Joining the Chorus–Sequestration: Any Fiscal Austerity Now is a Mistake

Everyone with a brain has commented on Sequestration and what should be done instead–some with sound logic and facts and data to support their view. The most recent brought to my attention in a comment by Tom Gallagher, via RenMac, is an analysis of the impact of austerity in Euroland, “Panic-Driven Austerity in the Eurozone and its Implications“.

The best complete article on this topic and what else needs to be fixed in America–actually in Washington–was Fareed Zakaria’s in a recent issue of World Affairs, “Can America Be Fixed–The New Crisis of Democracy.”  It details the ills of the US and spells out some solutions. The solutions were summed up in a sentence in his second paragraph of the 10-page article: “The focus in Washington is on taxing and cutting. It should be on reforming and investing.”  In the same issue, Roger Altman, who would have been my candidate for Treasury Secretary,  wrote a rather optimistic article, “The Fall and Rise of the West.” asserting his view that the West would emerge stronger from this financial crisis. I think Altman is right if Zakaria’s prescriptions are followed. I would highly recommend both of these articles as well as the fall, 2012, issue of the World Policy Journal, which devoted the whole journal to the subject of Democracy. If you only have time for one article it should be Zakaria’s–an elegant and fairly complete synopsis of how we got to this point and what should happen to get us past it. Zakaria provides some very appropriate solutions, which unfortunately require our politicians, and to some extent, we, the people, to act responsibly. Unfortunately, there is no evidence of this happening either from the Administration or Congress or us. And, now that it looks like it will happen, Sequestration is getting a “…it’s not so bad…” rationalization from some who should know better.

I am hoping for a miracle, I guess–just a simple agreement to postpone this nonsense and any short-term series of compromises and truly to focus on a long-term well-vetted plan,with a clear understanding of timing and consequences, that results in “…reforming and investing.” I think the markets, companies and individuals would react well to this. There isn’t much substantive to add to what others have said. I simply urge you to click on the links above to understand a bit more of the madness that is rampant in Washington and its implications.

What is the Big Deal about Big Data?

I have always been fascinated by data and how it could be used to run a business, create investment opportunities and understand and affect behavior. As I was getting my engineering degree in the ’60’s, I was exposed to the value of historical data and the use of algorithms to reach conclusions under uncertainty. My first job out of the Colorado School of Mines was, strangely, with Procter & Gamble. P&G was a big user of data in its product development, marketing and manufacturing operations. After business school, I was fortunate enough to go to work for a research boutique, Mitchell Hutchins, that was prepared to take full advantage of the early big data manipulation capabilities coming from dumb terminals connected through time sharing to large computers. Mitchell Hutchins was involved in the creation of Data Resources, an economic forecasting company co-founded by the late Otto Eckstein. Data Resources created very sophisticated forecasting models that could either be accepted or manipulated by its clients over these early networks. We also used the network to create individual company models and valuation models which became a regular part of reports to clients. The reports themselves were printed and distributed through the US mail or some early private delivery services. I must say the models that were developed through all this data manipulation were seductive and created an air of certainty in the conclusions that we reached. The higher the correlation coefficients and the R-squared, the more we believed. I am not sure if our forecasts, or those of Data Resources were that much better than others created through less sophisticated means. To Otto’s credit, while publishing his models, he remained a skeptic of the end results. “Add factors” were always a part of his forecasts in discussions with clients. I think we all ultimately learned to respect the power of data, but, at the same time, recognized that the models were only as good as the inputs we were using, and what we didn’t know or measure was as important or more important than what we knew. I think that applies even more so today as the available data expand. We will get some answers that we didn’t have before, but let’s all remain skeptics and avoid the seduction of the certainty associated with the size of input, the sophistication of the models, and the speed with which we get the answers.

So let’s explore Big Data.

