new product launches, and endless queues by early adopters and loyal fans at different cities across the world. But from our perspective, observing Apple as a player in a game, we would adjudge that you are not winning the game.

Confused consumers

First of all, your product offerings are in danger of becoming nodoids: in other words, they come to represent nothing more than a roll-out across a common platform of a suite of not dissimilar products absent any innovation. Consumers are either underwhelmed or disappointed. Once they ask the nodoid question: ‘is an iPhone an iPad or is the iPad an iPhone?’ the game dynamic switches from a game of playing to win to a game of playing not to lose. This is happening. Secondly, the analysts expect the i-Watch – so what? Analysts continue to debate the next big thing. So what? Could it be IPTV or cloud solutions?  So what? You know that you are not in search, you know that you are not in digital mobile advertising, you are a late entrant into cloud services, you failed to acquire Twitter, SIRI failed, Newton failed in the 1990s and in 2013 you allow us to believe that you are not a player in IPTV.

We have argued this before #tuncnunc discussing a range of game solutions to consider: launch a nano iPhone or engage in a telecom alliance with 4G LTE providers such as China Mobile. The 5C launch is about maximising profit margins; a nano offensive play, however, would ignite a $99 ‘sweet price’ competition for full functionality smartphone devices. Forward guidance on the stock estimate above $500 may adjust for these events in 2014-15 but these events may now be too late from a game perspective to play to win the long game. In other words, no longer is it about how Apple is performing in 2013, it should be about Apple’s likely performance in 2023.

 

 

Second mover advantage: SMA & Minimax

So an alternative for you to consider in your new role is to secure the second mover advantage [SMA] by playing not to lose. First, recognise that your market shares are increasing at a decreasing rate. Correct that trend. The iPhone 5 delay, for example, created a zero-sum switch to rivals, notably Samsung, in the UK and possibly across the EU. Your smartphone market share is under threat in Asia as the convergent smartphone and tablet game evolves to become Apple’s game to lose. Start thinking like your competitors – reason like this: ‘I think-you think-I-think’: Apple thinks that Samsung expects it to defend the iPhone, so Samsung will attack the iPad. But Samsung believes that Apple will reason this way, and so assuming that Apple will defend the iPad, Samsung will attack the iPhone. But Samsung also knows that Apple will reason this way.

This line of reasoning suggests that some kind of a decision tree ‘what-if’ analysis will reveal which strategy is Apple’s optimal choice. But it is more complex than that – we argue in our new book Decoding Strategy that how either player does in the game depends on what each believes the other is likely to do. Apple has to choose to play a minimax strategy, that is, a strategy that minimizes the maximum amount Samsung can expect to get in the evolving smartphone and tablet game, and thus maximize the amount Apple can expect to win. It is for you to patch a minimax strategy into your strategic vision for 2014 and beyond. To quote T.S.Eliot: ‘What we call the beginning is often the end, and to make an end is to make a beginning, the end is what we start from’. With best wishes in t+1…..

Drifting into a debt-recession trap

The despondency that has attached itself to the financial crisis is ‘taking shadows from the reality of things’. Dante would not approve. Europe is drifting into a prolonged recession as policy-makers worry about inflationary expectations and competitive devaluations. Households hope to be delivered from this agonizing crisis.  Are there solutions? The following is a grand narrative of policy options, contingent on a managed exchange rate regime, an idea first aired in the Letters to Editor page of the Financial Times in 2009. G20 has not acted. They meet in Mexico – maybe recent Yen, RMB, Euro, Sterling, Swiss Franc and US Dollar movements may persuade them to look at the role of exchange rate fluctuations ‘midst this financial crisis as Europe drifts into a debt-recession trap.

Drifting into a recession

There is a palpable sense of despair and hopelessness, a lack of demand yet inflationary expectations have become embedded in the policy-maker’s crystal ball. The real economy of households and companies is shrinking in a vacuous cycle of intermittent growth as rising bond prices and lower yields improve the real economy of the investor. Banks, the exogenous factor in the policy-makers’ macro-economic models, still fail to understand that job creation, time-to-build technologies and innovations require a flow of credit. Personal balance sheets are moving into safe harbours, given the wealth destruction that has occurred in the property and equity markets and will continue for the foreseeable future. Anybody who can is saving, more are spending less. Welcome to the debt-recession trap.

