MTV music videos: Making Money on Line

We’ve commented before on the near-impossibilty of teasing decent inflation estimates out of China. Despite that, we were early to comment that inflation was getting out of control. From a joint post with Marshall Auerback in February:

The government has engineered an enormous increase in money and credit in the past year. In fact, it seems to be as great as 5 years’ growth in credit in the previous Chinese bubble. The increase in money and credit is so great and so abrupt that you tend to get a high inflation quite quickly even if there are under utilised resources. Add to this the fact that China simultaneously is providing massive fiscal stimulus.

This combination is the making of a very messy situation. If China seeks to sustain demand via fiscal policy, the result is likely to be a big inflation problem. With many Chinese students steeped in Chicago School monetary theory coming home and assuming positions of authority, they could push for an aggressive, Paul Volcker-style effort to stop inflation.

But, what if the they don’t? Inflation can take off and thereby begin to ERODE the competitiveness of Chinese exports. Nouriel Roubini pointed out this issue in 2007: if China didn’t revalue, inflation would do the trick regardless. A continued high rate of inflation relative to its trade partners would push up the price of goods in home currency terms, which in turn translates into higher export prices. This might be the real reason why China is so reticent to revalue its currency. The Americans might go crazy if the Chinese devalued, but if the inflation is high enough, they might have to do it, as it will severely erode their terms of trade and cause their tradeables sector to collapse.

Or the hard-line monetarists triumphing by fighting inflation and the result is riots as unemployment increases.

Note that we pointed out that China was becoming less dependent on exports, but by increasing investment, which we also saw as unsustainable:

Exports are the only area where China makes any kind of money because they can sell these products for about 10 times what they obtain for a comparable product in the domestic economy (where profits are virtually nil). The export sector is a big contributor to overall super excessive fixed investment in China. Dollar appreaciation means foreign direct investment will go to zero net.

There will be strong forces for a reduction in fixed investment in this large sector. Hence, there is a good chance that even without monetary tightening by the Chinese authorities, the overall fixed investment boom in China will turn down….Nobody is thinking about this scenario but it is a real possibility. And with fixed investment now at fifty per cent of GDP (which is unprecedented in any economy) and exports at more than thirty, we’re looking at ratios that have never been reached before on a combined basis.

And the story in recent months from China has been of evidence of inflation. Consider this recap from Patrick Chovanec:

I’ve consistently argued that pent-up inflation poses a serious threat to China in 2011, I’ve also been predicting that we would almost certainly see the CPI rate dip in December, given the government’s high-profile crackdown on food prices. My reasoning was based on politics, not economics: it was politically imperative for China’s leaders to show they were taking action to rein in the skyrocketing cost of living, and they had the tools at their disposal to enforce a short-term, targeted result.

Price controls, and related crackdowns on speculation and hoarding, make bold headlines but do nothing to solve the economic pressures causing inflation. In China, those pressures arise from the fact that, due to China’s stimulus policies, its money supply has expanded more than 50% over the past two years. There’s just more money out there chasing the same amount of goods. Capping prices can’t change the fact that money buys less; it only changes how people are forced to deal with that fact – usually in a way that creates even bigger problems, like shortages or black market corruption.

Peter Tasker, in a Financial Times comment, argues that rising wages pose a fundamental challenge to China’s strategy:

The China story that has been sold so skilfully all over the world is simply another version of the “new era” thinking that has characterised every investment mania from the South Sea bubble to the dotcom frenzy….

There are good grounds for concern about the future. A significant increase in the profit share of national income, as we have seen in China this century, implies a significant decrease in the labour share – meaning that wages fail to keep up with economic growth. The other side of this is apparent in the gross domestic product numbers – a decline in the contribution of consumption and a ballooning dependence on investment. The longer these trends continue, the greater the ultimate reversal.

We’ve seen this movie before – 40 years ago, to be exact. In the 1960s Japan was achieving year upon year of double-digit GDP growth, fuelled by government-directed investment into infrastructure projects….

In the mid-1950s, Japanese labour had taken 60 per cent of total value added. In the miracle years this ratio fell to 50 per cent, then started a V-shaped recovery in 1970 as the labour market tightened. Ten years later it had soared to a plateau of 68 per cent. These gains had to be fought for. In the 1970s, Japan’s now dormant union movement was in its heyday. Profit margins were squeezed, and in real terms the stock market went nowhere for a decade.

Can workers grab a bigger share of the economic pie before the urbanisation process is complete? In Japan they did. In 1970 Japan’s urbanisation ratio (the proportion of urban population to total population) was still just 53 per cent. Currently the Chinese urbanisation ratio is 45 per cent, roughly where Japan was in 1964. However, Chinese statistics are notoriously unreliable. The floating population of unregistered urban migrants is estimated at between 50m and 140m people. So China’s true urbanisation ratio may already be close to Japan’s in 1970.