According to E-Bay the volume of business data is doubling every 1.2 years. The amount of data Big Science is accumulating dwarfs the business community. Several “laws” have come into play producing these enormous amounts of data and getting everyone excited about what can be done with Big Data if analyzed and manipulated properly.
The Harvard Business Review devoted much of its October, 2012, issue to Big Data. McKinsey and others have published numerous reports on the topic. This is all with the belief that applying the proper analytics to all this data can lead to better business decisions replacing or reinforcing intuition with hard facts coming from more complete and precise information. It all starts with the latest version of Moore’s Law: Processing speeds double every 18 months. This is without question the most important law related to Big Data. In my view, particularly these days, the utility of data is inversely proportional the amount of time it takes to process the data. Wirth’s law comes into play here: Software is getting slower more rapidly than hardware becomes faster. Other more assertive variations have been put forth: May’s law (sometimes facetiously called Gates’ Law): Software efficiency halves every 18 months offsetting Moore’s Law. The impact and perceived importance of processing the Big Data coming at us will very likely put even more of a premium on efficient software. For most applications, developers have had it easy. Processing speeds have allowed for the development of lazy code. One would hope that the exigencies of data growth change that. Otherwise value creation will lag and negate some of the other laws at work here. Metcalfe’s Law: The value of a network is proportional to the square of the number of connected users to the network (~n squared)–or probably more appropriate in today’s social media world, Reed’s Law: The utility of a large network can scale exponentially with the size of the network (~2 to the nth power). The real value or utility becomes, in most instances–certainly in the social media world–the near instantaneous analysis producing an economic action.

It has become a given that the proper use of data, i.e., metrics, can actually allow one to make better judgements and business decisions. Proper and selective use of the data becomes the key. Within a business what one measures can also affect how those generating the data behave. It should be apparent that it becomes important what one measures and how whatever data are collected are used. There is a variation of another law at work here, Parkinson’s Law. In its original: Work expands to fill the time available or in its computer corollary: Data expands to fill the space available for storage. With networks expanding, processing speeds increasing and the cloud and more powerful servers ultimately providing infinite storage, consultants and business school professors have discovered Big Data. In my view, this is creating another variant of Parkinson’s Law: The number of conclusions one can reach expands proportionately with the quantity of data available and inversely with the time it takes to analyze the data. All of those conclusions may be actionable. That doesn’t mean they will have a positive effect. It also doesn’t mean we shouldn’t seek these answers. It is not even a question of “should.” These answers will be sought.

There will be an advantage to those who are the early users of Big Data. This certainly proved to be the case in the investment and trading community. Every day an enormous amount of data are generated on stock price movements, trading volume, business results, economic results and, of course, the opinions of the pundits in the media and in the research departments of a wide variety of financial services entities. Models have been built and continue to be built and modified that attempt to show correlations among securities and deviations from those correlations. The low cost of trading combined with the speed at which a transaction can occur has allowed traders to take advantage of minute variations in highly correlated securities. Those who have created the better models and/or can react more quickly to a variation have done quite well. The importance of speed of reaction has been such that some traders moved their processing closer to the source of the information and the trading shortening the time it takes for electrons to activate and produce a transaction. It is a business where minute fractions of a second can make the difference. The models, though, have to keep morphing in terms of inputs and speed to stay ahead of the competition. Otherwise they all converge eliminating the disparities that produce profits. The Fallacy of Composition comes into play: When everyone stands up to see, no one can see. I think this is already happening in the trading community.

In the long run this will likely happen in other communities as well. We see aspects of this in consumer product marketing. This community has always been good at analyzing the data available to it to discern what customers want or can be made to want. This has led to a wide array of similar products from various companies with little distinction among them. The first movers always had an advantage for a brief period, but ultimately, others developed competitive products. Youngme Moon describes these phenomena well in her wonderful book “Different: Escaping the Competitive Herd.”  What she describes has broad application beyond the marketing community she uses as her examples.

