The dream that failed. The Economist on nuclear power

One year after Fukushima, the Economist has published a special report on nuclear power, which I recommend you read in its entirety if you are interested in the past, present and future of power sources on our planet (article and further links here).

It is a fascinating report (pictured: Enrico Fermi), and it ventures into broader issues of technologic success and failure (emphasis added):

The ability to split atoms and extract energy from them was one of the more remarkable scientific achievements of the 20th century, widely seen as world-changing. Intuitively one might expect such a scientific wonder either to sweep all before it or be renounced, rather than end up in a modest niche, at best stable, at worst dwindling. But if nuclear power teaches one lesson, it is to doubt all stories of technological determinism. It is not the essential nature of a technology that matters but its capacity to fit into the social, political and economic conditions of the day. If a technology fits into the human world in a way that gives it ever more scope for growth it can succeed beyond the dreams of its pioneers. The diesel engines that power the world’s shipping are an example; so are the artificial fertilisers that have allowed ever more people to be supplied by ever more productive farms, and the computers that make the world ever more hungry for yet more computing power.

There has been no such expansive setting for nuclear technologies. Their history has for the most part been one of concentration not expansion, of options being closed rather than opened.

This is what the Greek default looks like

Europe will have to make its choice this year. Either a much tighter, more constrictive fiscal union with a central bank that can aggressively print euros in this crisis, or a break-up, either controlled or not. I don’t think they can kick the can until 2013, as the market will not allow it. Either the ECB takes off its gloves and gets down to real monetization when Italy and Spain need it, or the wheels come off.

If you want to understand what’s going on in global financial markets, go to John Mauldin’s site and subscribe to his free weekly newsletter Thoughts from the Frontline. Every week he pores over analyst reports, travels, talks to a lot of people who know what’s going on behind the scenes, and sits down to package thoughts, numbers and charts to be conveniently delivered to your inbox to provide you with food for thought.  Also from this week’s newsletter: this is what the Greek default looks like.

Greece has two choices. They can choose Disaster A, which is to stay in the euro, cutting spending and raising taxes so they can qualify for yet another bailout; negotiating more defaults; getting further behind on their balance of payments; and suffering along with a lack of medicine, energy, and other goods they need. They will be mired in a depression for a generation. Demonstrations will get ever larger and uglier, as the government has to make even more cuts to deal with decreasing revenues, as 2.5% of their GDP in euros leaves the country each month. There is a run on their banks. Any Greek who can is getting his money out.

Greek voters will then blame whichever political group was responsible for choosing Disaster A and vote them out, as the opposition calls for Greece to exit the euro. Which is of course Disaster B.

Leaving the euro is a nightmare of biblical proportions, equivalent to about 7 of the 10 plagues that visited Egypt. First there is a banking holiday, then all accounts are converted to drachmas and all pensions and government pay is now in drachmas. What about private contracts made in euros with non-Greek businesses? And it is one thing to convert all the electronic money and cash in the banks; but how do you get Greeks to turn in their euros for drachmas, when they can cross the border and buy goods at lower prices, as inflation and/or outright devaluation will follow any change of currency. It has to. That is the whole point.

So how do you get Zorba and Deimos to willingly turn in their remaining cash euros? You can close the borders, but that creates a black market for euros – and the Greeks have been smuggling through their hills for centuries. And how do you close the fishing villages, where their cousin from Italy meets them in the Mediterranean for a little currency exchange? What about non-Greek businesses that built apartments or condos and sold them? They now get paid in depreciating drachmas, while having to cover their euro costs back home? Not to mention, how do you get “hard” currency to buy medicine, energy, food, military supplies, etc.? The list goes on and on. It is a lawyer’s dream.

There is a third choice, Disaster C, which is worse than both of the above. Greece can stay in the euro and default on all debt, which cuts them off completely from the bond market for some time to come. This forces them to make drastic cuts in all government services and payments (salaries, pensions etc.), and suffer a capital D Depression, as they must balance their trade payments overnight, or do without. Then they choose Disaster B anyway.

