• December 14, 2017
  • There’s a useful Op-Ed in today’s New York Times that we should all take to heart. In “The Economy is Partying Like It’s 2008,” Desmond Lachman, a resident fellow at the American Enterprise Institute, a former deputy director in the International Monetary Fund’s policy development department and a former economic strategist at Salomon Smith Barney writes of the economic warning signs all over the economy right now.

    Certainly, the American economy is doing well, and emerging economies are picking up steam. But global asset prices are once again rising rapidly above their underlying value — in other words, they are in a bubble.

    Most importantly, according to Lachman, people who ought to know better are keeping mum over what should be the warning signs. Even worse, where ten or so years ago there was a bubble in real estate, today there are bubbles—plural—all over creation.

    Stock values are at lofty heights that have been reached only three times in the last century. At the same time, housing bubbles are all too evident in countries like Australia, Britain, Canada and China, while interest rates have been driven down to unusually low levels for high-yield debt and emerging-market corporate debt.

    So many bubbles bursting in close succession would make the job of putting everything back together a great challenge especially for an administration that doesn’t have the, uh, intellectual resources of the George W. Bush administration, which at least had Henry Paulson over at Treasury and a consensus for Keynesian economics. In 2008 everything went to hell in a hand basket when Lehman Brothers failed because it massively over invested in the sub-prime mortgage market.

    Bitcoin or more generally cryptocurrencies might be the next Lehman Brothers in waiting. In 2008 Lehman had assets of $680 billion supported by only $22.5 billion of firm capital.

    Is Bitcoin just another scam? Why find out the hard way?

    The demise of Lehman posted on Wikipedia says.

    From an equity position, its risky commercial real estate holdings were three times greater than capital. In such a highly leveraged structure, a 3 to 5 percent decline in real estate values would wipeout all capital.

    We face a similar situation with Bitcoin right now. I am not a finance guy and do not offer investment advice, so please don’t view this as anything more than bloggertry, to coin a phrase. But, hey, there’s about $300 billion in Bitcoin out there and more if you count the ICOs of similar instruments. Bitcoin are non-sovereign, they have nothing like the full faith and credit of the United States (or even Brazil) behind them, they are not regulated and there are no central banks waiting to provide liquidity in the event of a market hiccup.

    On the contrary, they are dark holes into which real dollars are poured. It doesn’t help that exchanges and hedge funds are beginning to trade them and options on them. Recall that in the mid-2000’s exchanges and brokerages began trading in CDO’s, fancy options backed by mortgages that ranged from solid to sub-prime. When the sub-prime market wobbled, CDO’s and the brokerages supporting them became unsteady and Lehman failed bringing down the whole world financial system.

    Yes, we got through it all but not without ruining lives and it took a decade of lackluster economic activity to get back to where we were before the crash. The problem as Lachman sees it is that,

    Economic policymakers seem to have lulled themselves into a false sense of security by trusting the stricter bank regulations put in place after the collapse of Lehman Brothers in 2008. They seem to be turning a blind eye to the dominant role that so-called shadow banks (hedge funds, private equity funds, large money market funds and pension funds) play in the American financial system now.

    Bitcoin’s trading is nearly all retail and in the shadow banking system where it can’t be regulated. Small investors are Bitcoin’s greatest entrepreneurs. It seems reasonable that, like Ebola emerging from the jungle, we could see a financial contagion emerging again from the shadows and Bitcoin appears to be a vector.

     

    Published: 1 month ago


    Is Bitcoin just another scam? Why find out the hard way?

    Bitcoin’s end may be forecasted in its recent price run up (I intentionally didn’t say value because it has no intrinsic value). Late last week the digital currency traded above $20,000 for the first time according to an article in the New York Times. That article also noted that the crypto currency started the year below $1,000 and as recently as this October coins could be had at a now very attractive $5,000 each.

    The Times article said the factor driving the new interest is the increasing interest from Wall Street and for good financial reasons,

    At the current cost, the value of all Bitcoin in circulation is about $300 billion. To get a sense of how big that is, all the shares of Goldman Sachs are worth about $90 billion.

    But the only comparison should be with other currencies like the dollar. Bitcoin’s price is tiny compared to the M1 money supply, a measure of dollars in circulation. M1 is hovering near $3.6 trillion according to the Federal Reserve Bank of St. Louis.