There is a Big Deal about Big Data. The advances that can be made in science, business and, in particular, in the social media world are very exciting–a little scary, but most exciting things are. The early users will have an advantage–maybe a sustainable one as they learn what they still don’t know and adjust accordingly. It is important to understand that the outcomes will only be as good as the inputs and the analytics applied to them. To the extent one comes to rely on these outcomes without understanding what remains unknown, it increases the risks of larger and larger unintended consequences through error or just faulty or incomplete models. The models will always be incomplete. The more we accept that premise the more value our use of Big Data will have. It is hard to imagine the outcomes every time processing speeds and data accumulation double. We are on our way to a more superlative adjective replacing Big. Hang on!

The Debt Ceiling, Long Term Deficit Reduction and Insanity

Having barely survived the Fiscal Cliff, we now face the prospect of the crazies using the debt ceiling as a second attempt to derail this recovering economy. Everyone acknowledges that we have a growing debt problem which must be solved. That is a long term issue and should be dealt with accordingly, as opposed to immediate austerity in the face of a fragile but growing US economy. Even the IMF has finally concluded that austerity at the wrong time and at the wrong level is not the answer.  Restoring the Payroll Tax is already a mistake. This is not the time to reduce any flows into this economy.  It is time to sit down and develop a long term plan to reduce the rate of debt accumulation via serious review of federal spending across the board, entitlement reform, tax policy and, at the same time, redirection of spending and policy toward areas that will produce long term economic growth and jobs in this country and the world. We know the levers that will produce growth–education, technology, infrastructure, energy independence, immigration.

We do run the risk of waking up one day and finding the global financial markets unwilling to finance the debt we continue to incur.  However, if we develop a serious long-term plan that begins to go into effect well before this administration is out of office, while still maintaining a growth path, the financial markets will likely be very supportive. Companies and individuals just need to know the rules and see an economy with opportunity. While it was a rather optimistic view, the forecast I made in December does provide at least a vision of what could begin to happen this year. Look at how global equity markets, including our own, have reacted to what was a modest resolution of the fiscal cliff. I would predict that if the debt ceiling increase is accompanied by the elements of austerity that the chief crazy, Mitch McConnell, wants to put in place immediately, financial markets will reverse in anticipation of a major slowdown in growth domestically with an impact on global economies as well.

Where are the folks that are prepared to have the discussions in meetings among disparate parties as opposed to fighting their battles in the media? This includes both sides of the aisle as well as the Executive Branch. We have a real opportunity to get this right. Let’s hope we don’t blow it.

Battery efficiency needs a breakthrough and may be an interim technology. Fuel Cells with 60% well-to-wheel CO2 reduction and all that natural gas as a feedstock, may be the answer across many products.

The Energy Loft

2012 was an exceptionally busy year, however, with the New Year already underway, we wanted to look ahead and to share with you (with the help of our friends at Fuel Cell Today), some developments to look forward to in 2013.

 Automotive

 A number of automotive companies will continue their plans for commercialisation:

• The GreenGT H2 will become the first fuel cell vehicle to enter the Le Mans 24 hour race, taking place on 22^nd  and 23^rd  June 2013
• Hyundai will increase the number of its ix35 FCEV available for projects and demonstrations; the Korean automaker has said it will make up to 1,000 of the vehicles available before a full commercial launch in 2015             
• The UKH2Mobility programme will announce its ‘end of phase 1’ achievements in the form of an external report – more details to follow

Stationary

With a focus on meeting the global…

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The Fiscal Cliff, Long Term Deficit Reduction and Instant Gratification

Well, there was a form of Fiscal Cliff Resolution which appeared to make no one happy except maybe real people who got a little more certainty about how they need to handle their finances.  There seems to be general disappointment that the long term deficit problem was not dealt with.  Let’s state the obvious: the long term deficit problem is just that–a long term problem. Instant gratification is not required–except maybe for the securities markets. The short term problem, even for the securities markets and certainly for the commonweal, is maintaining the pace of a recovery that remains fragile. Why would any leader want to truly deal with a long term problem with a lame-duck Congress, particularly when the incoming Congress is modestly more in his camp? I would posit that he may not even want to deal with the long-term problems with this Congress if he has any belief that the 2014 elections could swing things even more his way as Congress continues to look political as opposed to statesman-like.