If China were to follow Japan, the next stage would be labour strife and inflation. The best way to avoid that outcome would be a radical tightening of the current super-easy monetary policy. But that would risk a serious slowdown and probably necessitate a large revaluation of the renminbi – both anathema to Beijing. Meanwhile, China’s reliance on a cheap currency is helping to fuel a trade war, in the words of the Brazilian finance minister.

There is no good way out of the corner into which China has painted itself. Rebalancing the economy is absolutely necessary. It is also a long-term project fraught with risks for China’s rulers – and for investors who have bought the story of inevitable western decline and unstoppable Chinese ascent.

The tendency of businesses and economies is to push successful models to their breaking point. We’ve over-relied on consumer debt and a cancerous growth of the financial sector; China has become unduly dependent on exports and investment. And each nation is fighting tooth and nail to stick with its old habits, precisely because the elites who’ve benefited from these strategies still wield considerable clout. So change is likely to come about only via disruption.

Values, Value and Valuation — The money is all relative

Oh how timing sometimes works out to be funny. I was driving home tonight and started thinking about the value of products, the valuation of companies and how the values that a company portrays can change the rest. No sooner had I sat down to write this piece than the news of Goldman Sachs investing $500 million into Facebook broke and refreshed the entire thing in my mind. So let’s look at these three things, and try to see if one manages to sway the rest.

Values

Do you, like me, find yourself more inclined to use or purchase something that comes from a company that you can believe in? The ethos of a company can — for me at least — completely break me away from the product. That very fact, because I feel that I’m likely not alone in my actions (or lack thereof) can have a serious impact on the bottom line of a company.

Look at Facebook, for instance. When the Social Graph was announced and the new privacy changes went into effect, many people threw up their hands in disgust. But many others continued with life as usual, even if a bit annoyed. Why? Because Facebook has this outward appearance of a company that’s simply trying to do cool things, and it needs information in order to do them. The company’s values seem, for the most part, to be in line with the things that we Internet users want. As such, there was a lot more wagging and a lot less barking from the angry dogs crowd.

You’re starting a company? There’s likely something to be said for developing an ethos ahead of time, making it known and then sticking to it. Would Google be where it is today if not for the “don’t be evil” tag line? Even if you don’t fully believe that the company runs that way, you still remember it. Point made.

Value

When value exceeds cost, even by a single cent, the purchase will be made – Grant Cardone

That quote is one that has stuck with me for some time now. A few years ago I was making my living selling cars and it is sometimes exceedingly difficult to overcome the objection of price. In the technology world, we’re constantly being offered products for “free”. The only cost? A bit of information, a slice of our privacy or somethings similar. But then, after using those “free” products, we start to build our own value for them.

Don’t believe me? Just look at some of the things that you likely use every day. Gmail? You’d pay for that. Twitter? You don’t want to admit it, but it’s likely become a valuable asset to your daily Internet life. The same can be said for so many things and yet we get them for “free”. But there’s a down side to this issue as well — it becomes very difficult for a maker to charge for a product when there are free alternatives. Don’t believe that? When was the last time that a box office movie didn’t get a torrent version?

And yet, even as companies try to build value in their products, still others think that the economy allows for them to set their own values and tell us what something is worth. TV networks are probably the most well-known perpetrators of this heresy. Apple TV launched, ABC and Fox decided to jump on board and see what would happen. Some of the rest? They decided that $.99 was devaluing the product and yet as the provider of the product, there is no one entity that is more unqualified to name the value.

Consider it a lesson in business, I suppose. The potential buyer will determine the value of your product. Always.

Valuation

Now here’s a sticky one. Valuation is one of those strange things because it means so many different things to different people. To the potential investors, it’s a measure of how much money can be made. To the business owner it’s a gauge of how well the business has done. To the end user? It’s…honestly not much.

As a case in point, around TNW we love Twitter. We want to see it succeed and we are sure that it will. The valuation continues to climb prior to any IPO and yet, as users of the service, it really doesn’t matter much to us. Sure, it would matter if the site closed its doors, but beyond that there simply isn’t anything about the valuation number that matters.

And so, as an entrepreneur you have to ask yourself where the balance lies. Do your company values allow you to build value in your product? If so, then the chances are that your valuation will end up right where it needs to be. There’s a fair amount of truth in the thought that, if you handle the small stuff, the big stuff will fall into place.

So with that, I offer you a thought going into the new year — start with your values. The rest will fall into place.

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Thursday, January 13, 2011

Making Money on Line

Values, Value and Valuation — The money is all relative

Values

Value

Valuation

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