The Internet of the Future: Nouveau Monde 2.0, Paris, October 21, 2011

I had the pleasure to represent Italian Angels for Growth yesterday at a seminar held at the French Ministry for the Economy, Finance and Industry in order to advance the G8 Deauville agenda for the digital economy. It is a bit unusual for me to participate in a governmental event, but since the invitees were “Ministers for the digital economy, leading firms, start-ups, venture capitalists, bloggers and think tanks”, I thought at least it would be a place where interesting people gathered.

“New World 2.0: Concretizing the Internet of the Future”, or “Nouveau Monde 2.0″, was indeed packed with content and not too long on rhetorics. I had to miss the opening session on Thursday night, which dealt with Democracy 2.0 and saw Minister Eric Besson, the event host, engaged – quite empathically, I am told – with a number of Tunisian bloggers. (Here is a short interview he gave about Nouveau Monde 2.0).

Friday started with a discussion on network infrastructure that is by now familiar to me from working in a telco (I almost felt like crying out: “Those numbers on video traffic on cellular networks? They’re not tomorrow! They are practically today!”) and was framed by Cisco’s Robert Pepper, who showed projections from the Visual Networking Index leading us into the “Zettabyte Era” by 2015. Two key facts here: the volume of data transmitted around the world is increasingly driven by consumers, not businesses; and the biggest consumer demand is for video, in its many incarnations (short- and long-form, recorded and real-time, and so on). It is, also, a remarkably global demand: according to Google’s David Drummond, half of the views for videos uploaded from France this year were due to users ouside France. The question is, obviously, who’s going to pay for the networks we need to put in place. There was a full range of policy options represented on stage: the most laissez-faire was probably the U.S., whose Department of Commerce representative, Lawrence Strickland, maintained that regulators’ job is to “get out of the way”, but nevertheless admitted that there is at least one case, rural broadband, where the government should step in. The most interventionist? Not Sweden, not Finland, but Australia, where fruitless haggling with the incumbent, Minister Stephen Conroy told the audience, led the government to give up in frustration and launch a Newco tasked with building the National Broadband Network out of taxpayers’ money; one guesses that having Singapore, Taiwan and South Korea as “neighbors” and competitors tends to sharpen resolve. The proceedings were lent gravitas by European Commissioner Neelie Kroes, who reminded us that not only do we have a financial crisis to solve, but we must also find the resources to invest in our digital future. She deplored the lack of a single digital market across the Union (think of the mess that national copyright systems have gotten us into), and shone the spotlight on the recent Commission recommendation to establish a €9.2bn “Connecting Europe Facility” (here’s how it should work). Kroes was the star of the session: in a way, at at time when almost all politicians seem to think desperately short-term, she seemed to show how politics should care for the long run. (I am, needless to say, a fan of her commitment to put more “girl power” into technology).

The second session was moderated by entrepreneur, angel investor and independent board member Sherry Coutu, and focused on privacy on the Internet: “as a mother, I worry about these things”, she said in introducing the panel. Barbs were exchanged, as expected, between Simon Davies of Transparency International and Elliot Schrage from Facebook. Schrage was also challenged by the audience, notably when Tunisian journalist Emna Ben Jemaa took Schrage to task about a number of decisions on Tunisian pages made, or rather not made, by Facebook administrators during the Arab spring: if you followed the hashtag #NMwww, you could almost hear the Twittershphere cheering her on.

The third session, introduced by Alcatel-Lucent CEO (and former BT CEO) Ben Verwaayen, took on the issue of the digital divide. In opening the panel discussion, Mr. Verwaayen admitted that even in the West we are absolutely nowhere with “Internet for all”, and asked whether spectrum is treated as a strategic scarce resource or a milk cow for finance ministers. Again, representatives from places such as Japan and Sweden shared the stage with politicians from Kenya and Morocco. Digital inclusion is a tough challenge, both in terms of infrastructure and in terms of awareness and culture: there are lots of inspiring experiments going on, from tools to get cashew nuts to market at the right time in Ghana to telecommuting after the quake in Japan, but no one has any easy answers.