Right now, we need to deal with the short-term issues of maintaining this recovery. Some of the compromises made to get past the Cliff didn’t do that–the Payroll tax restoration being a big one.  No doubt there will be more compromises to get past the debt ceiling issues. However, I do believe it is becoming more difficult for the majority in the House to continue to hold a gun to this economic recovery. The majority in the Senate and the minority in the House need to do their part as well. In addition, the ratings agencies should also stop looking for instant gratification. The long term deficit problem must get dealt with, including entitlement reform. It will get dealt with because it has to and it can be done. If that takes two years, during which we continue to see a reasonable economic recovery, I don’t think that’s a problem. Maybe  is pays to take another look at what could be happening if we keep eliminating uncertainty and maintain this recovery.

What to Expect in 2013 (and Beyond)–An Optimistic View

This year in early January I posted “What to Expect in 2012 (and Beyond).”  Some of what I expected last year has rolled over into 2013. With more than a month to go before we step into 2013 it is a little risky to make predictions, particularly when much of what is predicted depends on the resolution (or not) of the fiscal cliff. I believe we will reach a resolution and actually take some steps toward overall fiscal reform. That may be the biggest and most important expectation which sets the course for much of what else could occur. Hopefully, op-ed pieces like Steve Rattner’s in the 11/25 Sunday NYTimes will become part of the dialogue in Washington. Keep in mind that the expectations below follow the Byron Wien approach, i.e., my view is a greater than 50% chance of these expectations coming to pass while the conventional wisdom is less than that. Let’s plunge in.

1. With the resolution of the fiscal cliff and some steps toward overall fiscal reform, big corporations and small businesses step up their plans for 2013 and beyond, affecting hiring and capital spending.  The rest of the US economy joins the housing recovery, producing growth in the US exceeding 3.5% for the year with at least one quarter printing over 4% in spite of the trade deficit expanding.
2. The US experiences double digit growth in capital spending as delayed plans are finally implemented with resolution of the fiscal cliff.
3. Unemployment works its way lower by a percentage point. Unfortunately, the number of jobs unfilled increases substantially as the mismatch between skills and needs comes into stark relief.
4. The new leadership in China, while taking a conservative social stance, takes additional steps to insure a decent recovery in economic growth. The strength of the US economy aids China’s recovery.
5. While the noise about Greece grows and is joined by more concerns about Spain, Italy and France, Europe continues to muddle through with interesting support from the Middle East and some support from China.
6. As Moore’s Law marches on, Samsung and others introduce advances in tablets and communications devices which puts pressure on Apple that reflects itself in relative stock performance. Apple does an interesting pivot which changes the landscape for even more robust consumer devices.
7. The Argentine situation is not contained and has an impact on politics, growth rates and inflation for its neighbors, requiring more attention to South America from the US than we have been willing to give thus far.
8. As we enter the year end 2013, because of the surprising global growth, there are some unsettling signs of inflation. QE is reduced and expectations for a rise in rates increase.
9. The US stock market has a good rise in the first half of 2013, but inflation concerns and a possible Fed reaction push markets down in the latter part of the year reversing  some but not all of the earlier gains. Analysts find themselves chasing earnings for much of the year.

The next few expectations are holdovers, with some modifications, from 2012. They may not all come to pass in 2013. None of them were complete in 2012.  But as we move further into the decade, in my view, they will likely happen, and will have an impact on how our future unfolds.