    M1 is a good jumping off point because it reminds us that real money is regulated by something other than the marketplace and that regulation is much more transparent. Every major country and currency has its own version of such an index except in Europe where some countries use the Euro but the principle is still the same. In contrast, Bitcoin has Coinbase, a San Francisco company providing brokerage services. We should note that Coinbase’s systems went kaput for an afternoon last week. That’s not exactly something to make you warm and fuzzy.

    But the valuation (ok, I said it) is like blood in the water for Wall Street. Hedge funds and brokerages are lining up to trade in Bitcoin. Said the Times,

    Coinbase now has more account holders than Schwab, and it has struggled to keep up with the growth.

    But more troubling is the looming trouble that Bitcoin could deliver the the financial system,

    The path for large investors has been smoothed by the Chicago Mercantile Exchange and Chicago Board Options Exchange, which have been racing to roll out Bitcoin futures contracts. Most banks are already signed up with these exchanges and consequently can immediately begin trading the contracts. The options exchange has said it plans to start trading on Sunday [December 10].

    My friends involved in this say that Bitcoin and other crypto currencies provide a measure of freedom from government regulation, which is more conducive to doing business. But all of this freedom only reminds me of the words of Anatole France, an early 20th century poet, novelist and journalist, and Nobel Laureate, “The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.”

    I see this run up as potentially destabilizing to the global financial system and quite possibly the black swan that the Trump administration didn’t see coming that produces its first real test. The fall out from the test might turn out to be worse than the crash.

     

     

     

    Published: 1 month ago


    Oracle reports its earnings on Thursday, December 14, after the markets close and trying to guess how the company did in its second fiscal quarter has become a parlor game. Seeking Alpha, an investment newsletter, has been making observations ahead to the announcement trying to inform its subscribers about what to expect. They are not alone, financial analysts do this. But the thing that amazes me is how little the financial analysts understand the shift taking place both at Oracle and throughout the industry.

    Lots of people seem to be clucking over how much the company has invested—$22+ billion or just under 15 percent of all revenues over the last four years. At the same time Seeking Alpha notes that annual revenues have been flat as a medieval map of the world fir quite a while—stuck at about $38 billion.

    The good news, they say, is that cloud revenues have grown at 12.36 percent per quarter while on-premise revenue declined at 1 percent. Meanwhile hardware sales over the last 2 quarters have dropped about 2.5 percent per quarter for the last 2 years. All this despite some world beating computing and storage services. You can find all of the stats here.

    Now, it’s expected that the finance guys are always going to want to know about profits and growth and any big time capitalist manager is going to both understand this need and desire to meet expectations. As a technology analyst, I am not either guy and my capitalist instincts are in check whenever I look at a situation where a new industry and product lines are being developed as is the case here.

    Consider first what it will take for Oracle to begin making real money on its investment in the cloud. First step in any such situation is to diffuse the new or disruptive innovation to the marketplace. For Cable TV, telephone, and electricity it took decades of stringing wires and opening offices to reach something close to market saturation. Oracle or any cloud provider is piggy-backing on earlier investments in the Internet so scratch that.

    But add in some huge investments in data centers around the world that support Oracle’s cloud. Also add the cost of R&D and acquisitions that produce the actual apps that enterprises need and you can easily see how the company spent billions. At the same time, the crowd of users Oracle wants to attract is still in the sales funnel. Oracle’s more than 425,000 customers are primarily on-premise users and they are conscious of the cloud move and many are therefore planning their shifts; they are not investing in a lot more on-premise products as the numbers bear out.

    So Oracle is in a classic squeeze having paid out all or a very substantial part of the investment and they’re still waiting for the returns. This understandably makes the finance guys somewhat concerned and although it’s their job to seek profits they don’t show a great deal of sophistication in understanding the major trend that moving to the cloud drives.

    Seeking Alpha expects graphs of Oracle’s cloud and on-prem businesses revenues to intersect in 2020. That means continued slow downward trending for the on-premise business and very nice up ticking for the cloud. As a long-term viewer it looks pretty good to me. But I can certainly understand how widows and orphans might not.

     

     

     

    Published: 1 month ago


    I have been against crypto-currencies since I first heard of them simply because they are Ponzi schemes pure and simple. They are the financial equivalent of the perpetual motion machines of the middle ages, not that there were any. Inventors were just trying to invent them before real science entered the picture.