After the “official” conference was over, there followed a start-up evening (“Innovation Night 2.0″) put together by the outstanding team from Le Camping: three nascent start-ups and three slightly more mature ones got to present one-minute pitches and be grilled by senior executives from Microsoft, Google, Facebook… Here, the star performer was Criteo, a business that barely existed three years ago and plans to book $200m in revenues in 2011. When research reports talk about the jobs and the share of GDP growth created by the digital economy, folks like those at Criteo are the reality behing the numbers. Well done, guys!

Overall, the day felt like one of those rare occasions where my generation (the 40-year-olds), the previous generation (Ms. Kroes’s), and the younger generation (the university students presenting their start-ups in the evening) almost spoke the same language. The Ministry (where Mr. Besson holds, in addition to Industry and Energy, a specific mandate for the Digital Economy) deserves credit for creating a common space where this could happen. It was a showcase for a very dynamic France, and perhaps an example to the many other countries where participants came from.

The roots of the subprime mortgage crisis, and everything that followed. From a David Foster Wallace article

One reads David Foster Wallace‘s long-form journalism collected in Consider the Lobster slowly and with care, knowing there won’t be any more of his pieces for Harper’s, The New York Observer, Premiere and so on. (Incidentally, Gourmet, the magazine that commissioned the title story, has recently ceased to exist, too.) One of these pieces, appearing in this collection in its full uncut glory, got a brief revival in the 2008 elections: it is “Up, Simba”, where DFW got to cover on behalf of Rolling Stone none other than John McCain on the campaign trail in the 2000 Republican primary, which McCain lost to George W. Bush after a non-inconsiderable amount of “negative advertising”.

“Host”, the piece that closes the collection, profiles for the Atlantic Monthly a conservative radio talk show host named John Ziegler working at KFI in Los Angeles, and it is insightful and probing and sad. I just wanted to notice one little thing, and point it out to you. When the host is off the air, the writer’s ear does not tune out to the mindless chatter of the advertising segments. The writer keeps listening. And (this is 2004) he observes that there is quite a bit more of a certain type of radio advertising than there used to be.

As of spring ’04, though, the most frequent and concussive spots on KFI are for mortgage and home-refi companies. In just a few slumped, glazed hours of listening, a member of this station’s audience can hear both canned and live-read ads for Green Light Financial, HMS Capital, Home Field Financial, Benchmark Lending. Over and over. Pacific Home Financial, Lenox National Lending, U.S. Mortgage Capital, Crestline Funding, Home Savings Mortgage, Advantix Lending, Reverse mortgages, negative amortization, adjustable rates, APR, FICO… where did all these firms come from? What were these guys doing five years ago? Why is KFI’s audience seen as so especially ripe and ready for refi? Betterloans.com, lendingtree.com, Union Bank of California, bethebroker.net, on and on and on.

I don’t want to attribute any prescience to DFW’s words. While he might be read as implying that nothing good would come of it, this may very well be just our interpretation as readers in 2010, with the privilege of what we know today. As a writer, he merely observed and reported. May we observe the world around us with the same open-mindedness and insight.

Project 10^100: a missed opportunity for girls and women

Well, Google’s long-delayed Project 10^100 has finally come to the voting stage. And all of the 16 bundles of ideas that have made it to this stage are worthwhile endeavors.

But they’re also a missed opportunity. None of the ideas is about empowering girls and women. In fact, the word “women” is entirely missing from the page that describes the 16 finalists.

Yet, economists have proved again and again that getting girls into education, teaching women about their reproductive rights, financing women’s ventures, and setting up services that allow women to be productive in the workplace is the hidden lever to unlocking growth and prosperity. None of the 16 ideas up there on that page recognizes this. (Sure, many women will benefit if voters choose to fund better technologies to remove landmines, or more education for African students, or early warning systems to prevent mass atrocities – including war rapes. But there is no idea up there that says  “let’s spend this money 100% on women”).