Household balance sheets

Recovery must be centred on the household balance sheet; however, household budget patterns are unpredictable. Current decisions depend on expectations of what future policies will be. This is a conditioned response for households in a debt-recession trap. The mismatch between policy-maker and reality creates a short period – a phenomenon that households imagine if they change demand and spend more the other households will neither keep demand unchanged (so all increase demand and prices go up) nor continue to keep their behaviour unchanged (so bargains become available to the first mover) if they alter their behaviour. How each household responds depends on how each believes the other will respond. The result is demand is less, output is less and the recession is prolonged.

In the interim, households have adjustment costs – no interest income from government bonds, no dividend income from company-issued equities and minimal after-tax spend so unlike in the macro-economic models of our Central Banks, households are not seeking to maximise the concave single-period utility function subject to a budget constraint wherein the present value of consumption equals the present value of disposable income. Savings, for example, in a debt-recession trap signal to policy-makers that rational householders are experiencing low levels of expenditure in the present period due to the short-period phenomenon thus reducing the marginal utility of expenditure in future periods. So there should be a greater willingness to spend when the personal balance sheet are restructured.

Policy prescription: reduce income taxation to increase after-tax spend

QE and the US Dollar

During the Great Depression banks restructured their balance sheets; reduced loans in absolute and relative terms and invested (mainly) in government bonds. Isn’t this happening today? The ECB/Bundesbank believes that purchasing government bonds is tantamount to monetising government debt, thus leading to high inflation or a loss to the ECB on a government default. Paradoxically pre-crisis banks were turning government bonds from across the Euro zone into cash at the ECB, as governments borrowed and the banks relied on short-term funding. So really, all Central Banks – the Fed, BoE, BoJ and even ‘the outright monetary transactions’ policy at the ECB/Bundesbank facilitate the buying of government bonds – so why the mystery?

The Fed signals less worry about inflation through QE and the printing of money. Lowering interest rates may be devaluing the dollar but it is facilitating increased US export competitiveness. Central Banks that want to support their currencies are willing to increase interest rates. The Fed does not. The US dollar has been captured by Fed announcements. It is widely accepted that QE has contributed to a weak US dollar.

Exchange rates

When Timothy Geithner described China as ‘a currency manipulator’ in 2009 the exchange rate became politicised. More recently, Jens Weidmann, President of the Bundesbank, expressed concern about Central Banks’ efforts to revive exports by facilitating competitive devaluations. Did he have the Fed in mind?  Music to the ears of Brazilian Finance Minister Guido Mantega, who first signalled the ‘currency wars’ in 2010 as Brazil worried about an overvalued real. Its current account deficit is now contributing to a reduction in its economic growth. And the new PM of Japan, Mr Abe has had an impact on the Yen’s exchange rate pushing it from 78 per US dollar to 89 as he asked the Bank of Japan to double its inflation target to 2% – and to buy government bonds until that target is met.

Policy prescription: looser monetary policy and higher inflation targets

China and the Yuan/RMB

Elsewhere www.patrickmcnutt.com/wp-content/uploads/ChinaRMB.doc we had argued that Yuan appreciation will not and cannot solve the Sino-US trade imbalance. China in time, will, we had argued then, move to a more flexible exchange rate regime but at its own pace. It could occur during the 12th Five-Year-Plan 2011-2015 as economic growth in China becomes less reliant on export-led growth. By 2015 China trade and FDI flows will have moved away from US and Europe and more towards what we had described as the ASLEEP economies www.patrickmcnutt.com/video/cnbc-financial-crisis-interview/. We agree with Professor Subramanian at the Peterson Institute for International Economics that the RMB could displace the US dollar as the leading reserve currency in the next decade. Trading nations and TNCs are already diversifying into RMB – being able to trade in RMB reduces transaction costs and mitigates currency risks for exporters. Liquidity from China could relieve any inflationary pressures in trading economies.

Solution Template

Many trading nations are considering a looser monetary policy combined with a higher inflation target – it presents an optimal policy and an escape hatch in a debt-recession trap. An inflationary bias in the conduct of monetary policy might be optimal if inflation shocks can lead to (welfare enhancing) increases in output. Albeit, any comparative statics exercise emanating from policy-makers’ models should be interpreted with great caution. A looser monetary policy could drive their respective currencies lower but any hope of sustained growth will be frustrated by a beggar-my-neighbour policy of competitive devaluations in the race to win the greater share of increased exports.