1. Contrary to a normally quiet year during a transition of leadership, to some extent in reaction to some elements of an “Asian Spring” in the region, China takes several steps in response to a more activist populace upset with corruption, the environment, and some areas of economic stress. Externally, this includes significant acquisitions in other countries as well as the opening of manufacturing and service facilities where there is a receptive government. At home, R&D is accelerated, particularly in alternative energy, space and IT processing. Subsidies for hydrocarbons are reduced and an explicit carbon tax is put in place.
2. As the US economy grows, corporations find qualified hires difficult to come by.  Enlightened corporations become educational institutions to provide skills and basic knowledge to a work force that has been idle and undereducated by the public systems. Corporations become much more vocal about creating paths to bring illegal immigrants into the US system, expanding visa programs and finding other mechanisms to add talented labor to the domestic pool. The tide shifts significantly on immigration issues. The skill match is aggravated by decisions on the part of some US corporations to bring business operations back into the States. Labor costs are rising elsewhere and the elements of control, rule of law, productivity, available feedstock and relative safety lead to better economics for manufacturing and service locally.
3. Aside from the continuing concerns about Europe and the ripple effect of the Argentine situation on South America, India becomes a focal point. With the economy not growing adequately to provide jobs, upward mobility and political stability, the leadership looks for diversions and points to its neighbors, China and Pakistan as problems. There are internal confrontations as well. While there is limited impact on the global economy, the uncertainty affects foreign investment and India’s outsourcing businesses.

On balance, this is a set of optimistic expectations with some trouble spots, as always, diverting our attention. I am optimistic about what can happen, certainly within the US, as long as the crazies in Washington get a bit rational. If not, I will need to spell out a whole new set of expectations. It will be an interesting year.

What to Expect in 2013 (and Beyond)–An Optimistic View

Last year in early January I posted “What to Expect in 2012 (and Beyond).”  Some of what I expected last year has rolled over into 2013. With more than a month to go before we step into 2013 it is a little risky to make predictions, particularly when much of what is predicted depends on the resolution (or not) of the fiscal cliff. I believe we will reach a resolution and actually take some steps toward overall fiscal reform. That may be the biggest and most important expectation which sets the course for much of what else could occur. Hopefully, op-ed pieces like Steve Rattner’s in the 11/25 Sunday NYTimes will become part of the dialogue in Washington. Keep in mind that the expectations below follow the Byron Wien approach, i.e., my view is a greater than 50% chance of these expectations coming to pass while the conventional wisdom is less than that. Let’s plunge in.

1. With the resolution of the fiscal cliff and some steps toward overall fiscal reform, big corporations and small businesses step up their plans for 2013 and beyond, affecting hiring and capital spending.  The rest of the US economy joins the housing recovery, producing growth in the US exceeding 3.5% for the year with at least one quarter printing over 4% in spite of the trade deficit expanding.
2. The US experiences double digit growth in capital spending as delayed plans are finally implemented with resolution of the fiscal cliff.
3. Unemployment works its way lower by a percentage point. Unfortunately, the number of jobs unfilled increases substantially as the mismatch between skills and needs comes into stark relief.
4. The new leadership in China, while taking a conservative social stance, takes additional steps to insure a decent recovery in economic growth. The strength of the US economy aids China’s recovery.
5. While the noise about Greece grows and is joined by more concerns about Spain, Italy and France, Europe continues to muddle through with interesting support from the Middle East and some support from China.
6. As Moore’s Law marches on, Samsung and others introduce advances in tablets and communications devices which puts pressure on Apple that reflects itself in relative stock performance. Apple does an interesting pivot which changes the landscape for even more robust consumer devices.
7. The Argentine situation is not contained and has an impact on politics, growth rates and inflation for its neighbors, requiring more attention to South America from the US than we have been willing to give thus far.
8. As we enter the year end 2013, because of the surprising global growth, there are some unsettling signs of inflation. QE is reduced and expectations for a rise in rates increase.
9. The US stock market has a good rise in the first half of 2013, but inflation concerns and a possible Fed reaction push markets down in the latter part of the year reversing  some but not all of the earlier gains. Analysts find themselves chasing earnings for much of the year.

The next few expectations are holdovers, with some modifications, from 2012. They may not all come to pass in 2013. None of them were complete in 2012.  But as we move further into the decade, in my view, they will likely happen, and will have an impact on how our future unfolds.