My proposal? Together with my friend Raffaele, I had submitted an idea about women’s leadership and role models. It went like this: The 1,000 member companies of the World Economic Forum would commit to having neither gender represented by more than 60% of Directors on their Board. Sure, it would primarily have impacted the West, and not so much of the developing world. But it was a very low-cost idea – all it takes is leadership, commitment and some monitoring systems – and it would have triggered a vast culture change in our business, political and civic organizations. Culture change will come anyway, you say? It doesn’t: we’ve stopped making any measurable progress at all – except for places with forcing devices, such as Norway. It didn’t fly: let me know if you find a better forum to promote it.

In the menatime, how are you voting on Project 10^100?

On accountants, economists, investment bankers, civilization, good and evil

You might be interested, dear readers, in the interview in the current issue of Stanford Lawyer with the eclectic Charles T. Munger, Warren Buffett’s longtime partner in Berkshire Hathaway. A few snippets for your enjoyment follow.

On the SEC:

The SEC is pretty good at going after some little scumbag whom everybody regards as a scumbag. But once a person becomes respectable and has a high position in life, there’s a great reticence to act. And Madoff was such a person.

On derivatives:

Some of the most admired people in finance—including Alan Greenspan— argued that derivatives trading, substituting for the old bucket shop, was a great contribution to modern economic civilization. There’s another word for this: bonkers. It is not a credit to academic economics that Greenspan’s view was so common.

On the accounting profession:

They are way too liberal in providing the kind of accounting the financial promoters want. They’ve sold out, and they do not even realize that they’ve sold out.

On economists:

They say it’s not economics if you think about the consequences of good and evil, and good and bad business accounting. I think what we’re learning is that when you don’t understand these consequences, you don’t have an adequately skilled profession.

On Lehman Brothers:

You can’t save everybody. That would have created unlimited revulsion in the body politic. I probably would have let Lehman go, too.

On Goldman Sachs:

The culture of Goldman Sachs as a partnership was morally superior and better for the surrounding civilization than the culture that came after it went public.

On investment bankers:

I have lived in my own life with responsible investment banking. When I was young, First Boston Company was an honorable and constructive firm and very much served the surrounding civilization. Investment banking at the height of this last folly was a disgrace to the surrounding civilization.

Where I Was From: California and Federal money, by Joan Didion

“A good deal about California, in its own preferred terms, does not add up.” This is the start of the third chapter of Where I Was From. Why does it not add up?

Consider this. The Sacramento River, “the main source of surface water in a state where distrust of centralized government has historically passed for an ethic”, used to end in a huge swamp for a good portion of the year: it was

regularly and predictably given, during all but the driest of those years before its flow was controlled or rearranged, to turning its valley into a shallow freshwater sea a hundred miles long and as wide as the distance between the coast ranges and the foothills of the Sierra Nevada: a pattern of flooding, the Army Corps of Engineers declared in 1927, more intense and intractable than that on any other American river system including the Mississippi.

What put an end to that marsh? Federal money, of course. By 1979 there were 980 miles of levee, 438 miles of canal, 50 miles of collecting canals and seepage ditches, three drainage pumping plants, five low-water check dams, thirty-one bridges, ninety-one gauging stations, and eight shortwave water-stage transmitters. The Sacramento Valley is now an entirely artificial environment.

That’s not all. The railroad West was built through a federal cash subsidy. For decades, Californian irrigation and Californian crops were subsidized by the American taxpayer. As recently as 1993, hundreds of thousand of acres in California were planted in cotton, rice and alfalfa: alfalfa alone, a low-value crop, required more water than was used in the households of all thirty million Californians.

The Pentagon was, of course, the sugardaddy of the aerospace and defence industry, until the early ’90s slump and the hundreds of thousands of job losses in Southern California, as factories moved to friendlier states or just shut down.