As previously outlined, http://www.ft.com/intl/cms/s/0/bb726952-6b57-11de-861d-00144feabdc0.html#axzz2KtE2NBLz a period of managed exchange rates may be required under the auspices of G7, and ultimately G20. Europe, specifically, and the G20 trading nations more generally, need to manage their monetary and fiscal policies within a managed exchange rate regime in order to escape the debt-recession trap.

Policy prescription: managed exchange rate regime to align world currency fluctuations.

Rational households and companies may have ‘parked’ demand and production, delayed in the anticipation of an inflationary period with looser monetary policy and competitive devaluations. If their expectations were managed within a managed exchange rate regime then there could be some hope that the real economy may improve as the worlds’ trading nations together plan an exit from the financial crisis. ENDS/PatrickMcNutt

Fiscal cliff and Kantian equilibrium

The fiscal cliff is the Nash Equilibrium [NE]..it is the best the Democrats can do given the reaction of the Republicans; they will debate big ticket items on spending asnd taxes but both know that neitherparty wants to go there  –  but it will happen if there is no compromise, according to game theory. The NE is often best understood as a ‘trap’ to avoid, but you can only avoid it, if there is compromise, and we can only compromise if I trust you and you trust me! The ethical dimension to this can be found in the answer to ‘who will compromise first’, that is, fulfil duty and take responsibility to find a Kantian equilibrium; the Kantian sequence could be observed….Move A:  I move first, then you follow: Move B: you move next and then I follow..Move C: we both observe each other as ‘taking responsibility’…How either party moves in the sequence and thus ‘fulfils duty’ depends on what each party believes the other will do…you might just be about to read these signals in the US.

Spin-0 for Apple in a French defence: from iPod to iNext or acquire a telco?

In our previous Blog entries, on the smartphone and tablet market, we referred to the market as a game, G. In G a new phenomenon has occurred, created by a convergence of technology coupled with rational consumers asking: is the iPhone5 = a mini iPad or is the new iPad mini = iPhone6? This line of questioning, we believe, translates the Apple products into a scalar (spin-0) with no strategic direction. A scalar product, if you recall from physics, only needs a numerical value, and is not attached to a direction. Where is Apple going? Earlier this year, IDC Research reported that Apple’s share of the global market for tablets fell sharply in 2012 from 65% to 50%.

Strategists therefore need to ask the entropy question: do gains necessarily accrue to Samsung, Amazon and Asus or are rational consumers simply waiting or delaying buying Apple devices? To find an answer, we posit that Apple products and non-Apple products may share common features and functionalities but they do not overlap, thus creating lines of adjacent vertices in an evolving market share game.  Furthermore, Apple may have the greatest App store in the game but as it continues to rotate through iPod, iPhone and iPad to iNext, spherical  competitors from anywhere at any time to will enter the game and win.  Rational consumers delaying a purchase and the convergence in rival technologies facilitate competition, and by Q4 2011 Google powered devices began to close in on Apple’s dominance. More recently, Microsoft’s Surface, the Google-Samsung Nexus 10 running on the latest Jelly Bean software, the Amazon Kindle Fire HD and the Asus-Google Nexus 7 have emerged as formidable competitors in the game.

What if the XBox music internet service has the potential to impact on iTunes? Investors are not clueless about the technology convergence nor are they aloof to the need for an optimal strategic response from Apple. With a cash balance that is equivalent to a quarter of its CAPM, investors will want more investment. They may ask: why not acquire a telco? The iPhone5 can indeed promise 4G technology, albeit not everyone, who has an iPhone 5, nor anyone anywhere in the world, who is thinking about buying an iPhone 5, will be able to avail of 4G. There is no point really in offering rational consumers a new fountain pen without the ink! As rival competitors continue to enter the game G, the family of competitors grows and new features and functionalities create entropy and adjacent vertices that will limit Apple’s progress unless they join the family.  For example, today in November 2012, Apple is not a key player in social media, digital mobile advertising, OLED Smart-TV, nor is it dominant in cloud computing, NFC and mobile e-wallet payments. They could be in time, many investors hope that they will – sometimes this is not how it works.