1. Contrary to a normally quiet year during a transition of leadership, to some extent in reaction to some elements of an “Asian Spring” in the region, China takes several steps in response to a more activist populace upset with corruption, the environment, and some areas of economic stress. Externally, this includes significant acquisitions in other countries as well as the opening of manufacturing and service facilities where there is a receptive government. At home, R&D is accelerated, particularly in alternative energy, space and IT processing. Subsidies for hydrocarbons are reduced and an explicit carbon tax is put in place.
2. As the US economy grows, corporations find qualified hires difficult to come by.  Enlightened corporations become educational institutions to provide skills and basic knowledge to a work force that has been idle and undereducated by the public systems. Corporations become much more vocal about creating paths to bring illegal immigrants into the US system, expanding visa programs and finding other mechanisms to add talented labor to the domestic pool. The tide shifts significantly on immigration issues. The skill match is aggravated by decisions on the part of some US corporations to bring business operations back into the States. Labor costs are rising elsewhere and the elements of control, rule of law, productivity, available feedstock and relative safety lead to better economics for manufacturing and service locally.
3. Aside from the continuing concerns about Europe and the ripple effect of the Argentine situation on South America, India becomes a focal point. With the economy not growing adequately to provide jobs, upward mobility and political stability, the leadership looks for diversions and points to its neighbors, China and Pakistan as problems. There are internal confrontations as well. While there is limited impact on the global economy, the uncertainty affects foreign investment and India’s outsourcing businesses.

On balance, this is a set of optimistic expectations with some trouble spots, as always, diverting our attention. I am optimistic about what can happen, certainly within the US, as long as the crazies in Washington get a bit rational. If not, I will need to spell out a whole new set of expectations. It will be an interesting year.

Could the Labor Statistics be Rigged?

I just posted at comment at Marketplace.org in response to an article written earlier this year regarding data rigging. The conclusion of the article was that data are noisy, but rigging is not the issue. This, of course is all relevant given the Tweeter, Jack Welch‘s comment accusing the “Chicago boys” of manipulating the data. As Joe Nocera points out in his column today, the last accusation of employment data manipulation was by Richard Nixon of the BLS under his own administration when the numbers were more negative than he would have liked. I am not surprised that a former corporate CEO, particularly Jack Welch, would have so quickly jumped to a data manipulation accusation. Most public company CEOs are quite used to data massaging at least once a quarter to satisfy the stock market. I guess they must assume that everyone else does the same to meet objectives other than accuracy. Below is the posted comment to the Marketplace article.

If one looks at the history of revisions of economic data ranging from GDP to Labor Stats there is a pretty consistent picture. When the economy is declining the revisions tend to be negative. At turning points the revisions are noisy. And, in improving economies the revisions are usually positive. This is not always the case, but usually. We are in a slowly improving economy. The ADP employment reports which even Jack Welch, the tweeter, wouldn’t accuse of being rigged, have been better than the numbers from the labor department prior to revisions. The labor situation is quite dynamic—4 million people leave jobs and take jobs every month. The difference between those two represents the increase or decrease in jobs “created.” Take a look at http://bit.ly/NXCmxF, to get some more info on this. Whoever is president for the next four years will get credit for the continued improvement unless the crazies in Washington don’t deal with the Fiscal Cliff. I am optimistic.

“Miracle at Philadelphia”–The dissent, compromise and grace that created the Constitution of the United States and moved the country from a Federation to a Nation.

I recently read the late Catherine Drinker Bowen’s, “Miracle at Philadelphia,” the story of the 5 months of the Constitutional Convention in 1787 that created the Constitution of the United States. The book was published in 1966, but has so much relevance in so many ways to where we are in this country today.  The book, which Bowen acknowledged owes much to James Madison’s detailed daily diaries, goes through the intense discussions and arguments that resulted in the Seven Article, 4,450 word Constitution. It took two years for the 13 states to ratify the Constitution and another two years before the Bill of Rights, the first ten amendments, were passed. The book is fascinating reading. It is not my intent to recreate what Bowen wrote. I would urge everyone to read the book. It is not easy to find, although it ranks number 54 among all books in terms of presence in the most US libraries.