The most effective lobbying operation in Sacramento, the California Correctional Peace Officers Association, had by the early 2000′s about 29,000 union members. With thirty-three penitentiaries and 162,000 inmates, California had the largest correctional system in the western hemisphere. The prison guards were the political muscle behind the 1994 “three strikes” initiative. About Don Novey, their union leader, it was said: “If Don Novey ran the contractors’ union, there’d be a bridge over every puddle in the state”. And it was in 1995 that, in a statistic that still shocks me even though I have every reason to believe that Didion – a diligent investigative reporter -  has double-checked her numbers,

for the first time, California spent more on its prisons than on its two university systems, the ten campuses of the University of California and the twenty-four campuses of California State University.

Well worth, well worth reading, my Californian friends.

Understanding the Financial Crisis: extremist predictions for 2009

On Saturday, I had the good fortune to attend a Stanford University alumni event in London (the only European date in a four-year, 20-city world tour by President John Hennessy and distinguished faculty, called Leading Matters). It is not only a way for Stanford to reconnect with alumni, but also a great opportunity for alumni and their guests to hear about multidisciplinary research from faculty members on topics ranging from personalized DNA-based medicine to ecosystems sustainability and energy policy.

The most successful session by far, though, was one where academia and practice came together: Business School Dean Bob Joss (whom I am a great fan of – see a short article here) started off a discussion with alumni Jerker Johansson, CEO of UBS Investment Bank, and Bill Browder, founder and CEO of Hermitage Capital Management.

Now, I’m going to focus on what Bill Browder said. It is very much of a Black Swan scenario – yes,  blacker than it’s been so far. Not that I’m giving you such a big scoop: first, because Browder has already gone on the record as fundamentally bearish (see here);  second, because in a couple of weeks’ time you will be able to listen to the whole session on iTunes (the meritorious organizers of the event are making recordings and notes public – see for example the Los Angeles sessions from last January here); third, because he’s probably going to give much the same speech at the  London campus of the University of Chicago next week. It was Browder’s talk that generated the most heated debate at the cocktail reception and dinner that followed, and I did take some notes, so I thought I’d share them with you.

Browder made four – admittedly extremist, but in his view quite solid – predictions for how the crisis will play out in the rest of 2009.

1. Commercial banks will start “gating” their deposits (i.e., introducing restrictions on how much a depositor is allowed to redeem), probably in the European Union.
   Rationale: the entire banking system still has a precariusly low level of capitalization, and government guarantees are no longer credible – a country like Ireland, with €7bn in offical reserves, cannot possibly make good on €400bn of guaranteed deposits. If 10% of depositors decide to pull their money out, Ireland needs to come up with €40bn in cash, and by the time the ECB has scheduled a meeting to see if they can help out the Irish, the whole Irish banking system is insolvent. That’s why the last resorts for banks – or for governments, really – will be to tell you that you cannot take out more than, say, a thousand euros per week. Can’t happen? It’s already happened – in Russia, Argentina, Latvia, Ukraine. Sooner or later, it is happening somewhere in the EU.
2. The price of long-term US government bonds will crash.
   Rationale: 10-yr and 30-yr Treasury yields are unrealistically low. The US is facing the biggest budget deficit in its history: even if you argue that the US is not just like any other borrower (which Browder doesn’t believe, by the way), bond prices cannot defy gravity indefinitely. Who will buy enough bonds to finance a $2 trillion deficit? Nobody. Even if buyers can be found for bonds covering half of it, for the other half the Fed’s going to have to print money. And you don’t want to be caught holding bonds with a single-digit nominal return when the Fed prints enough money to generate double-digit inflation. (By the way, an interesting side effect may be that other countries can’t issue bonds at all, because issuing by the US Treasury is crowding out everybody else).
3. There will be a number of sovereign defaults, including in the EU.
   Rationale: follows from the above. Current risk premiums already imply a probability of defaulting within the next 5 years between 10 and 20% for the usual suspects: Ireland, Greece, Poland, Italy. The probability that at least one of them defaults, even if we don’t know which one, is pretty high. Again, it’s happened before (Russia, Argentina, etc.)
4. The price of gold will go up.
   Rationale: it’s the only thing that governments cannot print.