    At any rate a Ponzi scheme uses current inflows to pay “profits” to the earliest “investors” and the earlier you get in the more you make while the last one into the scheme finds he has no chair when the music stops.

    The price of a single Bitcoin is currently well above $8,000 and as the accompanying graphic shows it is one of the biggest asset bubbles in history. It’s going to hurt a lot of people when the bubble bursts because the damage won’t be confined to the owners.

    Published: 2 months ago


     

    Show season changes the CRM market, it always does. One day you’re in the vanilla application software space and a week later you understand the need to incorporate social media, or analytics or machine learning or you see a need for enhanced integration and development through platform services. It goes on.

    Today, in the wake of Oracle, Salesforce, Microsoft, and many other companies’ trade shows, we’re again taking a look at the available suites. But this time, we need to think less about what’s been added and how well integrated the components are.

    With Oracle now a year into rolling out its cloud strategy, we can’t say we’re in cloud computing’s early days any more. We’re in a race to computing as a ubiquitous utility like electricity, water and natural gas.

    Oracle was the last cloud holdout, the last company that led with its legacy on-premise products. Today they’ve reinvented themselves to offer infrastructure, platform and applications or any combination as services. They might talk a good game about supporting legacy customers forever, and that will be necessary, but they’d like nothing better than to convert the legacy base to cloud infrastructure. And make no mistake about it new cloud based apps is the eventual goal. Much the same is true of Microsoft whose end user products like Office are now being delivered by subscription even if some of the software still resides on the desktop.

    Salesforce was, of course, born in the cloud and it hasn’t suffered through a transition though for almost 20 years it has been undeniably causing one. The disruption impacted everyone else but the next disruption, or whatever we’ll call it, is affecting even Salesforce. With typical poise Salesforce is taking it all in stride and is even taking a leadership position.

    The disruption turns form purely delivering technology to focusing on how it is used. The focus is very important to Salesforce and all the others because it will have a direct impact on how much of its services (we used to call it software but this is now) get bought and deployed.

    So we see increasing emphasis on learning how to develop apps and administer them even to the point of opening up the training platform, Trailhead, to enable partners to develop training programs for their custom apps.

    In the background there’s also an effort to standardize on processes that deserves attention. Back in the day, a process was carved in stone. Your organization used a 7 step sales process or maybe a 5 step one. Introducing a 7-step process into a 5-step organization was enough to set off a riot. It was something you did only very carefully if at all. In that era there were sales methodology companies (still are) and there were software companies and each would tell you their products were agnostic. They were too, with a little coding.

    But today it’s different. The introduction of AI and machine learning has made both methods and applications secondary. Yes they’re still important but, no, they don’t rule the roost. Everywhere sales people seem to be sidestepping the argument about which method is better in favor of adopting an attitude of doing what the AI system suggests is the next thing needed to advance a deal. As it should be.

    Platform based CRM with robust partner communities and their apps have brought us to the point of fully integrated and automated business processes. Customization has never been easier thanks to the platform too. The next step in our journey will be inventing new business processes that derive from our need for, and attempt to be, more agile, to flexibly approach new opportunities.

    That’s what has been most interesting to me about show season. Each vendor has, in it’s own way, made a tacit nod to the primacy of data and analytics for automating processes. In that event, they’ve also begun closing the door on business processes that momentarily pop out of the automation sluice and into a spreadsheet or other manual thinking.

    The change isn’t only recognizable in sales though selling is a big beneficiary with solutions that include SFA, CPQ, admin functions, AI, ML, compensation management and gobs of graphically rich reporting. Marketing is a rich area with its newfound abilities to identify, target, hand off, score, and journey map. And service has its own rich tool set most significantly analytics married to multi-channel abilities to take customers from beginning to end of a support journey without necessarily bringing in a human.

    In all of this businesses are freeing up employee time for higher-level tasks that add value to customer experiences well beyond getting a deal or a right answer. This is where the customer facing jobs of the future will come from. They will demand more and different people skills as well as technical mastery.

    That’s why this show season has been a turning point. I think it will be looked back on as the time we began a more disciplined approach to customers and employees as people who interact with technology, not just as various flavors of technologists.

    Published: 2 months ago