The significance of the book is the detailed descriptions of the back and forth that clearly, in a miraculous fashion, resulted in a Constitution that we have come to believe was created by an all-knowing group of wise men who could do no wrong.  They could do wrong, and they disagreed violently at times, in private. The objective though was “to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the blessings of Liberty to ourselves and our Posterity…”

What comes across in the book, in addition to the ultimate intelligence, civility and seriousness of the attendees, is the continued reference at tense times to the importance of Happiness and Tranquility, as an expected outcome of the proceedings. There were references back to the Declaration of Independence and “the Pursuit of Happiness.” There was the letter to the Federation’s Congress, which had to approve sending the Constitution for ratification by the States with the appeal “That [the Constitution] may promote the lasting welfare of that country so dear to us all, and secure her freedom and happiness, is our most ardent wish.” This letter was signed by George Washington who opened and closed the convention.

We seem to have moved a long way from those original intents and the process that delivered them.  We are an unhappy country. I certainly don’t hear politicians talking about happiness and tranquility as objectives. Nor is there any desire to seek elements of compromise and do what is right for the country. This ranges from Nancy Pelosi’s statement to a freshman congressman that “we always vote as a bloc,” to Mitch McConnell’s ..”the single most important thing we want to achieve is for President Obama to be a one-term president.” It would be useful if every policy maker in the country read this book before making their next decision on what they say to their constituents and what goals they try to achieve in carrying out their responsibilities.

Let me provide some of the highlights from the book.

To get from a gathering of state representatives to a Constitution of the people required bringing together diverse interests of agriculture and mercantilism, small and large states in size and population, the concept of states’ rights with a national government and the issue of slavery. Slavery was the one kicked down the road with the only agreement that the importation of slaves would stop in 1808 and that a slave would account for 3/5 of a person. The convention started with the establishment of a Rules Committee which came back to the body quickly with a mode of conduct and resolution. Importantly, it included a decision that all deliberations would remain within the convention until resolution. It included general rules on civility of conduct–hearing each other out–, and an ability to reconsider matters that had already passed until agreement was ultimately reached with no recording of the Yeas and Nays that might fix one into a binding position. Later in the proceedings, there was the Great Compromise which resulted in the two chambers of Congress–one determined by population and the other by equal representation of each state. There was the clause in Article VI “…but no religious Test shall ever be required as a Qualification to any Office or public Trust under the United States.” It was a six-day a week process for those 5 months producing a 23-Article treatise.

A final committee was created after the elements of the Constitution were clear–the Committee of Style. It had the responsibility of translating the treatise into the document  that would be presented to the people and the states. Five men, Dr. William Samuel Johnson (chairman), Alexander Hamilton, Gouverneur Morris, James Madison and Rufus King were given that responsibility. None of these men agreed with all the elements in the proposed Constitution, but they were selected because of their command of the language, their no-nonsense approach and their historical perspective. They stayed true to the agreements reached in the convention. With an enormous amount of wordsmithing and simplification, in four days the document was condensed from 23 Articles down to 7. It took into account earlier documents in the history of man including the Magna Carta and the Iroquois Nations’ constitution. At conclusion, the phrase, “We the People…” bothered some of the states’ rights folks, but is said to have ultimately become a rallying cry against the absolutist kings of Europe. And, not all present at the convention agreed with everything in the final document. Benjamin Franklin expressed it well: “ I confess that there are several parts of this constitution which I do not at present approve…But I am not sure that I will never approve them…Most men indeed as well as most sects in religion, think themselves in possession of all truth and that wherever others differ from them it is so far error…But though many private persons think almost as highly of their own infallibility as of that of their sect…In these sentiments, Sir, I agree to this Constitution with all its faults, if they are such.” He subsequently went on to say it astonished him how close the Constitution came to perfection, and later wrote to a friend, “I consent, Sir, to this Constitution because I expect no better and because I am not sure that it is not the best. The opinions I have had of its errors, I sacrifice to the public good. I have never whispered a syllable of them abroad. Within these walls they were born, and here they shall die.”  He was not alone in these sentiments. Some at the convention did not sign, 33-year old Edmund Randolph, governor of Virginia, being one. He had actually presented in the first days of the convention many of the major elements that ended up in the final document. Every state, excluding Rhode Island, which did not attend the convention, did have signators. Randolph did go on to indicate that he would not necessarily oppose the Constitution “without doors,” but simply wanted to be free to do his duty as determined by his future judgment. Franklin’s future judgment included many letters to his friends in Europe urging them to form a Union of the countries with a Constitution and governance similar to that created for the United States.  As usual, a little ahead of his time.