The best question from a rather traumatized audience was: “What has to happen for you to be wrong?”

Browder replied that, for his argument to be wrong, asset prices have to stop falling. If we’ve bottomed out today, then the predictions above are wrong. However, note that, no matter how much they commit in relief programs and stimulus packages, governments have never been able to stop asset prices from falling.

Recommendations for the retail investor? Put 90% in Treasuries with extremely short maturities (2 weeks to a month) or, if you have access to it, buy commercial paper by the likes of Microsoft, Johnson & Johnson, and Philip Morris. Put the other 10% in gold. And sit tight.

The only bright spot in Browder’s argument was: the Euro is not going to fall apart. Stress on the Euro is coming from the likes of Ireland and Portugal, not from the healthier countries. The people with the biggest problem have the biggest incentive to stay in the Euro, because doing otherwise would be disastrous for them (as far as Italy goes, I’ve believed for months that without it we’d all be in the streets, banging pots and pans, Argentinian-style). Conceivably, France and Germany could decide they’d be better off getting out of the Euro and leaving the rest of the Euro countries to fend for themselves: yet their political commitment to the Euro is too big. It took 40-50 years to make the Euro, it won’t get unmade in the short run.

And on that happy note, my dear readers, let me remind you that the next Leading Matters is scheduled in San Francisco on May 9 and, given the proximity to the University, promises to be packed with interesting speakers, although it won’t be featuring Bill Browder, I believe. Still, if you have any friends who’ve been to Stanford, get yourself invited and you’ll have a great time fulfilling your intellectual curiosity. And wishing you were back in school, maybe!

Italy and the 2008 Gender Gap Report: real or apparent progress?

Last year I commented on Italy’s deservedly low position in the rankings of relative gender equality produced by the World Economic Forum. This year, the 2008 Gender Gap Report tells us that we are no longer in position number 84: we have jumped up to number 67. We are still quite far from other European and mostly Catholic countries such as Poland (49), Spain (17), France (15) and Ireland (8).

This year’s data on Italy, states the report,

show very significant improvement in the percentage of women among legislators, senior officials and managers, members of parliament and in ministerial level positions.

One would have to look beyond the raw numbers to get a sense of the real impact of those ministerial level positions, I would guess; but we’ll leave that to the next refinement of the ranking metodology.

It is also true that we have more businesswomen in position of power this year; yet, we have no way to know where Marina Berlusconi (who recently joined the board of Mediobanca) and Emma Marcegaglia (who became head of Confindustria, and is the only Italian in the Wall Street Journal’s “50 Women to Watch“) would be today if it weren’t for their fathers’ success.

And hopefully those women legislators and members of parliament will think about crafting and passing some of those laws that the rest of us need before we can feel that Italy offers true equality of opportunity, regardless of gender.

Over the edge

Four weeks ago, our world was on the edge. Since then, optimists have been denying the presumed contagion from Wall Street to Main Street; pointing out that many great companies, after all, were born in a depression; and generally poking fun at the doomsayers.

It is true that we’re not hoarding potatoes in our cellars, stocking up on candles, queuing up outside food stores with black-market ration cards, and other symptoms of a wartime economy. Yes, homeless shelters and soup kitchens do have more patrons. But we, the rest of us, most of us really, haven’t entirely stopped brushing our teeth in the morning, going to work, dining out, watching a movie now and then, and generally going about our lives.

Yet, try reassuring the poor souls at Volvo’s heavy trucks division. As reported by The Economist:

Volvo wins the prize for statistic of the crunch to date. The Swedish firm said it had received a mere 115 orders for heavy trucks in Europe in the third quarter, down by 99.7% on the 41,970 order bookings during the same period of 2007.

It may be temporary, and it may be reversible: yet, if this isn’t called, at least for one industry and one company, “falling off a cliff”, I don’t know what is.