Apple can fail: who remembers the Newton in the 1990s? Or the more recent befuddled roll-out its mapping service?  The more we observe G the more convinced we are than it mirrors a game of chess. But is it a game of French defence where it will be challenging for Apple (White) to hold on to the centre as opponent’s attack its Queen (iOS) quickly and swiftly, faster than any counterattack from Apple.  Maybe Apple should stop defending its pawn line of iPod-iPhone-iPad? Acquire a telco. In chess language, Black is out to attack the pawn line. What is Apple’s optimal sequence of moves? Is the ecosystem a sub-game of Alekhine defence by Google (Black) or Android alliance (Black), allowing its King’s Knight (Android) to be positioned across the board so as to weaken White’s centre pawns? We will take up these issues in next Blog entry – our continued recommendation for Apple is to play not to lose rather than play to win.

i-Lag or Byte of the Apple

The smartphone has evolved from new gadget to just another gadget – it has become commoditized.  The Razr i will indeed allow you to switch quickly between the web, play games, send texts and take photos. Will iOS 6 disappoint as consumers realize that it begins to slow down your iPad2 and is backward incompatible with the new generation iPod touch?  A case of i-lag will emerge as random consumers begin to ask: why upgrade to iPhone5? Why queue? Why buy Apple product? The convergence of technology will trump the key players as spherical competitors from anywhere at any time enter the game. Google’s Motorola has now unveiled its first smartphone with Razr i, a social media and mobile advertising market game began without Apple, SmartTV technology resides with LG and Samsung, and the new spherical competitors in smartphones are likely to be the Chinese players, Huawei and ZTE. Forget the device; the game has evolved from a game of competing ecosystems, OS v Android and 4G technologies to one of consumer expectations. Rational consumers have no idea what they want, but whatever it is, they want it now.  So expectations are dangerously high, matching them with low prices may be an optimal response. Judicious pricing policies will facilitate a winning strategy. We have argued before in this Blog for a nano-iPhone – a strategy to compete on price against the impending challenge from Huawei in the US. Launching a nano is a dominant strategy for Apple Inc because its payoff in the smartphone game will be (i) always at least as much as that of iPhone5 [whatever Samsung or Huawei do] and, (ii) at least some of the time actually better in the evolving game of commoditized smartphones.

Refer back to Blog entry: Simon en-cycling to SMIN!

Refer back to early Blog entries: The  Brontosaurus paradox

Economic Damage & Spoiled Markets

Markets are spoiled when policymakers place greater worth on the value of a penny saved than on a pound spent on doing something. Consumers prefer to save instead of spend, as each fears to spoil the chance of getting a better price later. With a declining demand at a time of positive technology expectations, economic damage embeds itself into the spoiled markets, as the experience of buying and selling in bad times influence future behaviour and the damage will occur and recur in a pattern of lifecycle debt and deflation. G20 policymakers could endorse global policies that borrow more of the future and spend in the present. The economic damage today is in government cutbacks, indebtedness, redundancies, job losses and credit restrictions. Although technology and innovation cycles are visible across many products and services, although we are in an information business cycle, any expectant boost to world growth has been muted by the debt of economic damage. Banks had had converted a simple banking exchange of deposits and lending into a complex debt instrument exchange system – complex betting on the probability that a no income, no job or assets (NINJA) loan recipient would repay. They have spoiled banking, they have lost credibility as their profits continue to be privatised, and their debts socialised. The recent initiatives from ECB and the Fed represent a pan-QE3 frontal attack on a stubborn world economy that is stumbling into an era of deflation and economic damage. The QE3 is a positive signal, it has a chance of success, but more has to be done now.

Greek crisis is a sub-game

Europe is in the long game of a United States of Europe and the Greek crisis is one sub-game in the time continuum, but the sub-game to watch in order to define a Nash Equilibrium is a Euro currency crisis…such a crisis has not happended although the Euro at May 2012 is devaluing against Sterling and US dollar.  I had made a similar point in an interview on Bloomberg London last May 2012 [available on my webpage]. A Euro currency crisis will dictate the elements of a final solution [whether Greece departs from the Eurozone]…a devaluing Euro now plays to Germany’s strengthens as an exporter……so we need to look at the Euro as a currency, its stability, its continued credibility as an international currency; if it continues to devalue and risks the United States of Europe then we could observe IMF and G20 exchange intervention [check the Yen crisis in 2011] so it is the Euro currency signals to observe as a critical pattern in order to find an equilibrium and thus comment on the present…For the moment the Euro currency is stable in a devaluing mode, the Greek crisis is a sub-game, of secondary importance to the primacy of the Euro and United States of Europe.

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