Well, how does this have relevance to today’s picture? As I stated earlier, I am not even sure Happiness comes up as a topic among our politicians these days. Civility, and compromise are also lacking from the picture.  It is not that there wasn’t passion back in the 18th century with strong positions held. But what appears to have been less present –not absent totally–back then, was the personal animosity, the unwillingness to compromise and the disregard for ultimately doing what was right for the country and the people in a timeframe that mattered. We have moved so far away from the process and actions that led to the formation of this country and its success over the last two+ centuries. A good task for all of us would be to understand the steps taken at the beginning that should be the foundation of today’s behavior. This  book, “Miracle at Philadelphia,” could provide a perspective for all of us on how we should be acting today. Find it and read it, please.

The Facebook IPO: In my view it was quite successful

I don’t totally get the Sturm und Drang around the Facebook IPO.  There may prove to be some issues around disclosure, NASDAQ, stabilizing of price, and anything else someone wants to raise to support their own agenda.  However, I said yesterday on Bloomberg Hays Advantage that from the company’s point of view, this was a very successful IPO.  The company issued public stock against a set of governance issues that in many instances would not have allowed a “normal” company to face its shareholders with a straight face. The underwriting fees were at a discount to “normal” fees.  It basically got the near term high tick on the stock price. It was the third largest raise in the history of IPOs and put additional capital in the company’s coffers and provided more immediate liquidity for its private equity investors than one would ordinarily see on an initial offering. Even with the decline in the stock price, this company is being valued at around $60 Billion, significant multiples of revenues and earnings. Certainly, the senior executives are expecting to continue to build a company over a long time period and have the ability to control that build, given the degrees of freedom to do so without interference from their shareholders. Today’s price of the stock is of less concern to them.  The public shareholders can only vote by buying more stock or selling it. They have very limited say in the governance of the company. The 26 pages of risk factors in the S-1, the filing statement, clearly spelled that out.

From the underwriters’ perspective it doesn’t look as good.  Underwriting does involve taking risk. There is always an attempt by the underwriters to leave something on the table. It takes out a fair amount of their risk and makes room to exercise the “shoe” to sell more stock (and generate more fees) above the original offering amount. The demand appeared to be there, but with some pushing from the company, I am sure, the price and amount were raised, as was the risk.  The world of IPOs has changed though, given the increase in high-frequency trading and the increasing presence of hedge funds in the IPO process. While most companies would prefer to see their stock go into the hands of long-term investors, the underwriters have a client constituency that, implied or otherwise, expects to get significant participation in a hot IPO because of all the other business they do with the investment bank. In this instance there was also a decision made to put more of this stock into the hands of a less-informed individual investor. I would like to know how many of those individual investors actually read the S-1 before they made their decision to buy the stock.

In addition, the concept of being able to “stabilize” the price movements and trading action around an offering is almost non-existent. The dollars available in the market place to influence price movement overwhelm any amount of capital that the underwriters can put to work. In this instance, even the trading systems, as robust as they are, were not adequate to handle the 80 million shares that ultimately traded in the first thirty seconds after the stock was finally opened, much less the 570 million shares traded in the full day. This was a huge offering of shares of a company operating in a mode of creative destruction of legacy businesses with the volatility associated with that. Exciting, newsworthy, with more news to come over many years. I am most excited about the wealth creation that did occur for those who put their capital and their energy at risk in the creation and early funding of the company. Much of that capital will likely make its way back into the creation of other companies that will take advantage of the phenomena of increased processing speeds and the power of information control put into the hands of individuals. Very, very exciting!